Fourth Turning's Neil Howe Warns The Amazon-Walmart Rivalry Will Determine The Future Of Retail

Tyler Durden's picture

Authored by Saeculum Research's Neil Howe, via MauldinEconomics.com,

The two firms are aggressively scaling up and branching out: Who will rise as the rest of retail sinks?

Amazon turned heads last month when it acquired Whole Foods for $13.7 billion. On the exact same day, Walmart announced its own $310 million purchase of clothing e-tailer Bonobos. The timing is no coincidence: As the de facto leaders of U.S. retail, Amazon and Walmart are each spending heavily in an attempt to unseat the other. Which company has the advantage? Amazon is a forward-thinking e-commerce heavyweight with many far-flung (if not profitable) business lines. Walmart is unmatched in brick-and-mortar retail, with a surging (if still small) e-commerce business. With the future headed online, investors are betting heavily on Amazon—but is this a mistake?

The two retail giants have been stepping on each other’s toes lately. Amazon’s Whole Foods deal has been widely interpreted as a defensive move against Walmart’s thriving grocery business. Amazon is also playing offense: The company is going after Walmart’s predominately lower-income customer base by offering a discounted Amazon Prime membership to U.S. consumers who rely on government assistance.

Walmart, meanwhile, has been even more aggressive. It all started when Walmart bought e-commerce firm Jet.com for $3.3 billion back in 2016. The company earlier this year rolled out free two-day shipping for all orders over $35, and is testing a pilot program that pays work­ers overtime for delivering packages on their commute home. Walmart is even barring some prospective tech vendors from building apps and services on top of Amazon’s cloud—and is telling its for-hire truck drivers that they cannot haul Amazon goods on the side.

Each company has scored some direct hits in this battle. But which one is positioned to win the war?

Amazon’s utter dominance of e-commerce sets it apart in an era when ever-more sales are moving online. As the leading e-tailer, Amazon has been the largest beneficiary of a massive shift online: Nearly half (43 percent) of all U.S. online retail sales take place on Amazon.com. One key ingredient to this success has been Prime, which now tallies 66 million subscribers—equal to roughly one in five U.S. consumers.

Arguably the company’s greatest strength is its ability to build successful tech-enabled businesses seemingly from scratch. Take cloud computing. In a few short years, Amazon has transformed from a cloud newcomer to the unques­tioned market leader: Fully 57 percent of survey respondents say that their business is currently running appli­cations in Amazon Web Services, 23 percentage points ahead of Microsoft Azure. Meanwhile, Amazon Home Services—a platform on which home­owners can find credentialed experts to carry out a rebuild—is now competing with the likes of Lowe’s and Home Depot. (See 77: “Home Services, At Your Serv­ice.”) In 2012, Amazon even began renting out excess warehouses to create yet another profit stream.

But for all of its success, Amazon has yet to generate much in the way of actual profits. Jeff Bezos is not interested in growing the company’s profit margin, but rather in keeping prices low in order to steadily gain market share—that is, grow faster than its competitors. With a lofty P/E ratio of 187.8, Amazon is clearly benefitting from investors who believe that the company will eventually focus on profitability. Such a huge bet on deferred earnings is fraught with downside risk.

So what’s the argument for Walmart? First, it is still a much larger company, with revenues of nearly half a trillion dollars—nearly four times Amazon’s. That scale alone enables it to put a much bigger squeeze on suppliers than Amazon. Second, Walmart generates a large profit—and generates it today. Walmart (P/E of 17.0) is a better value proposition than the majority of the S&P 500 (average P/E of 21.6). The company is also a reliable dividend machine: Walmart will pay out dividends of $2.04 per share in 2018, marking the 44th consecutive year of dividend growth.

Walmart’s main revenue driver is its brick-and-mortar retail business, which continues to gain steam amid a collapsing retail space. According to Credit Suisse, 2,800 U.S. brick-and-mortar retail stores closed up shop in Q1 2017, a record full-year pace. Commercial real estate firm CoStar reports that U.S. retailers must eliminate 1 million square feet of brick-and-mortar space just to grow their sales per square foot back to where it was a decade ago. In this low-margin environment, cost efficiency is key—and nobody does cost efficiency better than Walmart, a company that uses its clout to negotiate favorable deals with suppliers and finance its “Everyday Low Prices.” While mall anchors like Macy’s and JC Penney continue to announce store closures, Walmart plans to add 10,000 retail jobs and 59 new/renovated properties by the end of the fiscal year.

So what does the future hold? Amazon certainly has the look and feel of a winner in the digital age. The company epitomizes a blue-zone, mold-breaking, Silicon Valley mindset. Its leaders aren’t afraid to spend big today to solve tomorrow’s problems. Walmart, on the other hand, was founded in the deep-red, lower-middle class Bentonville, Arkansas (where it still keeps its headquarters) and built upon the paradigm of penny-pinching—hardly the type of company that inspires effusive praise as a forward-thinking leader.

But this line of thinking may be off the mark. For one, both companies acknowledge that tomorrow’s retail likely will be a blend of online and brick-and-mortar. As TechCrunch columnist Sarah Perez puts it, “Amazon wants to become Walmart before Walmart can become Amazon.” And the fact is that it may be easier—and cheaper—for Walmart to become Amazon. Walmart has already shown that it is willing to spend big on top tech talent. It would be a lot tougher, on the other hand, for Amazon to pour enough concrete to become a brick-and-mortar powerhouse while still maintaining the company’s culture.

The assumption that Amazon is far ahead in the court of public opinion is also untrue. Decades ago, Walmart was panned for decimating communities with bargain-bin consumerism. But today, Amazon is reviled by many consumer advocates who say that its e-commerce dominance—powered by its robot-filled warehouses—is killing retail jobs. In an era when consumers pride themselves on buying local to support their community (see SI: “The New Localism”), Amazon represents a faceless global entity without roots.

Even Millennials, who at first glance should be overwhelmingly pro-Amazon, show strong support for Walmart. According to YouGov BrandIndex, Walmart ranks as the fifth-favorite brand among Millennial consumers—just one spot behind Amazon and ahead of brands such as Netflix (#6) and Apple (#8). Why? Community-oriented Millennials likely realize the value of a company that creates 1.5 million U.S. jobs—and are won over by its ultra-low prices.

Both companies may very well outperform the broader market in the years to come. But don’t be surprised if Walmart eventually emerges on top. And even if the homely Bentonville retailer does no more than stick around, that makes it a big long-short winner relative to its Seattle-based rival.

TAKEAWAYS

  • Take notice: The Amazon-Walmart rivalry will determine the future of retail. Each firm is making moves in the other’s area of expertise: Amazon bought Whole Foods to scale up in the grocery business, while Walmart is ramping up its own e-commerce capabilities. Which company has the upper hand? Conventional wisdom points to Amazon, which has a dominant foothold in a surging e-commerce space and owns a reputation as a forward-thinking market leader. But the future of retail will likely be a blend of online and brick-and-mortar—which favors Walmart. Why? It may be easier to acquire tech capabilities (i.e., buying talent) than a physical footprint (i.e., building thousands of stores).
  • Keep in mind that market “duopolies” can save consumers money. Look at Coca-Cola and PepsiCo, two companies that together control roughly three-quarters of the soda market. Their duopoly status has helped to keep prices lower: The CPI for carbonated beverages has risen less than half as quickly as the CPI for all food since the early 1980s. Similarly, it’s easy to see how the Amazon-Walmart price wars are already benefitting consumers. In February, shoppers had to buy $49 worth of Amazon goods to qualify for free shipping. Today, that same perk costs just $25. Walmart.com shoppers can now save up to 5 percent on more than 1 million items through in-store pickup.
  • Expect Amazon and Walmart to continue to play hardball with suppliers. All of these discounts come at a price—to vendors. Walmart recently told suppliers that it wants to offer the lowest price on 80 percent of the products that it sells—a feat that would require some suppliers to shave 15 percent off of their rates. Amazon is equally notorious for its tough negotiations. The company often threatens to boot unprofitable products (known as “CRaP,” short for “can’t realize a profit”) from its virtual store shelves if the vendor won’t budge on prices. Insiders suspect that this is why all Pampers products mysteriously disappeared from Amazon.com earlier this year.
  • Keep tabs on the hotly contested grocery market. Today, Walmart controls more than one-quarter of the U.S. grocery market—more than double the share of its closest competitor (Kroger). But an influx of competition, especially from abroad, threatens this market share. German discount chain Lidl recently opened its first U.S. outposts, and its fellow German competitor Aldi is planning a $5 billion, 900-store U.S. expansion. Amazon’s Whole Foods acquisition will further turn up the heat on Walmart—though the move may be far more damaging to Target, which has been trying to get into the fresh grocery game for ages.

