It’s obvious that Walmart Inc (NYSE:WMT) has had an obsession with Amazon.com Inc. (NASDAQ:AMZN) for some time. At times it reaches Trumpian proportions, assuming things that are just not true, and it could end up being trouble for Walmart stock.
Take Bill Simon, who was the predecessor to current Walmart CEO Doug McMillon. Simon was always a bad fit. He had spent just four years at the company before taking the top job. He came out of the restaurant business. But he’s still obsessed with Amazon. Asked his views on TV recently, he claimed it “sells below cost” and should be broken up.
Amazon is less than one-third Walmart’s size, by sales. Also, Walmart usually takes just 2-3% of sales to its bottom line and has often been accused of predatory practices. But the Amazon obsession has continued under McMillon, and it is clearly hurting Walmart.
A Jet All the Way
As I noted in February , Walmart stock took a rocket ride after buying Jet.Com for $3 billion in August 2016. For several quarters it even grew its ecommerce operations faster than Amazon.
Then the numbers got big enough to matter, and when it reported results for last year’s fourth quarter Amazon was again pulling away. Walmart’s relative growth earlier in the year was a product of its relatively small size. Once it tried to scale, Amazon’s advantages became obvious. Walmart shares began falling, from a high of $108 per share to their April 3 opening price of $85.50.
What Walmart and Jet ignored is that ecommerce is about more than low, low prices. It’s different from the business Walmart had been doing. It’s not about buying a bunch of stuff and selling it. It’s about getting access to a lot of stuff and enabling the selling of it.
Amazon beats Walmart because it enables tiny merchants with limited product lines to compete against Walmart. Half of Amazon’s sales are made by third-party merchants, not by Amazon itself.
There are almost 800,000 such companies, many of them small businesses, some of them the kind of merchants that Walmart itself was crushing in earlier decades.
Costco Could Take a Bite of Walmart Stock
What Walmart should be worrying about is Costco Wholesale Corp. (NASDAQ:COST). Over the last five years Costco shares are up 70%, against a 9% gain for Walmart. In reporting 2017 sales Walmart announced it would close 63 Sam’s Clubs, about 10% of its total network.
Costco, meanwhile, is now up to nearly 750 warehouse stores, and its biggest problem may be finding new locations for them, as they can cost $100 million each to open. The Sam’s Clubs that were closed were mostly on the slow-growth side of major metropolitan areas, places like Irondale, Alabama and Lithonia, Georgia that Costco wouldn’t go near.
What Costco knows, and Walmart ignores, is that warehouse shopping skews high-end. It’s a place where big SUVs come in once a month to stock up. Such shoppers demand, not just low prices, but quality merchandise, and it helps that the employees are friendly.
Costco employees have long been paid more than those at Sam’s, and Costco managers spend most of their time on the sales floor with the workforce.
The Bottom Line on Walmart Stock
Walmart has done some things right under McMillon. The stores are cleaner. Employee pay has improved. The ecommerce unit has gotten better.
But Sam’s Club remains a mess, the stores’ management remain hierarchical and rigid and Walmart is Walmart is more vulnerable to a trade war than Amazon to a trade war than Amazon, with 28% of sales international and much of its merchandise sourced centrally from China.
Walmart’s problems can be fixed but it has no easy answers. This will continue to hurt Walmart stock, especially if it focuses on the wrong things.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
