Question

Case:

Walmart is the world’s largest and most successful retailer, with more than $485 billion in 2016 sales and nearly 11,700 stores worldwide, including more than 4,600 in the United States. Walmart has 2.3 million employees and ranks number one on the Fortune 500 list of companies. Walmart had such a large and powerful selling machine that it really didn’t have any serious competitors—until now.

Today Walmart’s greatest threat is Amazon.com, often called the “Walmart of the Web.” Amazon sells not only books but just about everything else people want to buy—DVDs, video and music streaming downloads, software, video games, electronics, apparel, furniture, food, toys, and jewelry. The company also produces consumer electronics—notably the Amazon Kindle e-book reader, Fire tablet, Echo and Tap speakers, and Fire TV streaming media player. No other online retailer can match Amazon’s breadth of selection, low prices, and fast, reliable shipping. For many years, Amazon has been the world’s largest e-commerce retailer with the world’s largest and most powerful online selling machine. Moreover, Amazon has changed the habits and expectations of consumers in ways to which Walmart and other retailers must adapt. According to Brian Yarbrough, a retail analyst at Edward Jones in St. Louis, Amazon and online retailing is probably the biggest disrupter of retail since Walmart itself.

Walmart was founded as a traditional, offline, physical store in 1962, and that’s still what it does best. But it is being forced to compete in e-commerce as well. Eight years ago, only one-fourth of all Walmart customers shopped at Amazon.com, according to data from researcher Kantar Retail. Today, however, half of Walmart customers say they’ve shopped at both retailers. Online competition and the profits to be reaped from e-commerce have become too important to ignore.

Walmart’s traditional customers—who are primarily bargain hunters making less than $50,000 per year—are becoming more comfortable using technology. More affluent customers who started shopping at Walmart during the recession are returning to Amazon as their finances improve. Amazon has started stocking merchandise categories that Walmart traditionally sold, such as vacuum bags, diapers, and apparel, and its revenue is growing much faster than Walmart’s. In 2016, Amazon had sales of nearly $136 billion.

For online shopping, Amazon has some clear-cut advantages. Amazon has created a recognizable and highly successful brand in online retailing. The company has developed extensive warehousing facilities and an extremely efficient distribution network specifically designed for web shopping. Its premium shipping service, Amazon Prime, provides fast “free” two-day shipping at an affordable fixed annual subscription price ($99 per year), often considered to be a weak point for online retailers. According to the Wall Street Journal, Amazon’s shipping costs are lower than Walmart’s, ranging from $3 to $4 per package, while Walmart’s online shipping can run $5 to $7 per parcel. Shipping costs can make a big difference for a store like Walmart where popular purchases tend to be low-cost items like $10 packs of underwear. It makes no sense for Walmart to create a duplicate supply chain for e-commerce.

However, Walmart is no pushover. It is an even larger and more recognizable retail brand than Amazon. Consumers associate Walmart with the lowest price, which Walmart has the flexibility to offer on any given item because of its size. The company can lose money selling a hot product at extremely low margins and expect to make money on the strength of the large quantities of other items it sells. Walmart also has a significant physical presence, and its stores provide the instant gratification of shopping, buying an item, and taking it home immediately as opposed to waiting when ordering from Amazon. Seventy percent of the U.S. population is within five miles of a Walmart store, according to company management.

Walmart has steadily increased its investment in its online business, spending between $1.2 billion and $1.5 billion annually in 2015 and the next few years on e-commerce. This includes fulfillment centers and technology and purchases such as $3 billion for Jet.com to secure expertise for delivering the lowest-cost basket of goods online. Walmart.com is now the second-most visited e-commerce site in the United States with 88 million unique visitors per month. Walmart has constructed one of the world’s largest private cloud computing centers, which provides the computing horsepower for Walmart to increase the number of items available for sale on Walmart.com from 1 million three years ago to more than 50 million today. In the spring of 2015, the company opened four new fulfillment centers around the country, each of which is more than 1 million square feet. To further counter Amazon, Walmart introduced its own free two-day shipping program for orders totaling more than $35.

New technology will also give Walmart more expertise in improving the product recommendations for web visitors to Walmart.com, using smartphones as a marketing channel, and personalizing the shopping experience. Walmart has been steadily adding new applications to its mobile and online shopping channels and is expanding its integration with social networks such as Pinterest.

More than half of Walmart customers own smartphones. Walmart has designed its mobile app to maximize Walmart’s advantage over Amazon: its physical locations. About 140 million people visit a Walmart store each week. The app’s Walmart Pay feature enables users to quickly, easily and securely pay with their smartphones in all Walmart stores. Users link a credit card or bank account to the app. At checkout, they can just scan the phone to pay rather than pulling out their wallets. The app can also store shopping lists, save wish lists, and arrange online orders. About 22 million people now use the app as they shop.

The Walmart website uses software to monitor prices at competing retailers in real time and lower its online prices if necessary. The company is also doubling inventory sold from third-party retailers in its online marketplace and tracking patterns in search and social media data to help it select more trendy products. This strikes directly at Amazon’s third-party marketplace, which accounts for a significant revenue stream for Amazon. Additionally, Walmart is expanding its online offerings to include upscale items like $146 Nike sunglasses and wine refrigerators costing more than $2,500 to attract customers who never set foot in a Walmart store. A new Product Content Collection System will facilitate vendors sending their product catalogs to Walmart, and the product information will then be available online.

