The Ultimate Retail War: Who is Winning the Walmart vs. Amazon Battle?

by Ryan McQueeney   Published on October 27, 2015 | 

A year ago, retail giant Walmart (WMT - Analyst Report) had a market capitalization of about $245 billion. In comparison, e-commerce rival Amazon’s (AMZN - Analyst Report) market cap was just over $145 billion. Since then, Walmart has lost almost $60 billion in value, while Amazon has nearly doubled in size to become the world’s largest retailer.The battle between the traditional mega-storefronts of Walmart and the online marketplace of Amazon has been going on for years now. However, it is only recently that Amazon has taken a decisive advantage. Today, we’ll look at why Amazon is winning and what Walmart plans to do about it.

Game of Strategies

As online shopping has grown over the past decade, Amazon has reaped the rewards. However, its e-commerce department operates with razor-thin margins and has not been the key to the company’s recent success. Instead, new initiatives and strategies have resulted in back-to-back earnings beats (also read Amazon Tops 3Q Earnings Estimates).

One of Amazon’s most important revenue streams is its cloud-based computing tool, Amazon Web Services. AWS is expected to bring in about $7 billion in revenue this year (also read 5 Things We Learned About AWS from Amazon's Q3 Earnings).

On top of this, Amazon has been pumping its premium service, Amazon Prime, with new deals and services. Prime even includes a video-streaming service and Netflix (NFLX - Analyst Report) competitor, Amazon Instant Video.

And while Amazon may not take in much profit from its basic e-commerce business, it is the popularity of this segment that is destroying other retailers. The company’s decision to increase its seasonal workforce by 25% is an illustration of its enormous growth (also read Amazon is Planning on Hiring 100,000 Workers for the Holidays).

Walmart has simply not been able to compete with Amazon’s online sales, partially due to its reluctance to invest in e-commerce. In a recent interview with Wall Street analysts, Walmart CEO Doug McMillion reiterated the company’s belief in its storefronts. “First, win with stores. We know customers love shopping in stores, and they’ll get great stores,” he said.

Despite what McMillon says, Walmart has recently decided to revamp its e-commerce segment. The company will spend $2 billion on e-commerce, with a specific focus on integrating its online selection with its stores. Walmart has even asked the Federal Aviation Administration for permission to test unmanned drone delivery services, which Amazon also started testing late last year.

“Will it be easier for an e-commerce company to build out a massive store network and create customer service culture at scale? Or are we better able to add digital and supply chain capabilities and leverage our existing stores? We like our chances,” McMillion said, in a not-so-subtle shot at Amazon.Walmart has also decided to invest in its workforce, providing managers with tablets and mobile devices that will increase efficiency and allow them to be on the sales floor more often. Also, Walmart will raise workforce spending from $1.2 to $1.5 billion next year. Workplace culture has actually been one of the criticisms of Amazon, so it’s interesting that Walmart has devoted attention to this (also read Amazon Refutes New York Times Story, Execs Square Off).

Overall, however, McMillon’s quotes and Walmart’s business model seem far off from the successful philosophy that Amazon has created. Amazon practices “consumer sovereignty”, a policy which figures that the best profit will come from providing customers with the best products and best customer service at the lowest possible price. In short, Amazon aims to treat its customers like kings and queens.

In fact, this was outlined in 2012 by Amazon CEO Jeff Bezos. Now known as the “Amazon Doctrine”, the company’s policy is admirable: “Above all else, align with customers. Win when they win. Win only when they win.”

Walmart will need to adopt a similar attitude if it hopes to compete with Amazon in the coming years.

Bottom Line

While Walmart’s new initiatives may eventually payoff, its short-term outlook is bleak. The company’s most recent forecast calls for no sales growth and profit-per-store falling by 12% next year. Currently, Walmart has a Zacks Rank #5 (Strong Sell). On the other hand, Amazon holds a Zacks Rank #2 (Buy), and is coming off another impressive earnings beat.