Walmart Goes After Amazon

Wal-Mart, the world's retailing behemoth, sold $480 billion worth of merchandise in the last fiscal year and earned nearly $15 billion in profits. Amazon, the formidable internet purveyor, reported $79 billion in merchandise sales and generates negligible profits. So one might be excused for expressing some confusion over the disparity in performance between the two companies' stocks.

Wal-Mart stock has been stuck in neutral. The current price is no higher than four years ago, around $74 per share. Amazon, on the other hand, has more than tripled over the same time period. A constituent of the infamous “FANG” stocks (Facebook, Amazon, Netflix and Google), the online retailer has clearly benefited from the inevitable shift toward internet shopping and away from traditional bricks-and-mortar merchandising. The writing, as they say, is on the wall for Wal-Mart.

Well not so fast. The big box that Sam Walton built has fired a salvo across the bow of Amazon with the announcement last week that it is buying ecommerce upstart Jet.com for $3.3 billion. The move is an effort to bootstrap Wal-Mart's online and mobile marketing presence, particularly with millennial consumers. And while Jet.com is tiny compared with Amazon ($1 billion in sales), the move, if executed well, could eventually challenge Amazon's hegemony in internet sales.

Wal-Mart is seeking to infuse its somewhat staid and traditional ecommerce offering with some of the innovative aspects pioneered by Jet. A press release announcing the acquisition noted that the transaction represented a “jolt of entrepreneurial spirit being injected into Wal-Mart.” The reason for such optimism is embodied in the main asset in the deal: Jet CEO Marc Lore, who will join Wal-Mart as its new global head of electronic commerce businesses.

Lore knows the e-ropes: he previously founded another internet shopping site that included names like Diapers.com and Soap.com. After selling out to Amazon for a half billion dollars, Lore went on to start Jet.com, employing a unique and innovative dynamic pricing algorithm that adjusts prices in response to volume purchased. Jet also offered free shipping on orders over $35. Wal-Martis betting that this kind of innovation can be transplanted into the rest of the company's ecommerce efforts. For the present time, Jet will remain a separate brand and operation, but look for increasing integration over time. If it works, Amazon could start feeling the pinch within a couple of years.

Can a creative entrepreneur and disruptor find a home inside the world's largest big box store? Wal-Mart is certainly laying out the red carpet for Mr. Lore. According to a report by Recode, His agreement calls for an unusually long five-year commitment to stay with the Bentonville, Ark., retailer. If he fulfills the terms of his contract, Lore stands to reap upwards of $1 billion in compensation according to recode. Clearly Wal-Mart is serious.

Although already the number two online retailer, Wal-Mart derives just 3 percent of its total sales from the internet, or $13.5 billion compared to Amazon's $79 billion (Apple, Staples and Macy's round out the top 5). Industry-wide, internet sales are growing at around 15 percent per year, but online-only retailers like Amazon and Jet are grabbing over 40 percent of that growth. Wal-Mart is gambling that the combination of an innovative and technologically advanced retailing platform with the traditional buying power and distributional heft of the physical retailer will add up to threaten Amazon with more competition. Time will tell how successful the gambit turns out to be, but consumers are almost certain to benefit from lower prices.

This article first appeared in The Chattanooga Times Free Press.

Chris Hopkins

Chris Hopkins, CFA, is Vice President and Portfolio Manager for Barnett & Company. He is a native of Whittier, California and has lived in Chattanooga since 1988. He began his career in finance in 1998, following twenty years in manufacturing management. Chris joined Barnett & Company in 2004. He served for twelve years an adjunct professor of Finance at UTC, and writes a weekly column for the Chattanooga Times Free Press on finance and economics. He is currently president of the CFA Society of East Tennessee, and is a member of the North Carolina and South Carolina CFA Societies as well as the National Association for Business Economics. He presently serves as city council representative on the Chattanooga fire and police pension board, and is member of the finance committee for the AIM Center. Chris holds the Chartered Financial Analyst (CFA) professional designation. He received Bachelor’s degrees in Physics and Economics from California State University at Fullerton, and earned his MBA from the University of Tennessee at Chattanooga.
Close Menu