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Honey-Badger's picture

Fuck em both, ebay and kjiji bichez!

 

 

Looney's picture

 

Jeff Bezos sure has huge balls and… a flabby vagina.  ;-)

Looney

Shitonya Serfs's picture

Nice. So, once again, the People are left with 2 choices.

Yukon Cornholius's picture

Twenty minutes, two feet and a heartbeat get me to my local farmers market, where the food is better, the prices are comparable, and the chicks are waaaaaaaay hotter.

SlowBro's picture

Just a reminder: Neil Howe prediced that the Millennials would be called heros. Strong, courageous, heroic.

I think we all see how that prediction turned out.

froze25's picture

I am just old enough to clearly remember life prior to the rise of China and the Box Store, when you still had mom and pop retail for basic items. Living standards were high and people were generally happier. #GoodOleDays

DisorderlyConduct's picture

I know, right? I remember dealing with people that actually cared about the customer. Because they had a personal stake in the outcome.

Instead, we now have greeters at Walmart that say welcome to walmart, I love you. Welcome to Walmart, I love you. God I hate that scripted bs fake caring garbage...

Ben Tornilloed's picture

I thought I was just an old fucked up curmudgeon for HATING, the fake caring garbage.  Good to know there is at least one more of us.

BarkingCat's picture

I used to find that really creepy.

 I guess now I'm just used to it and completely ignore it.

 But when I really think about it it is fucking creepy.

Pernicious Gold Phallusy's picture

Disney will make audioanimatronic robots to replace the Walmart greeters. 4chan will hack them so they say, "Welcome to the Haunted Mansion!"

Common_Law's picture

They left out that there's no sales taxes on Amazon in some places. That seems kinda important...

canisdirus's picture

We'll see. The generations seem to be spreading and are not as clean-cut anymore. When the war finally breaks out, as it's about to soon, it'll be Millennials and Gen-Z on the front lines dealing with it.

I'm glad that I'm old and have special skills, as they'll likely need me on the home front...

CheapBastard's picture

If Walmart could get its act together and improve their web site, they could be a formidable competitor. I would begin by replacing much of it's stuck in the mud management that dropped the ball to begin with.

For example, look at Walmart stawk and Amazon stawk.

canisdirus's picture

Walmart already lost this war. They are so far behind that they have no chance of making up the difference. Amazon already has the economies of scale, so it would cost far more to break into the market and compete with them than throw in the towel.

They needed to start working on it at least 15-20 years ago.

besnook's picture

but there is no .gov price fixing and no shortages. there is just no choice and poverty. capitalism, bitchez!

Buck Johnson's picture

If Walmart wants to win they can do one thing.  Have it where customers can go online and buy groceries and then Walmart have them delivered to individuals.  I think some Walmarts are doing it but only in a few places but they need to make it at every store that has a grocery store.  You see it used to be that one parent was working and the other was at home and was able to do the groceries and other things.  Now most of the time both are working and now the parent or parents have to compete with the crowds to get their groceries which sucks or do it on a weekend and spend part of the day doing something you wish was already done.

Just think about it, you go online and Walmart ask where your located and then they route you to a webpage that is for that particular store and all their savings and what they have to offer in groceries.  Then you order pick a time for a delivery of items/totes and then have them brough to your door.  I would pay extra to have this done and also I and others would possibly buy more if they don't have to worry about doing the shopping/walking around themselves.

Many old people would love this (remember baby boomers and their kids are getting older and the boomers ar retiring in droves), the working families, the infirmed (people who can't get out) and institutions.  Remember back long ago they used to deliver groceries and also did pick up.

I think they would make a killing with this service.  I ask you, don't you hate having to go out a few hours or more to shop on the weekend or a friday evening when you could do it online, have it delivered at the time of your choosing without wasting time and energy fighting crowds or whats left of your weekend.

 

TuPhat's picture

Neither one is going to win.  When it all comes apart the Walmarts will burn just as they did in New Orleans.  No one will remember Amazon when the internet is gone.  I depend on myself, family and friends.

Pernicious Gold Phallusy's picture

I don't think anybody has really figured out grocery delivery just yet. Like computers understanding natural human speech, it's been only 5 years away for the last 45 years.

Buck Johnson's picture

Actually it's not that hard, they just haven't went that route wholesale yet. 

