The Margin of Competition Between Amazon and Walmart

The margin of competition between the Amazon, the largest online retailer of the world and the Walmart, the largest brick and mortar business of America (revenue wise) has been diminishing considerably in last few decades. Since its first physical appearance in 2015, the giant ecommerce leader Amazon has been constantly threatening the well-established opponent of the industry, Walmart, which recently started to invest heavily in online retailing. A level playing ground has been created as Amazon’s invoked into the brick and mortar retailing and Walmart started to focus on online game (Hudson, 2017). The proliferation of the Internet, mobile and computing technology makes it easy to predict that the main showdown will take place on the online marketplace (Heller, 2016). This paper will review the market competition of these two companies in light of their market conditions, strategies and other factors.

Industry overview

The retail industry is a major contributor to the national economy. An estimated two-thirds of the US GDP comes from the industry. The estimated size of the industry is 5,733.4 billion US dollars in 2017 (Plunkett Research Ltd, 2017). More than 75 world leading retailers run USA based businesses (Farfan, 2017). The industry comprises of both brick and mortar (physical shop) and ecommerce (online shop) businesses. The industry experiences a constant growth throughout the year to accommodate the growing needs of consumers despite economic downturns. A report from US census bureau exhibits an average 4.5% growth of the industry between 1993 and 2005 (Farfan, 2017). Considering the revenue, size of operation and growth, the retail industry is mostly concentrated between Amazon and Walmart.

Industry Demand Determinants and Profitability Drivers

Amazon

The main demand determinants of retail industry include price, convenience, income, product diversity, competition, availability of substitute products and customer preferences. Of these factors, the price and convenience factors mostly drive the business demand of Amazon. The main profitability driver for Amazon is the technology. Its cloud service Amazon Web Service (AWS), multimedia service Amazon Prime and third-party seller service Marketplace earns more than half of its annual revenue (Stevens, 2016). Intensive adoption of technology in every aspect of the business has been the major secret of profitability for Amazon.

Walmart

The main demand determinants of Walmart are the price, availability and comfort. Despite the proliferation of the IT, few people either do not know or prefer to use it in their retail purchase or prefer to do their shopping physically, which remained to one of the demand determinants of Walmart as it has the competitive advantage of having the largest number of retail shops in the USA.

The main profitability drivers of Walmart include low overhead cost, increased sales and an established business goodwill.

Internal Analysis

Amazon

The SWOT matrix of Amazon is as below. From the SWOT analysis, it is obvious that the company is progressing and has little to worry about from both internal and external factors. However, it should ensure that the competitors do not overrun its advancement and technical disaster such as cyber security and system failure do not interfere with the progress of the company.

Walmart

The SWOT matrix of Walmart is given below. From the SWOT analysis, it is obvious that the core business strategies such as low overhead cost, large scale operation and cost leadership are the strengths of the company.

The company has been facing lawsuits from labor union and its delivery time needs more acceleration. However, it can leverage over its large number of outlets spared all over the nation. However, it is under constant threats from strong rivals like Amazon.

Key Strategies

Amazon

Amazon’s strategy is to invade the territory of Walmart’s brick and mortar business model seems to be paid off. The online retailer has been experienced a high and consistent growth since its first physical appearance in 2015. With a view to enhance market domination, the company is heavily investing in vertical expansion as evident from its acquisition of the Whole Foods in 2017 (Whitten, 2017). The acquisition of Whole Foods will add more diversity to Amazon’s shelf and will attract more consumers through providing their everyday meal solutions under one roof. With the core mission to develop a customer-friendly business model, the company is constantly innovating in its cash out, product delivery and inventory management services through the integration of technology. It has recently opened, Amazon Go, world’s first automated checkout system, where customer’s will not have to wait in the queue (Amazon Go, 2017). It is planning to introduce Amazon Fresh, an organic food delivery system to help people afford fresh foods at their home (Whitten, 2017). It recently ran Amazon Prime Air service, which guarantees 30 minutes delivery of products through drones (Amazon, 2016). Although various legal, security and technical factors are yet to be resolved, the prime air service will be the game changer for the retail industry (Bailey, 2017). The company heavily uses robots and automated technology for its product routing and inventory management, which helps it remain on schedule and handle the gigantic volume of products.

