Does this feel desperate to you?
Walmart has partnered with Uber to expand its grocery delivery service business.
The notorious big-box retailer now offers grocery delivery in Dallas, Orlando, Tampa and Phoenix.
So if you live in one of those four cities…
Uber will deliver your online Walmart grocery orders for $9.95.
If you’re not amused yet, consider this…
Earlier this summer, news broke that Walmart was enlisting its own staff to deliver online orders on their way home from work.
It’s a classic example of truth being stranger than fiction.
According to a Walmart spokesman…
“Walmart is uniquely qualified, uniquely positioned, to be able to offer this,” since 90% of Americans live within 10 miles of a Walmart store. “There is really strong overlap between where our associates are already heading after work and where those packages need to go.”
Bespoke Investment Group isn’t impressed.
The critically acclaimed research firm has Walmart listed on its “Death by Amazon” Index.
So will Walmart write itself into history alongside the likes of Polaroid, the XFL, RadioShack and Hummer?
Let’s see what my top two analysts think and then I’ll render a decision at the end.
The Beginning of the End
Life must sting a little bit for Walmart.
It wasn’t too long ago that the big-box heavyweight was being publicly blasted by mom and pop retailers around the nation for barging into their towns and undercutting their prices with cheap, foreign-made goods.
Now the company is being undercut by Amazon’s margin-killing delivery model — which requires no storefronts… or the overhead that goes with them.
Unfortunately for Walmart, the company arrived way too late to the digital-shopping and delivery party.
In the last 10 years, Amazon’s market value has increased tenfold, to just under half a trillion dollars.
Walmart, on the other hand, has outperformed the S&P 500 by just six percentage points over the same period. And the nation’s largest retailer sports a market capitalization less than half the size of Amazon’s.
And by offering Prime membership discounts to low-income Americans, Amazon is going after Walmart’s key demographic.
Bottom line: Walmart is dying a slow death at the hands of Amazon. Things are going to get a whole lot worse — not better.
Walmart’s Fate Is Sealed Either Way
My take on the Amazon-Walmart situation begins with a simple set of numbers.
When looking at the trailing four-quarter figures for each company…
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Amazon showed revenue of $485 billion, net income of $14.3 billion and a return on equity of 17%.
Walmart showed revenue of $149 billion, net income of $2.0 billion and a return on equity of 10%.
It’s not clear to me why the larger and more profitable company should fall victim to the smaller.
Yes, Amazon will continue to nibble at the edges of Walmart’s dominance. But that’s all it’s doing.
In spite of unfair sales tax advantages, Amazon has still not demonstrated that it can make a decent return from retailing. Remember, most of its earnings come from its cloud business.
Bottom line: Walmart will eventually die. All retailers do (just look at Montgomery Ward and Sears). But it won’t be Amazon that kills it.
The Donald Trump of Retail
My knee-jerk reaction is to go ahead and play “Taps” for Walmart. After all, the survival rates for an expense-laden, low-margin business aren’t good.
However, there’s an interesting trend in the market that can’t be ignored. E-commerce giants like Amazon and its Chinese counterpart Alibaba are moving into physical spaces.
This shouldn’t be happening. Not if e-commerce is going to disrupt the entire retail sector.
Don’t be fooled into thinking this is a fluke or fad, though.
As Alibaba’s Jack Ma has put it bluntly, “We must embrace physical space.”
Why? It’s likely because a converged model of online and physical stores is the ideal model to serve consumers. Or in Ma’s words, the end goal is “the integration of online, offline, logistics and data across a single value chain.”
Amazon’s acquisition of Whole Foods and the immediate changes after closing the deal certainly indicate that Jeff Bezos is simpatico with Ma.
If any traditional retailer is positioned to compete in this new world, it’s Walmart. The presidential election — yes, politics — underscores why.
President Trump was largely elected because of voters outside urban centers. Go figure, that’s also Walmart’s competitive advantage. As it was mentioned above, the company has stores within 10 miles of roughly 90% of Americans.
In contrast, Amazon’s strength is in urban centers, where its services are most convenient and cost-effective. Drones promise to expand that circle of convenience. But not enough to take over where Walmart thrives.
The end result? Amazon’s dominance promises to continue. Accordingly, it’s a must-own stock for investors. But it’s not a zero-sum game. So Walmart isn’t headed for an inevitable death. It stands to survive.
As for its stock, I’d rather own a thriving business, not a surviving one. So no thanks!
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily