Sears and Amazon – Bricks and Mortar Came Later
In 1894, Richard Sears issued Sears’ first catalog—later known as “The Big Book”-- and started its mail order business. One hundred years later, in 1994, Jeff Bezos founded Amazon. However, it was not until 1925, that Sears opened its first retail store. Now we see Amazon testing a bricks and mortar strategy with its acquisition of Whole Foods Market.
Looking back, Sears’ slogans in its first catalog included “Book of Bargains: A Money Saver for Everyone”; “Cheapest Supply House on Earth”; and “Our Trade Reaches around the World”. Amazon could easily adopt most of those original Sears slogans today. The company’s motto “Sears has everything” reflected the breadth of its catalog offerings. For example, in 1908, the Sears catalog listed house kits that came in two dozen different models. The average kit cost $55,000, in current dollars, and contained up to 30,000 individual pieces. The buyer supplied “only” land and labor.
Amazon’s Bricks and Mortar Strategy – To Lower Distribution Costs?
Which brings us to the question, will Amazon follow Sears’ early strategy with the addition of physical retail locations? Supermarkets remain one of the bricks and mortar locations most frequented by shoppers. Amazon will take advantage of that consumer pattern with its acquisition of Whole Foods. The key to this strategy will be to integrate the Whole Foods network into the Amazon distribution system. One means will be to add instant pick-up lockers in over 450 Whole Foods stores. In addition, Amazon will also likely give consumers the ability to experience the broad spectrum of Amazon branded products in
the Whole Foods stores. Most importantly, the locker system in each store gives Amazon additional means to reduce its sizeable logistic expenses. In 2016, Amazon experienced gross shipping costs of over $16 billion and about $7 billion after crediting shipping revenues.
Walmart Expanding E-commerce – Maximizes Utilizing Its Logistics and Retail Store System
Then there is the other titan—Walmart. While Amazon opens its first foray into bricks and mortar distribution, the king of bricks and mortar distribution recently took a major step to improve its e-commerce competitive position. Last year, Walmart acquired Jet.com, an on-line shopping network, for $3 billion. Since then, Walmart made other small e-commerce acquisitions. Just recently, Walmart collaborated with Google to add voice based shopping for its customers. With this addition, this partnership enables Walmart to compete with Amazon’s Alexa device using voice shopping capability.
Most importantly, Walmart will be adding pick-up lockers in its stores similar to Amazon’s Whole Foods strategy. The difference comes from the numbers. Walmart operates approximately 4,700 retail locations including 3,500 superstores in the United States. Walmart’s distribution network compares to Amazon’s Whole Foods network of approximately 470 stores worldwide. Further differentiating Walmart’s physical retail store presence, each week nearly one in three Americans visits a Walmart store.
Which is Easier?
So two interesting questions for investors to answer during the next few years: (1) Can the leading bricks and mortar retailer develop a competitive e-commerce system and successfully integrate it logistically into its retail network; and (2) can the most successful U.S. e-commerce company integrate its logistic systems successfully with its bricks and mortar acquisition? Also, will Amazon need additional bricks and mortar acquisitions to deal with the disparity between the numbers of its physical locations when compared with Walmart?
Investors show great confidence in Amazon’s long-term strategic planning. At the same time, with that confidence, they rarely penalize Amazon for it’s seemingly lack of short-term profitability focus. Therefore, Amazon benefits strategically from not needing to meet short-term investor expectations.
In comparison, investors expect Walmart to show higher levels of profitability than Amazon and give greater focus to its short-term results. With its competitive need to invest in its long-term e-commerce strategies, Walmart may hurt its current profitability as it steps up to compete with Amazon. Therefore, investors’ short-term profit focus on Walmart may put it at a competitive disadvantage in its strategic clash with Amazon.
Using physical locations to deliver e-commerce orders, both Amazon and Walmart will likely drive down delivery costs. These efforts, if successful, could wound UPS and FedEx as the intended consequences of this long-term logistic revolution takes its toll.
Caveat: These comments come from an observer of the economy and its participants and not as an analyst of either these industries or companies.
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