Page 67 - The Economist

The Economist December 9th 2017 Business 67

Schumpeter Walmart fights back

The beastofBentonville battles Amazon, the king ofthe e-commerce jungle
“Pickup discount” and formed a partnership with Latch, which
letsitsusersopen and locktheirfrontdoorsremotely. On Septem-
ber 29th it acquired Parcel, a logistics startup. On December 6th it
changed its legal name from Walmart Stores, to just Walmart.
There are three reasons to be optimistic. First, Walmart’s per-
formance has improved. In the most recent quarter, same-store
sales rose by 2.7% yearon year, and store traffic by1.5%. Food sales
increased attheirfastestpace in sixyears. Salesfrom e-commerce
represent only about 2% of the total but are rising at an annual
rate of 50% (customers who shop online and in stores typically
spend twice as much as those who only go to stores). Walmart
has the second-most-downloaded retail app, afterAmazon’s.
Second, Amazon’s behaviour is a backhanded compliment.
In June itspent$14bn on Whole Foods, a mid-sized grocerychain,
The deal brings Amazon more physical locations to sell, sort and
dispatch goods. It also gives it trusted private-label brands, ofthe
kind Walmart already has. If you type “spinach” into
Amazon.com, bags ofWhole Foods branded greenery appear.
Lastly, the example of China points to a fusion of the online
and physical worlds. In some waysthe countryismore advanced
than America; e-commerce comprises 9% of grocery sales,
BOA constrictor swallowing capitalism. A cyclone dragging according to Alliance Bernstein, a research firm. On November
Athe economy into its vortex. If you look back at how people 20th Alibaba, an e-commerce giant, bought 36% ofSun Art Retail,
described Walmart a decade ago, it is eerily similar to how Ama- a hypermarket retailer. Four ofthe six biggest Chinese supermar-
zon is viewed now. The supermarket chain has “a scale of eco- ket chains have partnerships with e-commerce platforms. (Wal-
nomic power we haven’t encountered before”, warned “The mart, which has424 storesin China, hasteamed up with JD.com.)
Walmart Effect”, a best selling bookin 2006. But capitalism never The duel between Walmart and Amazon could go in two di-
stands still. The world’s largest company by sales is now the per- rections. It might escalate into a war across America, for both
ceived underdogin an escalatinggrocerywarwith Amazon to fill companies hate losing. Oreach firm might conquerdifferent geo-
320m American bellies. The struggle will probably end in a graphical areas and demographic groups. Amazon could seize
messystalemate. That will mean mediocre returnsforinvestors— well-to-do cities, where population density is high and home de-
and happy days forconsumers. livery is more efficient. Walmart could continue to rule suburbia.
Just when Walmart’s aura was at its most intimidating, in Either way, margins will probably be squeezed as Amazon
2006, stagnation beckoned. Its reputation for bullying its suppli- throws money at the fight with its customary abandon. Mr
ers and staff became toxic. Over the next decade it hit saturation McMillon knows this. “One of the challenges at Walmart is that
point. About 95% of Americans shop at Walmart at least once a we don’t have free money—we are expected to make a profit,” he
year. It has three square feet of shop space for every adult in the says. The dangeris that it overestimates how much physical pres-
country and has sunk $83bn into a fixed-asset base that is the ence it needs. Ifit went backto its position in 2006, it could cut its
fourth-largest owned by any American firm. Investors have wor- domesticassetbase by34% and still have 90% ofAmericanswith-
ried for years that this empire of aisles and tills run from Benton- in 15 milesofa store. Foreverydollarofsales, ithas twice asmany
ville, Arkansas, would become obsolete—what did Walmart’s ex- square feet of sales and distribution space as Amazon’s retail op-
ecutives, schooled in the arts of beating up baked-beans eration (including Whole Foods). IfMr McMillon is brave he will
suppliers, know about the slick world of e-commerce being sell stores and return capital to investors. Walmart needs to make
dreamed up in Silicon Valley and Seattle? its balance-sheet leaner.
More than you might think. This year Walmart’s shares have
risen by 40% on hopes that it has more than a fightingchance. It is What’s in store forAmazon
clear that selling groceries online is very different from selling Walmartisprobablythe mostformidable adversaryAmazon has
books. In food, penetration of e-commerce is low, at 2%, com- ever faced. Disrupting the music, book and media industries,
pared with 9% for all retail. Food is perishable. People will not each known for their Corinthian spirit and long lunches, was
stuffit in theirmouths unless they trust its provenance. They also child’s play compared with taking on Walmart, with its fanatical
want flexibility—to buy food in a store, to order online and pickit commitment to low prices.
up themselves, or to have it delivered to their homes. So some Walmart’s history is also a warning. If you examine the two
physical infrastructure is helpful. “I wouldn’t want anotherset of companies’ financials, Amazon today looks almost identical to
assets,” DougMcMillon, Walmart’s boss, told the Economic Club Walmart in 1999. It has annual sales of$160bn orso, low margins,
ofNew Yorkin November. fast growth, a ballooning asset base and massive capital invest-
He hasrun Walmart’sbusinessesin Europe and Asia, where e- ment. The firm’s managers are on a high and investors have diz-
commerce for groceries is more developed. In 2016 Walmart zying expectations for the future. But for the ten years after 1999,
spent $3bn buying Jet.com, an e-commerce firm whose boss, Walmart’s share price was as flat as a pancake, because all the
Marc Lore, now runs all Walmart’s online operations. Walmart good news was already baked in. The actual business of world
has launched internet-based services such as “Easy reorder” and domination turned out to be a long, hard slog. 7