GUS100CORRINA's picture

Fourth Turning's Neil Howe Warns The Amazon-Walmart Rivalry Will Determine The Future Of Retail

My response; I AGREE COMPLETELY. Walmart has been EATING "MOM * POP" local retailers for years. The tide has turned with GLOBAL RANGE and REACH of the INTERNET.

Welcome to the REVOLUTION in RETAIL and there will BE FEW SURVIVORS.

DEMIZEN's picture

bezos is right.

The Cooler King's picture

Bezos ought to blast himself off to Mars to do an on site inspection of the #GROATH opportunities.

Honey-Badger's picture

When we raze central banks to the ground.

Grandad Grumps's picture

It appears to me that Amazon and WalMart are both controlled by one and the same. Lately I have been buying everything from WalMart as opposed to Amazon. Whu? It has to do with how I search for things.

Honey-Badger's picture

Would you like Coke or Pepsie with your shit sandwhich?

besnook's picture

i have a sam's club card, i recently bought tires. the tires were cheaper at walmart and the installation at sam's was only 10 dollars/tire. watch these fuckers closely. i have a prime membership at amazon but i find almost everything cheaper on ebay with or without free shipping.

Lester's picture

So much more for Buyer Beware to apply to....  Like how if you don't clear your cache when you look 2nd time at an item on Amazon, the price is often higher.

What I find to telling of The Times We Live In, is that Big A has NEVER MADE A PROFIT....  Least not on their merchandise sales operations.  How much does the CIA pay them for Cloud Hosting?   How is that not a conflict to begin with?  How is an unprofitable merchandising operation able to continue and flourish/expand?  How is the stock not a confidence game, that repeatedly shows evidence that would lead the rational to conclude the whole operation is a scam.  Then again, how is it that a search-engine has been allowed de-facto control of the internet?  Has anyone here ever bought anything because of an ad they saw on a Google banner or popup?

Lots of places cheaper to buy than Amazon.  The whole WallyWorld rise to power has been a criminality on par with the Libor Rate Fix and the Gold/Silver Price Manipulations.  Wally managers dropped prices in their stores to destroy local competition at whatever stores were strong and vital to the community.  Might've been a local feed store that sold outdoor gear and clothing, or local regional department store operations.  They were patient and had the deep pockets bank. 

The middle-class destruction was the goal here and the funding and operational overview Fed.Gov so eagerly beats all others with have never applied.  Maybe Jason Bateman's character found Bezos in some alley and put him in business?  Don't it seem that way?  I saw the small town's all over Texas in the middle-70s BW (Before Walmart) and there was lots of money and business activity; lots of regional home-owned department stores, even if only a couple of stores in nearby towns of 20-40k pop.  Not much there in them places anymore unless its a specialty vending operation Wally hasn't deemed worthy of their attention (yet).   Used to also be lots of mom & pop grocers.

It's been a long time coming and will stay a long time gone....   Didn't Dylan write that?  Don't make it any less true.  Then there is the one great Capitalist Truism:  You Can't Do Business With People That Don't Have Any Money...  Of course, now they're just gonna give money to everybody they put out of business...  Sure they are...

besnook's picture

what bothers me most are the capitalist free marketeers who can't see that the logical end of a free market is an oligopoly/monopoly without .gov intervention. the opportunity cost of not paying higher prices at your locally owned shop is the end of your community, an uneven trade off favoring the big box stores and internet purveyors.

N2OJoe's picture

I've sold on both and Ebay is generally cheaper because Ebay charges lower fees to the seller.

Also, since nothing is free, you're not actually getting free shipping on Az, it's just built into the price of each individual item. If you actually look around on ebay or buy multiple items from the same selller, they often charge shippng separately and it is less than buying multiple Az items with the "free" shipping. This is regardless of weather you have prime or not.

BarkingCat's picture

Do another interesting experiment. Using two separate devices go to Amazon and login to Prime on one of them but make sure you are not logged in on the other. Clear your cache too.

Then look up the same item. There is a very good chance that your Prime account will show a higher price.

 I've seen this multiple times before.  

 

Not sure now because I don't buy from Amazon anymore

 

 

canisdirus's picture

Amazon can algorithmically adjust prices on the fly. There is only one brick and mortar chain I am aware of that has this ability...

