| -- | John Mauldin | Aug 09, 2017 Amazon and Walmart Battle for Retail’s Future In true Outside the Box fashion, my good friend Neil Howe has reconsidered the escalating war between Amazon and Walmart for the future of retail, and in true Neil fashion he has come up with some surprising insights. One of the takeaways here, he says, is that market “duopolies” can save consumers money – so you and I had better hope the battle isn’t resolved anytime soon. Did you know that one in five US consumers is now an Amazon Prime member? But don’t count Walmart out, Neil warns. Neil missed Camp Kotok this year, and we missed him. This weekend you will get some of my takeaways from the give and take of the many great conversations that ensued out on the lake, around the campfire, and in the lodge. It takes a full day to get to Camp Kotok in the wilds of Maine and another day to get back. That time is a significant investment, but it’s worth it in terms of the insights per hour that I get in conversing with and listening to real experts in other fields debate in their own space. And for whatever reason, this year more people were coming up to me and asking my opinions. If you want to read more from Camp Kotok attendees, you should sign up for my Over My Shoulder service, where I’ll be featuring research from Camp Kotok alums all next week. Here’s the link. The tables at Camp Kotok were laden with rich food and heavenly desserts. And snacks and pancakes. And lots of fried fish at lunch. Shane and I are home until the end of August, which gives me a chance to get into the gym regularly and back on a real healthy diet. Shane grills most nights. She is the queen of very spicy jalapeno-grilled chicken. I do tend to gain weight on the road so home time is VERY helpful. You have a great week! Your deep in love with his wife’s home cooking analyst (and she likes mine pretty well, too!)
John Mauldin, Editor
Outside the Box
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Amazon and Walmart Battle for Retail’s Future By Neil Howe, Saeculum Research
July 19, 2017 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 itacquired Whole Foods for $13.7 billion. On the exact same day, Walmartannounced 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 asa 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 byoffering 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 yearrolled 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 thatthey 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 percentof 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: Walmartwill 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 cloutto negotiatefavorable deals with suppliers and finance its “Everyday Low Prices.” While mall anchors likeMacy’s andJC Penney continue to announce store closures, Walmartplans 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 Perezputs 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 asthe 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 thatcreates 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 controlroughly 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, shoppershad 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 percenton 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. Walmartrecently told suppliersthat 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, Walmartcontrols 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 Lidlrecently opened its first U.S. outposts, and its fellow German competitor Aldi is planninga $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. Suggested Reading Jason Del Ray. “Amazon and Walmart are in an all-out price war that is terrifying America’s biggest brands.” Recode. March 30, 2017. Neil Irwin. “The Amazon-Walmart Showdown That Explains the Modern Economy.” The New York Times. June 16, 2017. Sarah Perez. “Amazon wants to become Walmart before Walmart can become Amazon.” TechCrunch. June 16, 2017.
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