James Chen
Nov. 24, 2020
It has been a long, long time since Walmart Inc. (WMT) was the underdog in any fight, but recently the retail giant has been divesting from international markets to focus on a fight with a much bigger rival in Amazon.com, Inc. (AMZN) on a battleground where the internet giant made its name. We'll look at Walmart's recent moves and discuss why the retail giant is going all in on e-commerce.
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KEY TAKEAWAYS
- Walmart and Amazon have both done well throughout the pandemic, although they are judged differently by the market.
- Walmart has been pulling out of some international markets and investing heavily in its own e-commerce operations.
- Amazon and Walmart bring very different strengths to the e-commerce battle, but it is shaping up to be a long fight.
Walmart's Selling of Global Assets
Walmart recently sold the majority of its stake in Seiyu GK, a Tokyo-based supermarket chain consisting of 329 stores. Walmart will still hold 15%, but KKR & Co. Inc. (KKR) has the majority with a 65% stake, and Japan-based Rakuten, Inc. (RKUNY) is picking up the remaining 20%. This is part of a larger divestment of global investments in the past two years for Walmart, as it has sold stakes in the United Kingdom and Brazil while recently announcing the sale of retail operations in Argentina.
Walmart still has physical global assets in Canada, Central America, China, and Africa. Perhaps the global asset most indicative of its future strategy, however, is its $16 billion stake in India-based Flipkart. Walmart's recent earnings report confirmed this increased focus on e-commerce as a key pillar to the retailer's future growth.
A Platform vs. a Seller
Walmart has had a decent pandemic, all things considered. Foot traffic to stores in the United States is down, meaning shoppers are making fewer visits, but the sales per visit are up. The strength in the physical locations comes with a 79% jump in e-commerce sales for the retail giant. Walmart has also been introducing new features to its e-commerce operations, including a membership program that includes free delivery for a $98 annual fee and a third-party marketplace.
These moves should sound familiar, as they are key elements of Amazon's e-commerce business. Amazon and Walmart are already competing with each other, and the competition appears to be gearing up to become even more direct, as Amazon's announcement that it will go after pharmacies affects yet another part of Walmart's brick-and-mortar operations.
A Matchup of Giants
One of the most fascinating things about watching these two giants collide is how they came from different paths to the same place. Walmart was a retailer first and foremost, building its model around strategic physical operations, elite distribution, and the size needed to squeeze margins out of its suppliers. Now it is looking to build out an e-commerce platform to complement its advantages as a seller of goods.
Amazon, on the other hand, was an e-commerce platform first, developing a dispersed supply and delivery network through trial, error, and tons of user data. Now Amazon has evolved to be a retailer on its own platform, selling Amazon-produced goods that compete with some of its platform sellers.
Can Walmart Make It a Real Fight?
Although Walmart and Amazon are in competition with each other, you need look no further than their P/E ratios and market cap to see how differently the market judges them. Amazon has a market cap of $1.5 trillion and a P/E ratio north of 90. Walmart has a market cap of $4.25 billion and a P/E ratio just over 20. Investors expect Walmart to be profitable every single year, while the market has long seen profits at Amazon as simply nice to have. This divide has an impact on the investment thesis behind picking a winner between Amazon and Walmart, but there are signs that Walmart can make it fight when it comes to e-commerce.
The main strength Walmart has is the same strength it has always had as a retailer – a highly efficient distribution hub. Walmart's footprint in North America gives consumers the options of delivery to the door or online order pickup at one of its many nearby stores. The retail locations that are the backbone of Walmart's in-person sales also function as distribution hubs for e-commerce sales. This is a key advantage that the company enjoys over Amazon, which depends on warehousing and last-mile delivery.
On top of this, Walmart's economies of scales between physical locations and e-commerce may mean that sales on consumer staples will continue to generate strong margins while being more price competitive than anything Amazon – with its diverse supply/seller market – can match.
The Bottom Line
Walmart retreating from some global markets was seen as a necessary but painful decision to refocus on fewer markets with better growth prospects. The pandemic may have played a role in accelerating some of these exits, as e-commerce became critical to the core U.S. operations.
The strong earnings update posted by Walmart and the e-commerce growth underlying the results were greeted with indifference by the market – likely because Walmart has seen a significant share price increase already this year. The important thing for investors to note, however, is that Walmart has a real chance of taking a growing portion of the e-commerce market.