Robert Trip's picture

They should both peddle their wares down in Hell where they belong.

markitect's picture

When you dont pay a dividend and lose money on the majority of your sales and have a never-ending equity funnel from every fucking mutual fund in America, ya you can put anyone out of business.  Shit, If I lost money year after year by lowering my prices below my competition I'd be the only game in town.  Whats fascinating to me is Amazons been doing this for what, 25 years now?  Did universal laws of business cease in the 90s?  Arent dividends the reason why you own stocks?  

arby63's picture

Planned. Nearly magical and mystical no? Money from nowhere. Never ending flow too.

Robert Trip's picture

We have sold our collective souls for a cheap Chinese $10.00 toaster.

I am Jobe's picture

Americans have choices. Shhh don't tell them that . Americans are exceptional. 

Another regional indian.'s picture

War for the planet of the apes.

Salsa Verde's picture

Whoever can staff the most robots to work 24/7 will win; human beings lose regardless of the victor.

NEOSERF's picture

Like the hollowing out of the middle class in the US, so shall the middling retailers be killed off...only the Tiffany's and Walmarts will survive and all the American Eagles, Staples and Dicks Sporting Goods will go away

Cardinal Fang's picture

Who is really first in a world of cheap Chinese shit?

falak pema's picture

The issue here is what is SHIT? 

Once you define the premise you can talk about who makes it.

The way the question is phrased China and shit are cosubstantive; like twins.

Now that is  PRECISELY why and where the Cardinal should eat his hat! 

False premise. A lot of people make SHIT ! 

But that logic is now ZH's dominant mantra!

Hey ! Its true LIBERTARIANISM...

Ahhh, if its true libertarianism then its KOSHER !

Haha! 

falak pema's picture

This is what America has become : Oligopoly rivalry to the death.

Does it move the world to a new and better socio-economic paradigm?

That is the true question.

moorewasthebestbond's picture

Peopleofwalmart.com

 

Amazon has no such entertainment!

 

Advantage WalMart.

libertysghost's picture

There's something to be said for that point really.  There isn't such (or much of any kind of) an experience while shopping on Amazon and in the end that will matter IMO.  

People go to Walmart to feel better about themselves sometimes.  There's always plenty of "fails" walking around and if you got even a couple/few brain cells to rub together and had a shower in the last 24 hours you feel like everyone admires you.  Or maybe that's just me ;-) .

 

And to me, most importantly, show me the profit trends of the past and today...don't tell me what the profit (or the rising temperatures) you expect you'll have in some pie in the sky cooked books future.  To make a profit does amazon have to charge more?  If that's the case...it WILL matter and they WILL lose all that glorious "marketshare" they claim to be so concentrated on in the present. 

BarkingCat's picture

"Peopleofwalmart.com"

 

Amazon has another group of people who cannot get out of their parents' basement.


Last of the Middle Class's picture

The article grossly downplays Wal Mart's failed e-commerce business. They just don't seem to be able to monetize the internet. Painting "Pick up here" signs on their damn parking lot doesn't mean a damn thing to me. I avoid them like the plague. I've noticed they have FINALLLY NEARLY PERHAPS gotten a clue that customers just don't have to stand in line with 48 check stands and 3 of them open stuffed with welfare mamma's waiting to check out. If Wal Mart wants the business they need to refocus on each and every item in the foul smelling cinder block shell they operate. The fact is Amazon has hundreds of millions of choices and if you can wait they'll be there in a couple of days. Wal Mart's products need to be laser focused on what sells, what customers want, and the right product at the right price. They have worshiped at the alter of cheaper Chinese shit with no quality whatsoever for 30 years now and the market is just changing. Everything I've heard they're doing is just PR or rearranging the chairs on the Titanic as Bezos is focused and has a game plan, whether you like him or not. Retail is changing massively and Wal Mart is just having done to them what they did to the small business operator over the past 30 years. Run them ruthlessly out of business while painting little frigging smiley faces on their prices. Another thing is perception. They just look old and dated in everything they do and in fact, they are. There are a lot of things I buy, that I know full well at Wal Mart are HIGHLY marked up because they're not loss leaders. A perfect example was a cell phone case my wife needed. I have no problem ordering it from Amazon, while I'm eating out and waiting for 3 days to get it and saving $15. The market has changed, people are more savy and know if you get off the deep discount Chinese crap the prices can be very high. This is the stuff that is just right for Amazon and in fact hurts Wal Mart so much as it's their profitability built in to a segment of their inventory that is not sold at cost that is going elsewhere. Wal Mart may wake up, but I seriously doubt it.