Walmart

In response to the stringent competition thrown by the Amazon, Walmart is moving smartly. As the only sizable competitor of Amazon, Walmart is ready to go an extra mile to thrive in the retail business as evident from its recent focus on online retailing (Bentonville., 2017). It recently acquired ecommerce business Jet.com to develop its online retailing model to battle head-to-head competition with Amazon (Monica, 2017). It further acquired ModCloth, Bonobos and Moosejaw, three online retailer specialists, to expand horizontally.

The company continues to thrive to its aggressive pricing model in its online business to remain popular. Its strategy is to put intensive control on overhead costs to support the aggressive pricing model. To serve a broad base of customers with an assortment of needs, the company tailors its product assortments. To remain accessible to customer close to their neighborhood, Walmart opened 1000 pickup locations for its online customers following its growth in the number physical shops; it is estimated that 9 out of 10 Americans can find a Walmart shop or pickup point in their neighborhood (Green, 2017). In order to remain competitive in the business, the company focuses on minimizing its supply chain costs. It recently reported a 21% increase in its fuel efficiency in product shipping (Marion, 2017).

Financial Performance Analysis

Amazon

Amazon is experiencing a consistent growth in sales and revenue for the last five years as evident form the income statements in Appendix A.1. The net sales in year 2016 is $136 billion, which is a 27% increase from the previous year. A 300% increase in net income is recorded in 2016 with $2.37 billion from $596 million in 2015 (Morning Star, 2017). The net income raise may be attributed to the revenue from web services. 55% of increase in revenue, which accounts for $12.2 billion, comes from web services in 2016 from 2015.

From the key financial ratios of the last five years (Appendix A.2), Amazon is maintaining a consistent current ratio and quick ratio over the last five years, which indicates the company has adequate cash to meet short term obligation. A close to unity liquidity ratio indicates its goodness to stockholders. The debt/ equity ratio has increased considerably from 2014 and onwards. This indicates that the company is expanding considerably. Current stock price of the company is $1,402.05 which is a 1.175% increase from the previous day (Yahoo, 2018).

Walmart

As evident form the income statement (Appendix B.1), Walmart’s yearly sales revenue and net income is not growing considerably but is consistent over years.

From the key financial ratios of the last five years (Appendix B.2), Walmart is maintaining a consistent current ratio and quick ratio over the last five years but the figure is less than unity. It indicates the company is not well efficient in meeting short term obligation with its cash. A close to unity liquidity ratio indicates its goodness to stockholders. The debt/ equity ratio has been consistent and is less than unity, which indicates lack of significant growth. The stock price of Walmart is $108.39, which is a 1.68% increase from the previous day (Yahoo, 2018).

Recommendations

Amazon needs to strengthen its current business policy to ensure the consistency in growth whereas Walmart needs growth strategy as well strong policy for facing strict competition in the industry. Considering current status, Amazon is far better off than Walmart and will remain so in upcoming years unless Walmart comes with any game changing plan.

Opportunities to Growth

Amazon has the opportunity to grow as a brick and mortar business whereas Walmart needs to develop its business policy to catch up with the new ecommerce business. Furthermore, Walmart may try to deploy technology more into its business operation to lower its price and increase revenue.

Conclusions

The retail business of the USA and the world mostly revolves around the battle of two giants Amazon and Walmart. These two companies are now combatting head to head and improving their business strategies and operational plans constantly to thrive in the competitive market. Each of them has the ability, infrastructure and capacity to role out the other and overtake the entire market. However, whoever loses, the customers will win certainly as a result of their price and advantages competition.

References

Amazon. (2016, December 31). Amazon Prime Air. Retrieved from Amazon: https://www.amazon.com/Amazon-Prime-Air/b?node=8037720011

Amazon Go. (2017, December 13). Amazon Go. Retrieved from Amazon: https://www.amazon.com/b?node=16008589011

Bailey, K. (2017, Novermber 20). Why Amazon’s Drone Delivery Service Is Unrealistic. Retrieved from Observer: http://observer.com/2017/11/amazon-prime-air-drone-delivery-service-might-never-happen-in-united-statesr/

Bentonville., A. (2017, October 10). Walmart Highlights Progress on Strategic Initiatives and Outlines Plan to Win with Customers and Shareholders at its Meeting for the Investment Community. Retrieved from Walmart: https://news.walmart.com/2017/10/10/walmart-highlights-progress-on-strategic-initiatives-and-outlines-plan-to-win-with-customers-and-shareholders-at-its-meeting-for-the-investment-community

Farfan, B. (2017, July 16). 2016 US Retail Industry Overview. Retrieved from The Balance: https://www.thebalance.com/us-retail-industry-overview-2892699

Green, D. (2017, December 15). Walmart and Amazon’s long-simmering feud exploded in 2017 — and it’s redefining retail. Business Insider.

