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Amazon and Walmart Battle for Retail’s Future

August 9, 2017

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 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.


  • 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.

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.

Discuss This


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jack goldman

Aug. 10, 2017, 4:43 p.m.

What isn’t mentioned is many people, especially white educated people, have stopped having families or children. Low income welfare people who shop at Walmart and Amazon, have babies on welfare. What will a nation of divorced, drug addicted, crack babies with alcohol fetal syndrome be like? We are racing to the bottom and we are winning. Facebook, Amazon, Netflix, Google, Walmart do not raise families, help children, or produce wealth. These are the parasites who are using technology to harm our local communities. We need to make America great again by building up families, not expanding credit and debt for multi nationals to buy up the world. It’s a fake economy based on fake counterfeit currency debt. This will not end well. Where are the limits for penetration of Wall Street into Main Street to eat our children and families alive? Forty per cent of the children are born to single mothers. Blacks have 72% of their children born to single mothers. This is the death bell for America as families die to feed Wall Street for low price. There has to be a better way.

jack goldman

Aug. 10, 2017, 4:35 p.m.

Walmart, Amazon, blah, blah, blah. Did you know 40% of all children born in America are born to single mothers? We cheer the destruction of our families as we are pillaged by global corporations on Wall Street. So 20% of retail is done by Amazon, 80% isn’t. There are limits to cheering out own self destruction. Were there any “weapons of mass destruction in Iraq? No. We are lied to. Normal, a real family, has become abnormal, a divorced, never married, woman on welfare. The nation is rotting from the inside out, being pillaged by Amazon and Walmart, while Detroit and Chicago go bankrupt. We are in deep trouble from the counterfeiting of our communities and currencies and the invasion of Main Street by Wall Street. Did you know student debt slavery, student debts, exceed ONE TRILLION dollars and exceed all credit card carries? No one cares. Did you know banks lend ten times deposits and collect 40% when lending at 4% and collect 240% when lending on credit cards? Did you know no one went to jail for the banking collapse in 2008? Why?  We are eating our own nation alive for counterfeited companies. Facebook, Amazon, Netflix, and Google are CANCERS on families. Who can drain the swamp of these obese parasites? I just retired and I don’t recognize this chicken shit nation any more.

Alan Shaver

Aug. 10, 2017, 12:33 p.m.

A friend of mine who accepted an early retirement buyout from one of America’s largest brick & motar retail operations had an interesting perspective on this.  Noting that to cut costs the major retailers have essentially sent their most experienced managers into retirement, leaving them with a very thin management bench, most of which has no experience in how to “turn around” a poor situation.  “If you plan for an 11% decline in sales, you are certainly going to get it”, is the comment she made.  How can Macy’s, Sears, Target or the other “big box” stores compete when they no longer have management possessing the experience and knowledge required to make the business grow again?

My personal perspective is that as the large “anchor” stores close up in shopping mall after shopping mall, an opportunity develops for the small, specialty retailers to negotiate significantly better deals for themselves, particularly if they choose a shopping center that includes an Apple Store.

George Cawthorne

Aug. 10, 2017, 10:18 a.m.

Observing my own behavior… My wife and I are both Amazon Prime members and registered on the Walmart website. On 8/7/17 I compared prices/delivery options for 3 different items from Amazon and Walmart. One was not available from Amazon, Walmart’s price on another was lower, and the third was a wash. I placed 3 different orders with Walmart for pick up at local store. By 7:30am on 8/8/17 I had received emails that my orders were ready. The store had 6 large parking spaces near the front door boldly marked “PICKUP.” Just inside the door was a touch screen PICKUP kiosk. As I was entering my name on the screen a Walmart employee passed by with a load of groceries headed to another pickup customer and told me she would be right back. In mere moments 3 other employees materialized with my 3 items. Total time elapsed: less than TEN MINUTES! (Upon review this sounds like a Walmart commercial, but I am not usually a Walmart fan. But if there were only the two options (Amazon and Walmart) Walmart is the less bad option).


Aug. 10, 2017, 10:16 a.m.

The other massive missing aspect in Neil Howe’s research is it totally ignores AWS’s cloud market dominance.  IT infrastructure is a *massive* market… Gartner estimating $294B spend in 2016, with 17% shifting to cloud. (http://www.gartner.com/newsroom/id/3384720), or Forrester has IaaS/SaaS at a $236B market by 2020 (https://www.forrester.com/report/The+Public+Cloud+Services+Market+Will+Grow+Rapidly+To+236+Billion+In+2020/-/E-RES132004).  Amazon hit $12.2 billion in sales for 2016 and more than $3 billion in profit: https://www.geekwire.com/2017/amazon-web-services-posts-3-5b-revenue-47-last-year/. 

Regardless of what estimates you use, it is huge, growing fast, and Amazon is in the far far lead as corporate IT spend shifts to cloud.  While AWS will continue to require its own massive investment to compete with Microsoft and Google, it is not hard to see how Amazon could use some cash from AWS to subsidize Amazon.com.  https://www.geekwire.com/2016/amazon-without-aws-online-retailer-posted-big-loss-not-booming-cloud-business/
Walmart? no cloud whatsoever.

Ian Gill

Aug. 9, 2017, 9:41 p.m.

This analysis of the Amazon, Walmart battle is seriously short sighted. This fierce competition will ultimately lead to price pressures on suppliers. There are clearly limits on this pressure. Raw materials, wages, and innovation can only be pushed so far.  Automation, robots and AI will all put pressures on the numbers in the workforce. This leads to a contraction in the purchasing power of masses of people. Old Henry Ford knew enough to pay his workers well so that they could afford to by Ford cars. This all leads to a dismal future with Amazon/Walmart putting enormous pressure on suppliers which leads to fewer jobs, and a poorer customer/client. Somewhere a downward spiral will occur. Walmart wages are already borderline poverty wages.  Will big government step in and offer subsidies to workers(?) retailer(?) manufacturers (?) or even farmers(?) America you have a problem. Chinese cheap goods wont solve it.  Neither can I.