February 20, 2018
Walmart reported both same store increases and net revenue above the market’s expectations today, but their stock took a 10% hit. The reason; e-commerce sales were only up 23% during the fourth quarter against a 50% increase in the previous quarter. Profit also missed the mark, reportedly due to Walmart’s strategy to directly and aggressively compete with Amazon during the all-important holiday season.
Given the market’s reaction to this miss, one must assume that the future success of Walmart is not dependent on sales growth in the physical stores, but rather its ability to be better at being Amazon than Amazon. A daunting task for sure.
The results today also begs a more important question, namely is e-commerce destined to be a black hole of unprofitable sales and if so, how healthy is it for Walmart and others to cannibalize their own, profitable, in-store business for the less profitable on-line alternative?
To put this question in a broader context, we should remember that during the first twenty years of operation Amazon maintained the ability to grow its revenues and its stock price, while being mostly unprofitable.
Jeff Bezos, Amazon’s founder and CEO, understood the importance of providing a dynamic vision for the investment community, with the assumption that profits would eventually emerge after Amazon became a significant force in retailing. Given that Amazon’s market cap exceeded that of Walmart in 2015, one could guess that day has arrived.
However, with Walmart’s aggressive reaction to Amazon, the race for on-supremacy is on. Walmart’s last quarter results is stark evidence that it will be an expensive race with possible collateral damage to other smaller retailers who are looking for their place in the new omni-channel retailing environment.
So why Amazon is booming, without being pressed for profits, Walmart gets punished when they do the very same thing in their quest to compete? Walmart in fact, as the chart depicts, has been increasingly profitable during the same twenty years and yet their stock price is a fraction of Amazon’s.
The double standard is clear. Investors expect Walmart to grow their on-line business in the same profitable fashion as their physical store operations. Amazon investors are seemingly indifferent to profit performance.
All of this comes back to the point I attempted to make in the title of this writing, that is that while e-commerce is beginning to make good sense for the consumer, it is unclear to me how profitable it will ever be allowed to be as the developing duopoly of Walmart and Amazon are apparently willing to provide the service at a near loss or loss. In addition, will Walmart’s investors continue to punish Walmart for competing with an entity that has the advantage of not having to be profitable to grow? Most would say the Amazon will eventually have to play by the same rules as their competitors, but you would never be able to predict that by looking at the past twenty years.