Is Wal-Mart Stores A Day Late And A Dollar Short In Its Battle With Amazon.com, Inc.? : AMZN Stock

  • Wal-Mart has been doubling down on efforts to expand its eCommerce operations and compete with Amazon.
  • These moves seem to be working.
  • Can Wal-Mart mount a credible challenge on Amazon's dominance in the space?

Amazon.com Inc. (NSDQ:AMZN) might be the largest eCommerce player in the world in terms of revenue generated on its platform, but Walmart (NYSE:WMT) is looking to challenge the company's dominance. Wal-Mart has lately been making a flurry of eCommerce moves, including buying Amazon's rival Jet.com, doubling its stake in China's #2 eCommerce company JD.com (NSDQ:JD) to 10.8%, plans to start a Sam's Club store as well as a separate online store to sell imported products on JD, and doubling the number of warehouses dedicated to online sales by the end of 2016. Wal-Mart's 102 fulfillment centers now boast sophisticated logistics technology and robot-staffed facilities that for the first time puts them on par with Amazon's 180 fulfillment centers.

Wal-Mart is currently the second-largest eCommerce player in the U.S., though it's a distant #2 with just a sixth of Amazon's $100B+ sales. But after years of lagging behind, can Wal-Mart realistically expect to catch up with Amazon?

Also Read: 3 Reasons Why Amazon.com Inc. (AMZN) Is A Great Buy

Re-ignited eCommerce growth

Wal-Mart has for years been crowing about its plans to leverage eCommerce to drive growth at the company. For the first few years, the company's eCommerce operations worked well and consistently grew by 30%+. But with global eCommerce slowing down, Wal-Mart online growth slowed down dramatically to just 7% in Q1 2016.

AMZN-5

Source: Euromonitor

Wal-Mart has doubled down on its efforts to jumpstart its online business. The company has been adding 1 million items every month to its online assortment and now sells 15 million items online, up from 8 million a few months ago. The company also introduced a Prime-like subscription service dubbed Shipping Pass. Shipping Pass offers a 30-day trial for its 2-day delivery service. The service will cost just $49/year, about half Amazon Prime's $99. Further, Wal-Mart completed the rollout of its Wal-Mart Pay mobile app to all its 4,600 stores. Wal-Mart Pay is designed to compete with Apple Pay.

These moves appear to be working, and Wal-Mart has been able to re-ignite its online growth. The company posted online growth of 11.8% during Q2 2016. That was the first sequential in more than five quarters.

AWS makes the big difference for Amazon

But catching up to Amazon is easier said than done. Amazon is the second-largest eCommerce retailer in the world with 13.8% share of global eCommerce GMV compared to just 0.8% for Wal-Mart.

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Source: Internet Retailer

Mastery of logistics is part of what made Wal-Mart the retail giant it is today. But delivery on Amazon's scale is a different ballgame altogether. Wal-Mart has been trying to use its huge network of physical stores as fulfillment centers. But this approach has serious limitations since store managers tend to take a rather dim view of customers who check into their stores for the fulfillment of online orders. Wal-Mart's delivery approach also leads to significantly higher delivery costs--the company's shipping costs for an average package run as high as $6-$7 compared to $3-$4 for Amazon. That's a big difference considering that the average Wal-Mart online order is considerably smaller than Amazon's.

But ultimately what makes it unlikely that Wal-Mart will catch up to Amazon soon is AWS. AWS is a profit machine, bringing in more than half of Amazon's operating profits. With the cloud segment growing so fast and throwing off so much cash, Amazon's cash hoard has been rapidly expanding, and at more than $15B, it is currently twice as large as Wal-Mart's. This gives the company plenty of freedom to invest in high-growth initiatives such as Amazon Prime and technologies such as using drones for deliveries. Amazon Prime shoppers buy twice as much as non-Prime shoppers and bring in more than half of Amazon's revenue. In contrast, Sam's Club brought in just 12% of Wal-Mart's revenue during the second quarter, 1.3% lower than last year's corresponding quarter.

Jet.com might help Wal-Mart to close the gap

Despite being disadvantaged against Amazon in online commerce, Wal-Mart might still be able to challenge Amazon's dominance through its Jet.com purchase. According to Euromonitor, Jet.com was able to generate more than $1B in sales from 4 million shoppers over the past 12 months. That's impressive for a business that has only been in operation for little more than a year. Many of its shoppers are reputed to be Amazon customers.

Jet has already figured out a way to offer one-day delivery for half of U.S. homes at no cost. Meanwhile, the company's penetration in U.S. households for two-day delivery is approaching 99%. Despite its small size, Jet has been able to figure out key delivery logistics that Wal-Mart can extend to its online operations. If Wal-Mart is able to successfully do this, then it might be able to close some of the huge gap on Amazon.

Also Read: Amazon.com Inc. (AMZN) Continues Its World Domination Quest

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