Walmart’s commitment to e-commerce is not designed to replicate Amazon’s business model. Instead, CEO Doug McMillon is crafting a strategy that gives consumers the best of both worlds—what is called an omnichannel approach to retailing. Walmart’s management believes the company’s advantage is that it is not a pure-play e-commerce retailer and that customers want some real interaction with physical stores as well as digital. Walmart will sell vigorously through the web and also in its physical stores, retaining its hallmark everyday low prices and wide product assortment in both channels and using its large network of stores as distribution points. Walmart will closely integrate online shopping and fulfillment with its physical stores so that customers can shop however they want, whether it’s ordering on their mobile phones for home delivery, through in-store pickup, or by wandering down the aisles of a Walmart superstore. Walmart is aiming to be the world’s biggest omnichannel retailer.

Amazon is working on expanding its selection of goods to be as exhaustive as Walmart’s. Amazon has allowed third-party sellers to sell goods through its website for a number of years, and it has dramatically expanded product selection via acquisitions such as its 2009 purchase of online shoe shopping site Zappos.com to give the company an edge in footwear. Amazon has been building its grocery offerings, with Amazon Prime, Prime Now, Prime Pantry, and Amazon Fresh offering delivery times as short as an hour in some cases.

It looks like Amazon is trying to innovate in physical retail store sales as well as online. Amazon has opened retail bookstores in Seattle, Chicago, San Diego, and other U.S. locations featuring Amazon electronic devices as well as books. It is thinking about moving into the grocery business as well as retail stores for furniture and appliances. These are retail experiences that lend themselves less easily to online purchasing because customers like to see and feel these types of goods in person. Amazon set up a physical grocery store in downtown Seattle called Amazon Go that is designed around an app that is able to place the items customers buy in a digital shopping cart so they can leave the store without waiting in a checkout line. The system automatically charges the credit card linked to the customer’s Amazon account and even knows when that person puts something back.

Amazon continues to build more fulfillment centers closer to urban centers and expand its same-day delivery services, and it has a supply chain optimized for online commerce that Walmart just can’t match. It now has more than 100 warehouses from which to package and ship goods. Warehouses speed up Amazon’s shipping, encouraging users to shop more at Amazon, and the cost of these centers as a portion of Amazon’s operations is decreasing. Amazon is building up its own delivery operation to compete with UPS, FedEx, and the U.S. Postal Service by offering better delivery and lower costs for both its own customers and possibly those of other retailers. Both Amazon and Walmart are experimenting with drones to accelerate fulfillment and delivery. But Walmart has thousands of stores, one in almost every neighborhood, which Amazon won’t ever be able to replicate.

CASE QUESTION:

1. Analyze Walmart and Amazon using Porter’s competitive forces. which are: traditional competitors, new market entrants, substitute products and service, customers, and suppliers

Answer 1

Porter's Five Forces Analysis
	Walmart	Amazon
Competitive Rivalry	HIGH as competition in the retail industry is intense. Several firms of varying sizes and business models are present in the industry. Although, Walmart has an edge due to its pricing strategy but due to the aggression posed by the other retail players, regular innovations in the business model are required by Walmart as along with big brands, several new and small brands can also be seen entering the industry.	HIGH as the factors such as low switching cost, high aggressive industry players, and availability of substitutes make the competition for the company challenging. Its biggest competitor: Walmart, has also started with the online shop and along with other giant players like Costco, it puts the industry under pressure of rivalry for greater market share and supremacy.
Threats of New Entrants	LOW as Walmart is one of the leaders in the industry and although, new companies can enter the space but it would not be easily possible for the new entrants to compete with Walmart due to its size, reach and capital sufficiency and other factors like distribution network, supply chain, and goodwill.	LOW as like Walmart, Amazon has also achieved massive economies of scale across various economies in the world and it would take immense amount of resources for any new firm to reach that level and be a direct competitor and hence, new entrants do not pose as a big challenge for the company.
Bargaining power of Suppliers	LOW to MODERATE as Walmart is a big source of distribution for the suppliers and also, the company can provide with several perks and benefits to the suppliers. Cost of switching from one supplier to another is low for Walmart, so, in a it is the suppliers that would like to be a part of Walmart.	LOW as being a company with successful establishment, it always has an upper hand over suppliers in the supply chain. It would be difficult for suppliers to go into forward integration but not much difficult for Amazon to opt for backward integration. Therefore, it is not so easy for suppliers to dictate pricing strategy.
Bargaining power of Buyers	LOW as the pricing startegy of Walmart anyway makes it affordable for customers and along with pricing factor, Walmart also ensures that the experience it gives to customers in terms of variety, convenience of purchase and other related services stops individual customers to switch or compel the company to alter its pricing strategy.	HIGH as the cost of switching is extremely low for the customers and any prudent buyer would jump to another online seller the moment they get a cheaper price for the same product as there are relatively less factors by which Amazon can attract and retain its customers than a physical store and hence, the company always need to ensure that it keeps coming out of ways and strategies to reduce the bargaining power of the buyers
Threat of Substitutes	LOW as Walmart has an advantage of scale and being able to offer products at much cheaper prices than the competitors. So, being a one stop shop for a large number of products of different qualities and brands along with superior and favorable price makes the company immune to the threat of substitutes.	MODERATE to HIGH as Amazon doesn't have many differentiating factors that would make a customer to stick to the company. Although, the factors like customer service, delivery speed do make a significant difference in a customer's decision but these may not always stop a subtantial amount of customers from switching if they find a big pricing difference. Hence, it becomes essential for the company to maintain and improve its goodwill and customer service.