• Industry Spotlight

Retail stocks: from Walmart's bricks to Amazon's clicks

This is Part 3 of our retail stock series, read parts 1 and 2 here:

Amazon. It’s impossible to talk about the future of retail without mentioning the e-commerce powerhouse, which became the second-ever company in the world to briefly break the trillion dollar mark in September. 

But it’s also impossible to imagine that future without considering Walmart [WMT], the US big-box retailer that is consistently characterised as Amazon’s lumbering bricks-and-mortar competitor.

Representing both the past and present of retail business models, these two – and their competitors in-between – have been going head-to-head for some time. As the battle rages on, however, it’s clear that each is starting to learn from the other’s playbook.


The rise of Walmart 

Having started out as a single discount store in Arkansas, Walmart has gone on to become the company that generates the world’s most profits, employing 2.3 million people in more than 5,000 shops across the US. 

Since its IPO in October 1970 – when shares were listed at $16.50 apiece – the company has gone on to reward shareholders immensely. Despite some blips in its value (and only the slightest wobble when Amazon [AMZN] floated on the market in May 1997), the stock has, on balance, been a safe bet. 


$280bn - Market cap of Walmart 


Walmart’s recent August earnings show that the retail giant not only won’t succumb to Amazon any time soon, but has placed a target on its rival’s back: the retailer reported its best overall figures for more than a decade with its e-commerce business growing by 40%. Visits to Walmart’s physical stores have been increasing, too, by just over 2% – and shoppers are spending more with each visit. 

After all this good news, its stock responded accordingly, shooting up by 9%. Department store chain Macy’s [M] had good news in the first half of 2018, too, reporting sales growth of more than 2%. 

It has invested in retail tech firm b8ta, and is planning to use the start-up’s software to scale its shop-in-shop concept (although its stock fell after the announcement, with investors concerned over whether this performance could continue).


$915bn - Market cap of Amazon


Mall scale

Indeed, analysts have been flagging up problems with stores such as Walmart, Macy’s and Target [TGT], which have huge real-estate footprints, for some time. 

“As store closures and bankruptcies continue among key retailers, we expect further deterioration in the mall ecosystem,” Goldman Sachs said in September. 

In a world where tech powerhouses are expected to take all, investors have been pushing physical retailers to future-proof their business models. At Walmart’s 2017 AGM, CEO Doug McMillon acknowledged this need to take on Amazon. “[Walmart] has started to invent the future of shopping again,” he told shareholders. 

“We’re going to make shopping with us faster, easier and more enjoyable. We’ll do more than just save customers money and you, our associates, will make the difference. Looking ahead, we will compete with technology, but win with people. We will be people-led and tech-empowered.”

Last year, it introduced Store No. 8, a tech incubator that has launched three start-ups to date, all focused on building innovative retail technology. 

Within Walmart HQ, the company is reportedly looking into launching a streaming service, and has also been on an acquisition spree, last year bringing into its portfolio modern fashion brands such as direct-to-consumer menswear brand Bonobos and vintage-inspired ModCloth. 


“Walmart is strong in groceries but it doesn’t have the long tail” – Aaron Shields, executive strategy director at Fitch


Mattress empire

The retailer has also been mimicking the actions of start-ups wherever it can’t acquire them. 

In a nod to the rise of Casper mattresses and the burgeoning sleep-industry empire, Walmart has introduced its own bedding and mattress line, exclusively available online. It’s also said to be launching a high-end basics clothing range (in the style of start-up apparel company Everlane).

Aaron Shields, executive strategy director at retail consultancy firm Fitch, says that these acquisitions are a reflection of Walmart’s strategy to move beyond being a place to get general groceries and instead become a one-stop destination for all kinds of products, in a similar vein to Amazon. 

“Walmart has realised it’s very strong in general grocery and merchandise, but it doesn’t have the long tail. It has what people shop for most weeks, not those once-a-month or once-a-year purchases,” he explains. “One of the pillars of [Walmart’s] strategy is around acquiring more of these longer-tail companies.” 

Morgan Stanley analysts agree. In a note to its clients, it suggested that, in order to keep competing with Amazon, Walmart should continue acquiring companies with sophisticated e-commerce models, like direct-to-consumer glasses brand Warby Parker and athleisure brand Outdoor Voices.


