Kings of Retail: Can Amazon Knock Wal-Mart Off Its Throne?

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The growth of Amazon (NASDAQ:AMZN) has been nothing short of meteoric. Over the past few years the company has turned the retail business on its head, knocking out competitors left and right and forcing itself to the top of the heap of online retailers.

This head-knocking hasn’t gone unnoticed by other retail industry heavyweights, and now, 20 years after opening its online doors, it appears that Amazon has finally kicked the proverbial hornet’s nest.

That hornet’s nest is Wal-Mart (NYSE:WMT), the undisputed champion of American retailers. The mega retailer, which made its name in the big-box weight class, is getting ready to bring the fight for retail dominance from its brick-and-mortar locations onto the virtual stage. While Wal-Mart does have an online presence, it’s hardly competitive with Amazon’s marketplace. Consumers are much more likely to simply jump in the car and make the trip to a physical Wal-Mart location to make a purchase than to use the company’s website, which consumers often use to simply check prices or store availability.

As Amazon does not hold physical store locations, the two companies have thus far had a major barrier to keep them separated, despite the fact that they both provide essentially the same services to customers. But Amazon has finally picked up enough momentum that Wal-Mart executives must be feeling the heat, and have decided to take action.

As reported by GeekWire, it looks as though Wal-Mart is taking the Amazon threat seriously enough that it is ramping up its online presence. Amazon occupies a space that has, for the most part, been untouchable by Wal-Mart, which is famous for opening up shop, undercutting the competition, and putting other smaller brick-and-mortar shops out of business.

Amazon’s online-only approach has left it invulnerable to that method, so Wal-Mart is taking the fight to the company. It appears to be paying off, as well. GeekWire says that Wal-Mart’s online sales in the third quarter were up 24 percent year-over-year on a constant currency basis.

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Those numbers do inspire confidence, but they won’t come cheap. Wal-Mart is investing heavily in its online presence, noting in its latest earnings report that earnings will be lower than initially forecast as the company absorbs higher healthcare costs and puts more money back into augmenting its virtual storefronts.

“We delivered net sales growth of $1.9 billion in the second quarter,” said Greg Foran, Walmart U.S. president and CEO. “Our e-commerce business, including store-fulfilled sales, delivered double-digit sales growth.”

When you crunch the numbers, Amazon still lags well behind Wal-Mart in terms of overall revenues and in size. Amazon’s market value is roughly $154 billion, while Wal-Mart’s is $239 billion. Yes, that margin has been shrinking as of late, but is it really enough to spook the Wal-Mart brass into letting their shareholders down to mount the defenses?

It would appear so, and it’s not only pressure from Amazon and its ilk on the online space. The fact is, anemic economic conditions in the United States — and even the world — are beginning to take their toll. Wal-Mart has traditionally been a retailer built for and staffed by the lower and middle classes.

A deeper look at Wal-Mart’s recent earnings, although massive, do show some cracks in the retail giant’s armor. Slate dug in and revealed that the store’s traffic declined 1.1 percent this past quarter, which has led to some executives actually being let go. Profits have also taken a dip, due to a variety of reasons, including increased competition from online retailers.

Slate’s take on what’s really behind the company’s sluggish results over the past few quarters? As Bill Clinton once said, “It’s the economy, stupid.”

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A great number of companies that have been traditionally geared toward middle-class consumers are experiencing problems. Restaurants like Olive Garden and Red Lobster are feeling the crunch, and even Wal-Mart itself hasn’t been immune. As middle- and lower-class families struggle mightily with the new face of the American economy, the businesses that cater to them are having a hard time adjusting.

Perhaps that’s what has helped spur Amazon’s growth, as consumers are able to use its virtual platform to compare prices from many competing vendors on Amazon’s marketplace, often finding items for substantially lower prices than they would otherwise. Amazon also fills a niche for urban dwellers and millennials, who oftentimes don’t own a vehicle and are not willing to make a trip to the suburbs to visit a Wal-Mart location.

One other area that Amazon is attacking with full force is groceries, which Wal-Mart has come to dominate over the past several years. By taking on traditional supermarket chains for customer dollars, Wal-Mart was able to find a new segment in which to grow, but recent trends seem to indicate that even that is subsiding.

Meanwhile, Amazon has rolled out its Amazon Fresh grocery delivery service, which appears to be the next big growth area for the company, and it has been welcomed by consumers. So far, only customers in Seattle, San Francisco, and Los Angeles have been able to try it out, but the company is set to expand the service in the future.

Wal-Mart is experimenting with smaller, more urban-centric stores to try and bring its presence to more customers. Similar to what Target (NYSE:TGT) has done with its “City Target” stores, Wal-Mart is opening “Neighborhood Markets,” which are essentially small, grocery-focused brick-and-mortar locations. The numbers being reported by those stores have been positive so far and could provide a glimpse into the company’s long-term strategy.

Even so, the company faces a formidable and growing foe in Amazon, and if Wal-Mart hopes to keep pace it will need to keep redirecting resources to bolster its online presence. If it doesn’t, the company may be asunder due to its heavy investments in physical store locations while other retailers take advantage of virtual space.

All signs point to big changes in the retail industry overall, and for right now, Amazon is shaking things up enough that even Wal-Mart is looking to institute big operational adjustments.

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