Amazon's Biggest Challenger: Meet The New Boss, Same As The Old Boss
In this corner, representing brick-and-mortar, weighing in at $485B in revenue across 5,000 stores staffed by 1.5 million associates: the reigning world champion, Walmart. The challenger, with $135B in revenue from 541,000 employees: Amazon, known as the disrupter.
Battered but not beaten, the original retail superstore has armed itself with new ideas, advanced technologies and deep pockets to fight back harder than ever before for omnichannel dominance.
Walmart Vice President of Real Estate JP Suarez was frank during the Retail Leaders Panel at CREW Network's annual convention about what Amazon has done to Walmart's business model. Historically, Walmart has been a leader in assortment and price. Then online happened, and those were no longer a differentiator.
"Now we have to look at ways to react to price disruption," Suarez said.
Walmart is turning to its services and aiming not just to be good, but to be great.
“If you’re not great at what you do in retail, you’re going to die. The retailers that are dying are not bad businesses. They’re just not great, and if you’re not great, you will get picked off.”
Walmart is pulling out all the stops to make sure it does not get taken down. That means taking a page out of Amazon's book.
Walmart's Growth In E-Commerce
Walmart is the third-largest online retailer, but it is still far behind Amazon, which continues to dominate e-commerce. A new report from eMarketer predicts Amazon could take 43.5% of the U.S. e-commerce market this year, up from 38.1% last year, as reported by Recode. Meanwhile, eMarketer expects Walmart's market share to grow from 2.8% to 3.6%.
A major reason for Amazon’s dominance is its perception as an online mall, offering over 50 million products from roughly 2 million sellers. Walmart is working to challenge that model. In the first quarter of 2016, Walmart had just 10 million items on its website. With its latest quarterly update, management said it has 50 million items for sale through its online marketplace.
Nearly all of that growth can be attributed to relatively small third-party sellers instead of Walmart bringing in new wholesale vendors. Known for its contentious history with suppliers, the world’s largest retailer has become more accommodating, offering better financial terms and ease-of-use for third-party sellers on its site.
Now, Amazon is being seen as the old crank. The e-commerce giant has gotten a reputation for kicking sellers off its marketplace, raising fees and keeping merchants’ wallets open with a constant stream of new marketing products. Between the per-sale commission and cost of advertising, Amazon takes about 30% of each sale. Walmart takes about 15%.
Overcrowding on Amazon has become a particular sore spot for many merchants.
"Amazon sells 25,000 different kinds of toilet paper holders, how do you win and differentiate in that environment?" Chan Rubin asked Bloomberg. Rubin, who sells vacuum parts on Amazon, answered that question by signing on with Amazon’s biggest rival.
Still, many high-end manufacturers refuse to list their products with Walmart because of its perception as a low-end retailer. Walmart is working to change that, too. Walmart is reportedly partnering with Lord & Taylor to bring its e-commerce operations to Walmart.com. Walmart has also been acquiring small, upscale sellers, like Moosejaw, a maker of $500+ backpacks and other high-end outdoor gear.
The efforts are paying off. Walmart has seen tremendous growth in its e-commerce sales so far in 2017. Its first-quarter e-commerce sales grew 63%, followed by 60% year-over-year growth in the second quarter. Gross merchandise volume is growing even faster.
Amazon has noticed and is drawing a line in the sand.
Picking Sides In The War
You will not find any Nikes being sold by Walmart online. Nike signed an exclusive deal with Amazon. Kohl’s now has an Amazon section in stores and will return items bought through Amazon. The owner of Sears is selling Kenmore-branded appliances on Amazon in some markets. Best Buy is teaming up with Amazon for voice shopping. You can now buy an Amazon Echo in the produce section of Whole Foods.
Walmart is building its own alliances by outright buying partners. Parcel, Bonobos, Modcloth, Shoebuy.com and Jet.com are the company’s most recent acquisitions, for an estimated total cost of $4B. The purchases come with e-commerce talent and institutional knowledge. Jet.com’s former CEO, Marc Lore, is now the head of e-commerce at Walmart. Rent The Runway's founder Jennifer Fliess joined Walmart earlier this year.
Walmart is also forging alliances outside of retail. In voice shopping, it hooked up with Google, which has signed up other chains such as Target and Home Depot to fight the dominance of Amazon's Alexa-powered Echo devices.
The Brick-And-Mortar Battle
Though e-commerce steals the headlines, physical retail still accounts for 90% of all retail sales, according to Suarez.
"At the end of the day, retailers that are properly digitally enabled with a strong retail presence will win," he said.
As Walmart is turning itself into an e-commerce player, Amazon is turning itself into a major physical retailer, but it has a huge gap to make up. Walmart's 5,000 locations puts it further ahead in brick-and-mortar retail than Amazon is in e-commerce.
