Five existential threats against which Walmart struggles
- Summary:
- Den puts forward the bear case for Walmart's ability to execute on a digital strategy that can overcome its market challenges.
Stuart Lachlan concluded his review of Walmart's chief merchandising officer's recent discussion about progress in its digital strategy with the blunt:
A big job ahead.
Indeed. But more to the point, can Walmart compete effectively in a market where it names Target as its target (sic) but where it should be paying far more attention to Amazon. It's worth reviewing some of the history here to better understand where Walmart really is and how its efforts, while laudable, are hobbled by financial considerations and relative technology immaturity.
Those of us old enough to remember the emergence of connected supply chains and business intelligence efforts will recall how Walmart was an early leader in understanding how to efficiently manage the retail supply chain in the context of consumer demand. While it was always secretive about the way it achieved those efficiencies, industry insiders knew perfectly well that the eponymous retailer was making copious use of both its buying power and what we now loosely term 'big data' to drive in-store inventory management and merchandising. Its early lead brought it huge dividends and allowed it to grow exponentially, mostly at the cost to the independent retailer and, in some cases, the suppliers who it aggressively beat down on price. Walmart achieved channel master status that effectively gave it clear runway to deliver huge profits.
Amazon - the real threat
Enter Amazon. When Amazon expanded beyond digital goods, Walmart, and pretty much every other retailer, ignored them. Wal-Mart fell into the trap of believing that its omnipotence would protect it against any existential threat. What Walmart didn't recognize comes in five flavors:
- Amazon is building for growth. It doesn't have to fork over cash to investors and so can reinvest heavily in its services. Right now, that gives Amazon a cash advantage of some $10.4 billion per annum. That's the amount Walmart paid investors either in dividends or stock repurchases in its last fiscal year. That number represents about 39% of the total cash it can generate. To make matters worse, Walmart shrunk its capital investments and squeezed suppliers even more to keep the cash engine going in the face of falling income. We also see that manifesting itself in reorganization, store shut downs and market retrenchment. None of those things are growth strategies but defensive maneuvers.
- Walmart is viewed by investors as a value play, which is shorthand for a bargain stock where dividend yield is way more important than growth. That imposes a considerable financial burden upon the company and makes it very hard for Walmart to spend as perhaps it would like in order to compete. We see the impact of that perception in the divergence of stock value between the Walmart and Amazon. (see graph at top)
- Amazon is building what can be fairly described as a global, virtual network. Walmart correctly claims that it is in close physical proximity to the whole US population but that's irrelevant in a connected world where anyone with a browser is connected to anyone else, regardless of location. Amazon still has to ship product but I would argue that its inventory and delivery systems are at least as efficient as those used by Walmart. Its drone strategy can only further shrink the distance between Amazon and its customers. Crucially, Amazon's crowdsourced recommendation engine speaks for itself. The received wisdom is that consumers research online, find the best deal and then go pick up. But as Brian Sommer recently discovered, that is not an optimal solution for most big box operations.
- Amazon has demonstrated that it can go toe to toe with Walmart on pricing when it chooses and beat it out. Walmart for its part believes price is pretty much everything and has only recently understood that the whole customer experience is what matters. That isn't restricted to the service it offers but the quality of goods it provides. I rarely visit Walmart but on the few occasions I have, I've been struck by the number of folk who have come up to me and said something like: "Don't buy that crap, look elsewhere." That is especially true for processed foods but equally for some garment items. And then look at how Walmart has recently realized that the modern day equivalent of wage slaves won't deliver the best in store experience. That costs money Amazon doesn't have to spend.
- Finally, and I think this is the killer punch - Amazon has Echo aka Alexa. If you don't know, Echo is a consumer device that is voice controlled. It can play your favorite music, manage your internet enabled lighting and heating and, of course, build your shopping lists which it fulfills via....Amazon. Echo's range of connected services is growing all the time. From what we know, Amazon Echo is supplier agnostic and can offer fulfillment from any supplier on its books. You might be thinking 'gimmick' and yes, that would have been true in the early days. But more recent reports suggest that Echo is proving to be very popular. In an ironic twist, Echo is the most frequent out of stock item in the Amazon store. One commenter at the NYT (h/t Jeff Nolan) went as far as to say:
By perfecting an interface that is much better suited to home use — the determined yell! — Amazon seems on the verge of building something like Iron Man’s Jarvis, the artificial-intelligence brain at the center of all your household activities. Who could say no to that?
Echo is important because much like Walmart in the 90s and early 2000s, no-one else has a capability that comes close to what Echo can offer. Tie that back to Amazon's network and fulfillment platforms and you have a glimpse into where this goes. Walmart has no equivalent offering. Neither does anyone else for that matter.
My take
The question is - can Walmart win? In the short term the answer has to be 'no.'
Despite the fact Walmart enjoys 5x the revenue that Amazon garners we have to remember that in 2011, Amazon was barely a rounding error in the retail space. How long did it take Walmart to create a dominant position? Decades and billions of dollars in physical location building plus many more billions in software usage. Amazon's ability to use its network as a sales generating flywheel outpaces Walmart every time. The fact Amazon often competes against itself on price is a comforting factor for any consumer, along with the choices it offers for delivery and other service items. In short, its service options are way better than the competition.
On technology, Amazon can out smart Walmart any time it likes. Amazon is, after all, a software business that happens to do retail, not the other way around. Critics might argue that Walmart's deep experience in analytics and supply chain should help it but the evidence is no longer there to support that view.
For its part, Walmart is looking at its demographics and betting that cash strapped and cost conscious millennials will fill the gap. In America, it might also be counting the many millions of people who are living paycheck to paycheck. That may well pay off but then Walmart has also to keep any cash poor segment happy across its entire range, including low margin commodity items like food and groceries that Amazon does not have to think about. Yet. What's more, I note that in Lauchlan's piece, the CMerchO was talking customer value on the top line, not on the bottom or profit line. As I have outlines already, Walmart faces declining margins and so, regardless of bulk, it has an uphill task to generate the cash flows necessary to compete with Amazon while at the same time maintaining its vast network of connected stores.
Big job ahead? You bet...more like the Himalaya's of mountains to climb.