For both, part of the focus has been about becoming a contender in the apparel space. Armed with the data it’s gleaned from selling billions of dollars of branded apparel—both directly and through third parties—Amazon continues to amass a private-label stable that’s designed to speak directly to its core customer. Meanwhile, Walmart, which has never been considered a fashion leader, bought deeper into the apparel space with two key acquisitions, which also lent it more online cred.
Walmart’s fashion aspirations dovetailed with its drive for a bigger piece of the e-commerce piece through the announcement of its upcoming virtual mall concept, which will bow with a Lord & Taylor flagship, a department store that has struggled in its attempts to become an online destination. While Walmart was prepping its digital push, Amazon laid down physical roots with the Whole Foods acquisition, and in so doing, proving to many that brick-and-mortar retail isn’t dead.
In addition to the larger initiatives, both companies also continued to tinker with return policies, delivery windows and last-mile solutions in an attempt to paint itself as the ultimate in convenience, whether consumers shop online or off.
Each move positions the retail heavyweights for head-to-head competition in the years to come.
Looking at the most recent quarterly results, Amazon’s rapid sales growth outpaces Walmart, posting 29 percent third quarter sales growth, driven by a 40 percent lift in Amazon Marketplace commissions (to $7.9 billion) and 22 percent third quarter e-commerce sales. But Walmart’s 3Q sales are nearly 3X’s as large as Amazon’s and rose 4.2% driven by a 50 percent e-commerce gain and a 2.7% same store sales gain. Amazon’s operating profits and operating profit margin are dwarfed by Walmart at $347 million and 0.79% of sales versus $4.8 billion or 3.87% of sales. Looked at another way, Amazon’s 3Q profits were $8 million less than Walmart’s 3Q operating profit decline of $355 million as it beefed up investment in e-commerce, price, technology and labor. But then, Amazon has always been rewarded by investors for sliver thin margins and reinvesting in its businesses to grow the top line; now other retailers are following suit but investors may penalize retailers that mimic Amazon’s strategy—as witnessed by Goldman Sachs lowering its buy recommendation on Walmart shares to neutral on Nov. 20 based on valuation.
Through Nov. 17 Walmart shares rose 42 percent, with significant price-earnings ratio expansion, from 16X to 21X forward estimates. Really, 21x versus Amazon’s 142 P/E multiple; it may be time to reconsider the premium Amazon has been afforded. Amazon’s flywheel is mighty powerful, driven by the virtuous cycle of new Prime members, new services and merchandise offerings, and efficiency and speed, but those 470 WholeFoods Market stores are bound to alter Amazon’s asset- (and labor-) light competitive advantages.
—Additional reporting by Marie Driscoll