Friday, December 01, 2017

Clash of the Titans

If you are an avid reader of economic stories in the news media, the above headline will not be unfamiliar to you. It reflects what is probably the most revolutionary impact ever to affect an industry that has seemingly been with us for centuries – retailing. Having entered that field with an MBA in retailing, and as a 30 year veteran of that industry, I am astonished and intrigued by the speed with which the traditional system of consumer/retail store relationships seem to be deteriorating. Despite the hundreds of thousands of retail establishments in this country there is just one that has caused this unique upheaval – Amazon.

The Retailing Debacle

The most conspicuous example of that is the cascade of retail store closings in 2017 (many of them the brand-name anchor outlets once courted by competing real estate developers). Here is the count: Sears/Kmart 358; J.C. Penney 138; Macy’s 68; Staples 70; Limited 280; Gap 200; hhGregg 220; Payless Shoe 800-900; plus many others. Credit Suisse’s shocking estimate of store closings in 2017 number 8,640. If that isn’t bad news enough about the retail industry, the landscape for shopping centers is equally alarming. This is how Time Magazine has reported on this subject.

“Local jobs are a major casualty of what analysts are calling, with only a hint of hyperbole, the retail apocalypse. Since 2002, department stores have lost 448,000 jobs, a 25% decline, while the number of store closures this year is on pace to surpass the worst depths of the Great Recession.”

Time continues: “Shopping malls are both workplaces, and gathering places. And in the 61 years since the first enclosed one opened in suburban Minneapolis, the shopping mall has been where a huge swath of middle-class America went for far more than shopping. It was the home of first jobs and blind dates, the place for family photos and ear piercings, where goths and grandmothers could somehow walk through the same doors and find something they all liked. Sure, the food was lousy for you and the oceans of parking lots encouraged car-heavy development, something now scorned by contemporary planners. But for better or worse, the mall has been America’s public square for the last 60 years.”

However, shopping malls are feeling the consequences of failing retailers. There are still about 1,100 malls in the U.S. today, but a quarter of them are at risk of closing over the next five years, according to estimates from Credit Suisse. Other analysts predict the number will be even higher.

The Current Titan

Amazing is the fact that this devolution of traditional retailing, as well as the once ubiquitous shopping mall, is the result of the extraordinary and intimidating success of just that one company – Amazon. I first wrote about this then relatively new company (created in 1994) in 1998 in this publication when I wrote, “Amazon will never make a profit.” My prediction held until six years later when the company did make its first profits of a measly $5 million. Still, Jeff Bezos, the founder of Amazon, is much less concerned with profits than with revenue.

In fact just recently the Barons publication wrote, “ has built an ecommerce giant in large part by playing the long game. More than two decades into its existence, Amazon still doesn’t generate much in the way of profit, and the company remains willing to make investments regardless of profitability. Investors have gladly gone along for the ride.” That would be somewhat of an understatement since an investment of $1000 in its IPO 20 years ago would now be worth some $500,000 as of this writing (November 22). Not coincidentally it also made Jeff Bezos, the founder and CEO of Amazon the richest man in the world with $49.7 billion.

The Other Titan

What really exaggerated the recognition, and accelerated the momentum of a clash between the two behemoths of retailing, Amazon and Walmart, was Amazon’s purchase of Whole Foods. Here is how the New York Times viewed this move: “With Amazon buying the high-end grocery chain Whole Foods, something retail analysts have known for years is now apparent to everyone: The online retailer is on a collision course with Walmart to try to be the predominant seller of pretty much everything you buy.”

But this is Time’s most interesting observation: “Each one is trying to become more like the other — Walmart by now investing heavily in its [on-line] technology, Amazon by opening physical bookstores and now buying physical supermarkets. But this is more than a battle between two business titans. Their rivalry sheds light on the shifting economics of nearly every major industry, replete with winner-take-all effects and huge advantages that accrue to the biggest and best-run organizations, to the detriment of upstarts and second-fiddle players.”

Impressive Numbers

In August, 2016, Walmart made its first move to challenge Amazon when it paid over $3 billion for, then considered among the fastest growing and most innovative ecommerce companies in the U.S., with an experienced leadership team led by co-founder and CEO Marc Lore. However, consider these numbers outlined at the Internet Retailers Conference and Exhibition (IRCE) that took place in Chicago earlier this year.