Passage to India

But Walmart’s biggest acquisition, which has put it most directly in a dogfight for dominance with Amazon occured this summer when it bought 77% of Indian e-commerce giant Flipkart (which Amazon tried to acquire three times, but was blocked by India’s competition commission each time). 

Currently, Amazon and Flipkart each control about 30% of the marketplace. With India’s e-commerce market expected to quadruple to reach $150bn by 2022, there’s a big battle at hand.

Walmart is also expected to use Flipkart’s tech and experience to push into e-commerce in more emerging markets as it takes its targeting of Amazon global.

5000 - Number of Walmart stores in the US 


Keeping up with the Waltons

Other retailers are stepping up their digital offering, too. Costco [COST] announced an impressive 35% increase in e-commerce sales at the start of 2018, while department store Kohl’s [KSS] has been busy opening up e-commerce fulfilment centres across the US. 

Target, meanwhile, announced a 41% increase in digital sales in its most recent earnings call. Store-only sales were up by about 5% too, with Target benefiting from a similar strategy to Walmart.


4 - Number of Amazon Go stores in the US

In recent months, it has launched its own electronics range and two low-cost clothing brands. The company says that long-tail items like these are helping to drive sales. 

It’s also acquired Shipt, a same-day grocery delivery start-up, in a bid to compete with Amazon Fresh and other nimble grocery delivery firms like Instacart.


What Amazon doesn’t have

This is where Amazon is realising its biggest weakness. Yes, it has made a success of becoming a go-to destination for low-repeat purchase items like electronics. 

But it doesn’t have what its incumbents have in spades: physical presence. When it comes to grocery items that people will visit stores for on a weekly or even daily basis, Amazon is lagging behind: for the most part, people don’t want produce delivered. 

A decade after launching its grocery service, Amazon Fresh, the online retailer recognised that it was, perhaps, trying to change consumer shopping habits too much and has even shuttered the service in some locations.

It has since gone on to purchase Whole Foods (for $13.7bn in 2017) and started offering a grocery click-and-collect service through the health-food retailer. 

Still, this only adds about 480 stores to its portfolio, and mostly in more affluent areas in the US (as well as London). Back in South Asia, barred from buying Flipkart, Amazon has also moved into physical retail, buying 49% of Indian supermarket chain More.


40% - Increase in digital earnings reported by Target


On the future shopping side of things, its Amazon Go food stores – which enable buyers to pick up goods and walk out the door without checking out – have been called revolutionary, but have also faced some technology glitches. 

The roll out had to be delayed multiple times after the tech went into meltdown when more than 20 people were in the store. As a result, just four have been opened since the first launched in 2016 (Amazon is reportedly now “considering” opening 3,000 by 2021).

Compared to its Chinese e-commerce counterparts however, Amazon is trailing behind in futuristic retail. 

Online giant Alibaba [BABA] has had runaway success with its Hema supermarkets (it has 65 stores and counting, complete with mobile phone scanning and payment, robots and overhead conveyor belts). 


$13.7bn - Amount Amazon paid for Whole Foods


Its dominance in e-commerce in China may also worry Amazon: the market is set to reach $1.8tn by 2022

Alibaba has also expanded into smart-technology fashion, in partnership with US lifestyle brand Guess?, to create an experience similar to Farfetch’s Store of the Future in Hong Kong. 

Here, every time a customer picks up a piece of clothing, special tags alert smart mirrors that then display prices and styling tips. All transactions are made through Alibaba’s e-commerce app.


Brave new world

Amazon’s power is going nowhere, but retailers are shaking off a previously near-paralysing fear of the behemoth. 

Stocks have been over performing, with Walmart, Target and Home Depot [HD] appearing on many investment houses’ buy recommendations; the widely predicted death of bricks-and-mortar retail appears to have been a mistake.

In 2016, Warren Buffett dumped the majority of Berkshire Hathaway’s shares in Walmart. If he’d clung on to them, it’s estimated his investment firm could have grown to the tune of $50bn. 

And with the growing opportunity in India and other emerging markets, along with strong digital sales in the US, it looks like the growth of the once-considered dinosaurs like Walmart is set to continue.

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