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Gladiators Get Killed; Dump Wal-Mart, Buy Amazon

17 October, 2011

Wal-Mart has had nine consecutive quarters of declining same-store sales, reports Reuters. Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent for the company to reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.

After four decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, which is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy-to-identify bull’s eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiselling away at Wal-Mart’s No. 1 position and at its margins!

Yet, the company has eschewed all opportunities to shift with the market. Its primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) sort of a Facebook-as-local-newspaper approach to advertising. But none of these extensions of the old strategy makes Wal-Mart more competitive as shown by the last nine quarters.

On top of this, the retail market is shifting pretty dramatically. The big trend is not the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers that show the accelerating trend:

  • In 2010, preparing for the holiday shopping season, 60 per cent of shoppers planned going to Wal-Mart, 45 per cent to Target and 40 per cent online.
  • Today, 52 per cent plan to go to Wal-Mart, 40 per cent to Target and 45 per cent online.

This trend has been emerging for over a decade. The ‘retail revolution’ was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the online trend keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores may fail as well. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment and then buying online where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be online retailers, who like David-versus-Goliath use technology to change the competition. And the clear winner at this, so far, is the one who has identified trends and invested heavily to bring customers what they want while changing the battlefield.

Increasingly, it is obvious that Amazon has the leadership and organisational structure to follow trends in creating growth:

  • Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales, bankrupting thousands of independents and retailers like B. Dalton and Borders.
  • Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
  • Amazon developed an online storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the online trend.)
  • Amazon created an easy-to-use application for authors so that they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their products.
  • Amazon recognised the mobile movement early and developed a mobile interface rather than relying on its Web interface for online customers, improving usability and expanding sales.
  • Amazon built on the mobility trend, when its suppliers, publishers, didn’t respond, by creating Kindle which has revolutionised book sales.
  • Amazon recently launched an inexpensive, easy-to-use Tablet (Kindle Fire), allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the ‘Wal-Mart Slayer.’

Each of these actions was directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no-growth economy. Just look at sales of Kindle books:

Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3, unique visitors rose 19 per cent versus 2010, and September has witnessed 26 per cent increase.  Kindle Fire sales were 100,000 on the first day and 250,000 during the first five days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15 million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is No. 2, Amazon is No. 3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few months’ experience, Amazon is bigger than Google Offers and is growing at least 20 per cent faster.

After 1980, investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight, we know management burnt through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have three decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.

Given that gladiators, at best, end up bloody and most often dead investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple) make enormous returns for investors. Amazon today is a really good opportunity.


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Gladiators Get Killed; Dump Wal-Mart, Buy Amazon

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