Amazon now has 13 bookstores, dozens of pop-up stores and partnerships to put products in stores run by Kohl's and Safeway. Amazon's biggest physical retail move was its acquisition of Whole Foods, adding 365 stores. For the first time, Amazon's earnings report details physical store sales, which totaled $1.3B in Q3. Considering Walmart posted $123B in the same quarter, Amazon still has plenty of catching up to do.
The hardest part for Amazon is that Walmart is not standing still. Brick-and-mortar stores are still Walmart’s major focus, as Walmart CEO Doug McMillon described on the company’s recent earnings call. That includes an overhaul of its prototype.
"Today, together, we're building a new Walmart," McMillon said at the company's annual shareholders meeting in June.
The company is testing out a variety of high-tech improvements to its physical locations, including an automated pickup tower at several stores in Arkansas, Detroit, Houston, Atlanta and North Carolina. The tower allows customers to pick up online purchases in store seamlessly.
“Think of this as an ATM for parcel pickup,” Suarez said. Walmart is also working on an app to facilitate returns through the tower. “We’re putting 500 of these towers in our stores, we love them.”
The towers are strikingly similar to Amazon's lockers. Amazon signed contracts in October with building owners and managers to install lockers in more than 850,000 apartments across the U.S. The apartment building program, dubbed “Amazon Hub,” will mix things up by accepting packages from all suppliers, not just Amazon.
Walmart has plenty of other ideas. Robotic employees have been roaming the aisles of Walmart stores in Arkansas, Pennsylvania and California for the past three years. The retail corporation told CNN the program is expanding to locations in El Paso and Fort Worth in Texas, and Jacksonville, Florida, for a total of 50 stores by the end of January.
The Grocery Battle
After dabbling rather unsuccessfully in grocery delivery for the past decade, Amazon’s high-profile acquisition of Whole Foods kicked the battle for your grocery basket into overdrive.
In addition to Amazon Fresh and the 365 Whole Foods stores, Amazon is trying out stalls in Seattle that let people order groceries online and go to drive-in spots to pick up the merchandise. Amazon also sells groceries through Prime Now, the same-day delivery service, and via Amazon Pantry, a Costco-like twist on online shopping.
On the other side, grocery is Walmart’s bread and butter. The retailer is the largest grocer in the United States by far with annual sales of about $170B. At Walmart's recent investor day presentation, one-third of the slideshow focused on online grocery, suggesting it is a priority for McMillon.
About 900 Walmart locations already offer grocery pickup, and Suarez said that will rise to 1,100 by year-end, with more to follow in 2018. The chain is testing out grocery delivery from 12 stores in Denver and San José. In Phoenix it is conducting a delivery test with Uber. Jet.com offers fresh and frozen groceries for delivery on the East Coast and some markets in the Midwest.
Walmart is also testing out stand-alone grocery pickup locations, just like Amazon. Walmart’s next one will be in Metairie, Louisiana, where the company will lease the location and renovate the existing building on the corner into a 4K SF two-story distribution center with drive-thru lanes.
The innovation does not stop at the physical real estate. McMillon recently boasted how one grocery department manager has been using a made-by-Walmart app that helps ensure products are in stock. The retailer used to have a major problem keeping track of inventory and too frequently, items moved to shelves much closer to their sell-by date than necessary, leading to lost sales.
All this equips Walmart well to handle Amazon’s growing grocery presence. Still, Walmart executives recognize how brutally competitive the grocery market will remain. Suarez said Amazon, Aldi, Lidl and other rivals will keep the pressure on. But you guessed it, Walmart has a plan for that, too.
"We're going to win on price. Great Walmart pricing will always be the differentiator," Suarez said.
Walmart has no plans to charge extra for any of its additional delivery or pickup services.
Black Friday And Cyber Monday
Both Amazon and Walmart are gearing up for holiday shopping. Amazon cut prices again at Whole Foods on Thursday, this time on several holiday staples. The e-commerce giant also just announced this year's Cyber Monday deals, and they are starting early with price cuts beginning Nov. 17.
Walmart has its own online deals, and the big-box retailer plans to hold more than 20,000 parties at its stores over the next two months, with the first event, called "Toys That Rock," taking place nationwide this Saturday, Nov. 18.
"While we're shipping a whole lot of advertising to the omnichannel experience, we don't want to let the store experience get lost in that," Walmart U.S. Chief Marketing Officer Tony Rogers said on a call with members of the media. "We are investing in [stores] this year more than we ever have."
The retailer will also increase the number of toy demos in stores to 165,000, and bring Santa Claus in again for selfies.
One thing is certain, the war between Amazon and Walmart is just getting started. As the two largest retailers in the U.S. hurdle toward each other, the biggest winner will be the consumer.
CORRECTION, NOV. 16 8:15 P.M. ET: A previous version of the story incorrectly stated Walmart purchased Rent The Runway. The founder of Rent The Runway parted ways with the company before joining Walmart.
