Move over Walmart, here comes Amazon

If current trends continue, an important milestone in Amazon’s history will pass later this year.  For the first time, global sales of media products like books, DVDs and music will be surpassed by sales of general merchandise.  Founded 15 years as an online bookseller, Amazon is already considered an online mass merchandiser where one could easily purchase Pampers and Power Drills as well as Police Academy II and the Police’s Greatest Hits.  This is no surprise to the millions of consumers who now shop online for everything.  According to ChannelAdvisor, an eBay-backed firm that helps major retailers sell on the Web, e-commerce purchases are projected to make up 15% of total retail sales within the next decade, up from 7% today.  Should Amazon be able to maintain its share of this growth, it will soon rival some of the largest global retailers, including Walmart.

Amazon’s odds are good given their powerful competitive advantages. The lack of physical stores and an ability to turn inventory in less than 65 days (before they have to pay suppliers) allows Amazon to maintain negative working capital (thereby maximzing cash flow) and a lower fixed cost structure while supporting aggressive pricing and superior product selection. Furthermore, an “always-on” Web presence of their full selection allows Amazon to generate sales 7-24, an important advantage during the crucial Christmas season.  Finally, Amazon plans to dramatically expand their private label offering beyond the hundreds of items currently available.  This will allow them to secure greater discounts from manufacturers as well as enhance their own brand equity.

Although Walmart continues to dwarf Amazon in terms of  revenue and profitability, Amazon’s share price, reflecting future prospects, tells a different story.  Today, Amazon’s shares are priced at 60 times earnings versus 15 times for Walmart.

Having bested scores of booksellers, electronics stores and online sellers like eBay, what are the implications for the retail industry of Amazon, The Worlds Online General Store?

Many companies will suffer.  For example-

  • Retailers that sell relatively undifferentiated products like jewelry and hard goods will feel the wrath of Amazon’s lower pricing and greater selection.     
  • Branded manufacturers will likely face increased pricing pressure as well as new listing and ancillary fees.  Firms like Nike that historically have chosen not to sell through Amazon may find themselves unable to resist one of the largest (and only growing) retail channels.

 Although a threat to some, a larger Amazon share represents an opportunity for others-

  • Good retailers that focus on service and a rich customer experience should be able to compete with Amazon, especially with products like clothes and sporting goods where sales expertise or a visual inspection is important
  • Many small sellers will benefit from Amazon’s larger market footprint through participation in their affiliate sellers program, whereby they sell their wares through Amazon’s e-commerce platform.  This program is crucial for Amazon, representing 30% of their total revenue.

It is likely that Amazon will continue its relentless advance.  How other retailers respond will help determine whether Amazon begins to challenge Walmart or whether it continues to be a large, albeit niche, player.

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2 comments so far

  1. […] 3 non-traditional retailers (Amazon, Newegg and Netflix) among the top 25 internet retailers, with Amazon coming in the highest at #4.  Furthermore, a scale based strategy has fared no better in the […]

  2. […] of the World’s most successful companies – IBM, Amazon, Apple and Google etc – have gained a sustainable competitive advantage and industry-leading […]

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