Four out of every $10 spent online in the U.S. is with Amazon (43%). Eighty percent of online growth comes from Amazon sales. Currently, there are approximately 80 million Amazon Prime members – that’s 64% of households in the U.S. Including non-Prime members, that number probably jumps to an amazing three quarters of all households.

However, Walmart’s numbers are also quite impressive. Each week, nearly 260 million customers and members visit Walmart’s 11,527 stores under 63 banners in 28 countries and ecommerce websites in 11 countries. With fiscal year 2016 revenue of $482 billion, Walmart employs more than 2.3 million associates worldwide. One survey concluded with this amazing finding: Nine of ten U.S. consumers made a purchase at Walmart in 2016. Perhaps this is not surprising since Walmart’s more than 1.2 million employees in the US, as well as its more than 4,600 stores are located within 10 miles of 90% of the US population.

What’s the Difference?

It is clear that Amazon and Walmart are competing to be the dominate player in the on-line arena. Each however is vying for that title from a different base. Amazons’ strength is obviously its existing internet dominance. This is due in part to its strong appeal to affluent consumers in major cities.

Although Walmart has thousands of stores that sell hundreds of billions of dollars’ worth of goods, it is particularly strong in suburban and rural areas and among low and middle income consumers. One survey reported the average annual income of the Amazon customer was $90,000. According to a 2015 survey the average Wal-Mart customer, is a white, 50-year-old woman with an annual household income of $53,125. But it also has a newly rejuvenated website that bodes well for its future.

So, as the underdog in this race for preeminence, how is Walmart planning to first catch up, and then overtake Amazon to become number one? To answer that we must first look at the purchase more than a year ago. This site will appeal to a more affluent customer than does But the key to its long term future depends more specifically on its founder, Marc Lore, now President and CEO, Walmart U.S. E-Commerce who founded and sold to Walmart. He was asked about his strategy to achieve the number one spot this September, and here is his answer:

1. Embrace the Future (and the Future is Voice-Activated)

As Amazon continues to plow investment into its portfolio of voice-controlled Echo smart devices, Walmart is working with Google Home to the same effect. It’s a big deal, Lore said. “It’s important to look at not just the technology but what it enables…what does it enable in terms of merchandising and logistics that maybe wasn’t possible before?” The Internet allowed retailers to be better merchants through a “more efficient catalog.” Voice allows for a similar reframing of the practice of merchandising.

2. Make Targeted, Tuck-in Acquisitions

“For us, two different strategies,” Lore said of the company’s aggressive e-commerce shopping spree that included Bonobos, Moosejaw, ShoeBuy, and ModCloth. “With respect to the first, it’s really about trying to accelerate growth on the existing site and it’s more of an asset purchase than anything else. It’s not really as much about ROI on the site that we acquired as much as what it can do on Walmart and Jet. The other one…it’s really about thinking into the future.”

3. Rethink the Org Chart

When Lore took over Walmart’s e-commerce operation, he made some key departmental changes that he believes helped jumpstart growth in the division. “One of the first things I did was made Customer Care and Customer Experience both directly reporting to me,” he said. “Not only do you get better people, I think, when they’re at that level but it elevates the customer within the organization.”

4. Leverage Existing Assets

It’s no secret that Walmart has a tremendous footprint of brick –and mortar stores—almost 5,000 in the U.S. alone. Lore sees that physical infrastructure as a huge asset to achieving digital growth. “This is one of the things that gets me most excited about being at Walmart, just being able to leverage the 4,600 stores around the U.S. that are within 10 miles of 90% of the population,” he said with a grin. “When you think about them doubling as warehouses, they’re already profitable, they’re already there, product is getting to them in full truckload quantities. It’s the most efficient way to get product forward deployed. So the last mile from store to home and picking are the two other capabilities you need to finish the last piece of the puzzle.” And those two capabilities, Lore added, are well underway.

5. Empower Employees

How does Lore ensure that he can preserve the entrepreneurial spirit of his acquired startup Jet within the far larger confines of Walmart? He said it’s all about empowering employees. “If you give people information and trust them and empower them and let them run and have them know that they’re going to be rewarded for taking risk and not be penalized for it,” Lore said, “that’s the kind of environment and culture you need to create.

Walmart did not pay $3.4 billion for They spent that much money to secure the services and knowledge of Marc Lore. They bought his stellar track record, his sterling reputation as a team leader, and let’s face it, a well-earned iconic status. If he can catapult Walmart into the leading internet retailer, or even into an equal with Amazon, he might eventually challenge Jeff Bezos for the title of the richest man in the world.


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