Results Count ... everything else is conversation.: Walmart – The Whale is still making waves across retail

Walmart's fortunes may be the nails in the coffins of weak retailers

Amazon's continues soaring growth, with fourth quarter sales rising 20%, and 146% growth in Q4 profits. It is tempting to draw the conclusion that Amazon is quickly winning the battle, even against Walmart. On the surface, the lack of growth for Walmart would seem to be "good news" for the rest of retail. But, the rest of the story behind Walmart's numbers does not bode well for the future of traditional retailers. Their bottom line is: Differentiate or Die.

Why this is important:The headlines are often about Amazon, but it may be Walmart putting the nails in the coffins of retailers who can’t afford to compete on price.

Amazon may not be invincible, but it is the current juggernaut

Image Credit: ddpavumba

It is sometimes easy to get distracted by Bezos and his PR stunts like "drone delivery". The more practical reality is that Amazon is the one US retailer that has consistently posted year over year growth in double digits, year after year. What retail CEO would not like to have the "problem" of explaining Amazon's 4^th Quarter results to Wall Street:

4^th Quarter sales rose 20%
Full year sales rose 22%
146% increase in 4^th Quarter profit to $239millon
Full year profit of $274 million vs. prior loss of $39 million

Amazon's numbers are remarkable given their amazing focus on "strategic pricing", especially in the competitive 4^th Quarter in the US. While there is no question that Amazon can be a price leader that challenges even Walmart, the secret sauce of Amazon's growth is "world-class customer service".

As today's omni-channel consumers increasingly shop any time and everywhere, Amazon has differentiated its brand on convenience, selection and service. In many cases, consumers choose Amazon for their convenience of secure delivery to their door over the cheapest price. But make no mistake about it, Amazon can and does compete on price, and they are literally able to make thousands of pricing changes on the fly every hour!

Be careful if you poke a giant whale in the eye … they make big waves

To put things in perspective, Walmart is still the "Whale of Retail" that dwarfs Amazon in size. Walmart's annual revenue in 2013 is estimated to be $466 Billion, versus about $75 Billion for Amazon. But, to say that Walmart has been "challenged" by Amazon would be an understatement. We and others have commented about how Walmart is investing and adapting in an omni-channel world, including:

Walmart's purchase of social media and marketing companies
Walmart investing in heavily in innovation labs
Walmart's aggressive investment in Walmart.com strategies
- Especially buy online and pickup in store
- Testing same day delivery strategies

The reality for Walmart is that it has a traditional bricks and mortar heritage. It continues to operate over 4,200 stores in the US, and over 8,500 worldwide. To put things in perspective, consumers spend $36,000,000 every hour at Walmart every day, and most of that is through stores!

However, to maintain that volume, Walmart has to remain competitive. Its stores rely heavily on generating traffic and repeat visits. To do that, a very high percentage of Walmart's sales are in commodities and package goods, which are very price sensitive. As a result, Amazon and other ecommerce sites around the world can compete very directly with Walmart on one of its core value propositions of "low price".

Suffice it to say that Amazon and ecommerce have Walmart's full attention, and Walmart is responding directly to their challenge in order to prevent customer and traffic erosion.

Walmart's has exhibited a lack of annual and comp store growth

The latest headlines this week can be summarized as: "Walmart reports weaker Q4 Sales". In fact, Walmart has generally had flat year over year growth for the last several years. Walmart reported that "comp sales" (stores open more than 1 year) were down at both Walmart and Sam's Club for their fourth quarter ending January 31^st.

When you are the number one retailer in the world, you are a big target! When you heavily serve the needs of lower and middle class families, your sales are subject to factors like unusual winter weather, and changes in governmental food stamp assistance benefits, etc.

But, make no mistake about it. The 4^th Quarter challenged even Walmart to compete on low prices. In the opinion of retail analysts Janney Montgomery Scott and David Strasser, they attributed "the modest earnings cut to aggressive holiday promotions that rattled the industry".

Don't spit in the wind or tug on Superman's cape …

As I look at retailing convergence, I'm reminded of the chorus from a Jim Croce song:

You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't mess around with Jim

In this case "Big Jim" would be the Whale of Retail called Walmart.Walmart is not standing idly by to have Amazon take their customers. They have the capacity and resources to compete online. They also have the resources and capital to aggressively compete on price! Their 4^th Quarter revenue and earnings forecast indicate they will continue to do so.

Nailing the Coffins of those who can't compete on price

Image Credit: Carlos Porto

The bottom line for Walmart right now is that aggressive pricing lowers their EPS (Earnings Per Share) by just a few pennies. Those small EPS losses scaled to the overall size of Walmart puts huge pressure on independents and struggling retailers like Sears, Toys"R"US, and their closest competitor Target.

Walmart's aggressive price matching along with Amazon's competitiveness has created a massive "vice" squeezing the rest of retail in the US. Not only is this impacting consumers shopping patterns, but it is causing brands and suppliers to start questioning who they will ship first, and extend credit to in the long term.

In the game of selling commodities at the lowest prices in the US, there are currently only two clear winners: 1) Walmart who has the distribution expertise, size and capital, and 2) Amazon with the business model and compelling consumer service proposition.

Differentiate or Die. It is not a slogan. It is the current reality for all those retailers caught in the "middle" between Walmart and Amazon. If they try to compete on their product centric heritage of promotions and price, their survival is in question. While the coffin may almost be nailed shut for Sears, there is precious little time for the other retailers in the "middle" to differentiate value beyond price.

Postscript to Jim Croce's song:

I won't bore you with all of the lyrics, but for those of you who know Jim Croce's song, it is a ballad about the old guard "Big Jim", versus the new kid on the block "Slim". By the end of the song the last line of the chorus changes to:

And you don't mess around with Slim

In the future of retail, "Slim" is a very appropriate metaphor for the "nimble adapters" who can quickly change in order to survive. Slim would definitely not be the metaphor for Sears, who just had to close their flagship store in Chicago.

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