Walmart (WMT) thinks consumers don’t have to pay a premium before they can save. It’s not a thought bred out of nowhere — no, it speaks directly to Amazon’s (AMZN) $99-a-year Prime platform.
To that end, though, Walmart announced in a July 13 blog post that it would be rolling out awesome low-price deals starting this week. And unlike Amazon Prime Day, WMT said the deals would be available to everybody at no additional costs. And it won’t last for just one day.
But does this position WMT to be the winner in the retail domination battle?
Let’s look closer at what the two companies offer.
What Amazon Prime Day Is About
Amazon Prime Day is a one-day event celebrating Amazon’s 20th anniversary. Amazon claims the initiative would feature more deals than Black Friday — the biggest shopping day of the year. If Amazon delivers on that promise, we should be expecting nothing less than 5.5 million items sold (given that Amazon reported sales of 5.5 million products on last year’s Black Friday).
Contrary to what Walmart wants to have us believe, Amazon is technically opening Amazon Prime Day to everyone, offering a 30-day Amazon Prime trial to all. So anyone can actually benefit from the deals that the Amazon Prime Day offers, and not have to pay a dime extra.
So much for Walmart’s “deals week” being any better on that front.
Walmart’s event is actually very similar to that of Amazon, though there are two notable differences:
- Walmart said it would reduce the minimum order that qualifies for free shipping from $50 to $35.
- The discounted offers would be available for up to 90 days, which is the usual period WMT set for its “rollbacks” — Walmart’s term for discounts.
Still, it’s so similar, it seems that Walmart is actually helping Amazon in celebrating its anniversary, as WMT otherwise has nothing going on that would attach it to the event.
Improved Revenues, But Not Profitability
If nothing else, Amazon Prime Day would improve the revenue outlook of both companies for the third quarter — and for the entire 2015 as a whole.
You have to remember that Amazon said Amazon Prime Day would be bigger than Black Friday. And Walmart is in it to match Amazon, meaning it’s ready to offer a near-Black Friday experience.
Plus, Black Friday isn’t going anywhere. It’ll still come and go.
If this spurs people to simply spend more, Amazon’s manufactured holiday could result in a record-breaking year for both companies in terms of revenues. (It’s a different matter altogether if people merely end up buying now what they planned to later.)
But the reason why Black Friday is so successful is the deep discounting retailers do to get people in the door (or on their sites). Success for Amazon Prime Day will come that same route.
Amazon Prime Day is featuring massive discounts — of up to 50% in many cases — which is a killer for margins. Considering that AMZN and WMT’s gross margins are 30.31% and 24.85%, respectively, and that Walmart’s profit margin is an anemic 2.9% while Amazon’s is fractionally negative … that’s a problem.
WMT Is a Loser as It Blindly Follows AMZN
In actual scheme of things, Walmart is competing with Amazon Prime Day simply so it doesn’t lose any retail market share to Amazon. While that looks smart on the surface, WMT is still at least a step behind.
I see the Amazon Prime Day — coupled with the fact that Amazon is giving consumers opportunity to try Amazon Prime for 30 days — as an initiative to increase the awareness and eventually the membership of Amazon Prime for reasons beyond retail sales (not that retail sales should be ignored completely). If Amazon Prime Day were simply to celebrate Amazon’s 20th anniversary, AMZN wouldn’t be needlessly pressuring margins so severely.
I believe Amazon is mainly using the Amazon Prime Day to grow its free video streaming traffic, thereby, making it more attractive to digital video advertisers. (And even if that were not what Amazon is consciously doing, it would happen anyway, as this event is likely to increase the number of Amazon Prime subscribers over the next month because of the multiple value Amazon Prime offers.)
It is worthy to note that mobile video ad revenue is projected to grow to $46 billion by 2019. And with mobile not going anywhere soon, coupled with the fact that video remains the easiest way to reach target customers, this market should continue to grow at the expense of TV ad revenues.
With such a structured system that identifies its members, Amazon would be able to adopt a pay per head model – similar to that adopted in the betting space — to help itself and advertisers measure the value both parties get.
Amazon Prime Day Takeaway
As stated above, Amazon is likely using this as a bait to grow its video traffic, a move that puts the company in better position to reach sustainable profitability.
Investors who have time on their side should be optimistic about the chances of AMZN. However, I certainly wouldn’t bank on WMT getting much out of riding Amazon’s coattails.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