Heller, L. (2016, October 30). The Battle Between Walmart And Amazon Will Be Epic. The Forbes, p. Shoptalk.

Hudson, E. K. (2017, December 03). Competition between Walmart and Amazon thickens. In the balance, our future. Retrieved from The Real Deal: https://therealdeal.com/2017/12/03/competition-between-walmart-and-amazon-thickens-in-the-balance-our-future/

Marion, G. (2017, March 12). Walmart’s Strategic Initiatives. Retrieved from The Balance: https://www.thebalance.com/wal-mart-s-strategic-initiatives-2221112

Monica, P. R. (2017, November 27). Amazon vs. Walmart: Rest of retail fights for crumbs. CNN, pp. http://money.cnn.com/2017/11/27/investing/cyber-monday-online-retail-stocks-amazon-walmart/index.html.

Morning Star. (2017, December 31). Amazon.com Inc. Retrieved from Morning Star: http://financials.morningstar.com/ratios/r.html?t=AMZN&region=usa&culture=en-US

Plunkett Research Ltd. (2017, July 16). U.S. Retail Industry Statistics and Market Size Overview, Business and Industry Statistics. Retrieved from Plunkett Research Ltd: https://www.plunkettresearch.com/statistics/Industry-Statistics-US-Retail-Industry-Statistics-and-Market-Size-Overview/

Stevens, A. (2016, June 10). What Are Amazon’s Revenue and Profitability Drivers? Retrieved from Market Realist: https://marketrealist.com/2016/06/amazon-emerged-one-biggest-disruptive-forces

Whitten, S. (2017, August 24). Amazon’s acquisition of Whole Foods is ’a threat to everyone,’ even restaurants.

Retrieved from CNBC: https://www.cnbc.com/2017/08/24/amazons-acquisition-of-whole-foods-is-a-threat-to-everyone-even-restaurants.html

Yahoo. (2018, January 26). Amazon.com, Inc. Retrieved from Yahoo Finance.

Appendix

Appendix A

A.1. Amazon’s Five-Year Income Statement

12 months ended

Net sales

Income from operations

Net income (loss)

Dec 31, 2012

61,093

676

-39

Dec 31, 2013

74,452

745

274

Dec 31, 2014

88,988

178

-241

Dec 31, 2015

107,006

2,233

596

Dec 31, 2016

135,987

4,186

2,371

Source: Based on data from Amazon.com Inc. Annual Reports

A.2. Amazon’s Five-Year Key Financial Ratios

Liquidity/Financial Health

2013

2014

2015

2016

2017

Current Ratio

1.07

1.12

1.08

1.04

1.03

Quick Ratio

0.75

0.82

0.77

0.78

0.74

Financial Leverage

4.12

5.07

4.89

4.32

4.67

Debt/Equity

0.53

1.16

1.06

0.79

1.00

Appendix B

B.1. Walmart’s Five-Year Income Statement

12 months ended

Net sales

Income from operations

Net income (loss)

Dec 31, 2013

466,114

27,801

16,999

Dec 31, 2014

473,076

26,872

16,022

Dec 31, 2015

482,229

27,147

16,363

Dec 31, 2016

478,614

24,105

14,694

Dec 31, 2017

481,317

22,764

13,643

Source: Based on data from Wal-Mart Stores Inc. Annual Reports

B.2. Walmart’s Five-Year Key Financial Ratios

Liquidity/Financial Health

2013

2014

2015

2016

2017

Current Ratio

0.83

0.88

0.97

0.93

0.86

Quick Ratio

0.20

0.20

0.24

0.22

0.19

Financial Leverage

2.66

2.69

2.50

2.48

2.56

Debt/Equity

0.54

0.58

0.54

0.55

0.54