According to the Wall Street Journal, Walmart’s reign as America’s biggest retailer is under threat from Amazon. The numbers are extraordinary:
Walmart sales in 2023 were US$648B. The bulk of this is through US retail stores, with a side hussle in advertising and digital sales.
Amazon reported US$575B last year, with the bulk of its profits from non-retail operations such as cloud computing (AWS) and advertising.
To put those numbers in context, ten of Australia’s biggest revenue earning companies earned a combined US$275B (or A$413B at ca. 0.67 exchange rate) last year.
But let’s shift our focus to the US grocery business. Walmart reportedly earn about 56% of their sales from groceries, or about US$360B in what is estimated to be more than a $1T industry. It is a fiercely competitive industry, with 63,000 supermarkets and margins 1-3%.
Walmart began selling groceries in 1988. It has about 4,600 stores in the US, more than 10,500 worldwide. Walmart has about 25% US grocery market share, 3-4 times the nearest rival[1].
Amazon’s acquisition of Whole Foods in 2017 generated enormous excitement, with many predicting within a few years, Amazon would come to dominate this highly competitive market segment. The result has been wildly different.
Amazon launched Amazon Go six months later (2018), again to much fanfare ( or you can watch the SNL sketch here). In March 2022 one contributor to Fortune declared: Amazon Go is already the greatest retail innovation of the next 30 years. Just two years later, the same writer reported: Amazon’s removal of Just Walk Out from Amazon Fresh is just plain smart[2].
So, where is Amazon’s burst into the physical retail market now? As one commentator observed:
“A deal many thought would transform the US retail industry and send traditional bricks-and-mortar retailers to their doom has instead been one giant snooze fest”
Amazon has been experimenting with physical stores for nearly a decade. It opened its first book store in Seattle in 2015; its second in mid 2016. It went on to open 24 book stores in the US. But in March 2022, Amazon announced it was closing “all 68 of its Amazon Books, Amazon 4-star, and Amazon Pop-up locations across the US and UK to focus on its fresh, whole Food and Go”.
The reality is that Amazon’s experiment in grocery has also failed to live up to expectations. Amazon has about a 2% market share in the US grocery business. Can Amazon succeed? Your first thought is probably: would you bet against Amazon? But there are some important reasons to challenge that presumption.
How can you evaluate the likelihood of success in a diversification strategy? Here are three questions which might guide your thinking.
What can you do better than any of the competitors in the sector?
Amazon might argue it has better data analytics capability than the incumbents: it is in its DNA. Walmart is likely no slouch, but data analytics is not its DNA. Amazon could also argue its innovation flywheel outperforms against most major corporations rate of innovations. Has this advantage been enough to out compete Walmart? Apparently not.
What strategic assets do you need to succeed in this market? If not, can you catch up?
Key assets in supermarkets include: physical assets (stores); logistics and supply chain capability; consumer market knowledge; specialist retail store know how. Whilst Amazon clearly has logistics and supply chain know how, it lacks physical stores and specialist retail store knowledge. And its consumer knowledge is in the online environment, not ‘in store behaviour’.
Could Amazon acquire or develop these resources & capabilities? Arguably, but in strategy there’s a phrase we use ‘path dependence’. We might know what we need to do, but it takes time to build out these resources and capabilities.
Amazon’s core strategy is clear across its various retail businesses: convenience and low cost, built on scale. Amazon has recently closed 8 of its 28 Amazon Go convenience stores. Walmart has 4,600 stores. Amazon is at a severe disadvantage because they operate so few stores.
Walmart has more than 25 years experience in physical store retailing. Amazon can recruit executives with deep experience in grocery retail, but success requires more than executive capabilities. As one former Amazon retail executive observed:
“success in retailing is based more on flawless execution than on introducing new technology … given the choice of investing capital in technology or increasing the quality of products like
fruit and vegetables, retailers should invest in quality”
Amazon has plenty of experience in selling groceries, just not in physical stores. And physical stores are much different – and more difficult – than selling over the internet.
What can you learn from diversification - and are you set up for the learning?
Amazon has a longer investment horizon that most businesses. These forays into physical retail can be seen as investments in learning. The reality is that Amazon is a US$1.9T company (at 23 May 2024). There are few new markets that are big enough to move the dial on revenue and earnings for a company that size. A US$1T retail market might be that next growth opportunity, alongside health. Thus, investing in store based retail may be a stepping stone to a greater future. For example, could Amazon’s experience from physical retail lead to improved online retail performance?
Through 2023 the CEO Andy Jassy expressed confidence in the bricks and mortar grocery business:
“we doing a fair bit of experimentation today … to find a format we think resonates with customers, differentiated in some meaningful fashion, and where we like the economics … we’re optimistic
we’re going to find that in 2023”.
What makes Amazon think they can win in the physical stores? I’m not a believer. To succeed it is going to have to create a new model for groceries: just walk out isn’t enough.
But Amazon is the #2 player in online groceries (22% market share behind Walmart on 25.7%). Can they dominate the online groceries? Absolutely. This plays to their DNA. To adapt from a quote by Elon Musk[3]:
“Amazon is a digital company … if we’re not the leader, shame on us”
The Unfashionable Strategist
[1] The numbers vary depending on your source, but the picture is consistent: Walmart is a behemoth.
[2] Although to be fair, his commentary highlighted the disconnect between the value of the ‘just walk out’ technology and the Amazon Fresh value offering
[3] Musk’s original quote was: “Tesla is a Silicon Valley company. If we’re not the leader, shame on us”
