The Fall of a Giant: Wal-Mart

The fall of Wal-Mart

Wal-Mart has been a global retailing behemoth. The rise of Wal-Mart is an amazing story, but it seems like the fall will be equally spectacular. Just a few decades, after Sam Walton from Bentonville Arkansas, started building the world’s largest retail empire. The same empire is today facing an existential crisis.

Wal-Mart used to have absolutely no competition. The company had revenues of $445 billion per year which is greater than the GDP of most third world countries. At one point in time, the sales made by Wal-Mart used to account for over 3% of the American GDP.

However, things have changed rather quickly. Wal-Mart is facing a major onslaught from online retailer Amazon. To the surprise of everybody, it seems to be losing this battle. From the beginning of 2000, Wal-Mart always emphasized the importance of e-commerce and would regularly state that the company will try to increase its footprint in the field. However, Wal-Mart has done too little too late, and in the meanwhile, a new retail giant has risen!

In the early 2000’s Wal-Mart had revenues that were 16 times the size of Amazon’s revenues. Today, just 17 years later, the tables seem to have turned. Amazon today is worth twice as much in the capital markets. Wal-Mart has a net worth of $220 billion. Amazon, on the other hand, has a net worth of $430 billion. Investors have been driving Wal-Mart’s share prices to the ground as prices have been falling continuously for about two years. The more Wal-Mart is coming in contact with Amazon, the more losses it is facing.

Causes of this Debacle

  • Losing Price Wars: Price wars used to be Wal-Mart’s game. Wal-Mart was so good at this that it had a reputation for driving mom and pop stores out of business. The company played with economies of scale and passed the benefits on to the consumers. At Wal-Mart’s peak, it was the undisputed leader in low prices. However, today the battle is not so easy. Amazon has an asset-light model that Wal-Mart cannot easily compete with. The income statement of Wal-Mart is full of real estate related expenses for its big box stores. However, Amazon faces no such expenses since it runs the entire business from the virtual world. Wal-Mart has therefore lost the edge as far as lower pricing was concerned, and that was what defines Wal-Mart!

  • Huge Share Buybacks: Sales and profits have flatlined at Wal-Mart. For the past two years, both sales and net profits have seen negative growth. This is a sign of a business that has reached its maturity and is near decline.

    Wal-Mart management does not know what to do with the excess money that they have. Hence, they keep ordering large dividend payments and share buybacks. On an average, Wal-Mart has given out $6 billion per year to its shareholders.

    Amazon, on the other hand, has been very aggressive with its investments. It has not given a single dime out to investors in the form of dividend payments. Instead, it is pulling back all the money in the business to grow it. Despite this appeasement policy by Wal-Mart, investors are slamming Wal-Mart’s share while at the same time the stock price of Amazon is going through the roof.

  • Poor Supply Chain: Wal-Mart’s supply chain was built to stock its mega stores full with products. They are the leaders in mass transportation and obtaining bulk discounts. However, e-tailing has simply changed the game.

    The logistics involved are now about supplying individual products to the consumer’s doorstep at the lowest possible costs. This is where Amazon has the lead over Wal-Mart. Customers have also complained about many illogical issues with Wal-Mart.

    For instance, when customers order multiple products with Amazon, they get it at the same time in the same packet. However, when a bunch of products is ordered from Wal-Mart, they arrive at different times making it inconvenient for the customer.

  • Amazon Go: Amazon has ventured into Wal-Mart’s territory of brick and mortar stores. It seems to be beating Wal-Mart at its own game. Although Amazon Go stores are much smaller than Wal-Mart, they are extremely efficient. These stores are not manned, and there are no checkout counters. People have just to pick up the stuff they want and leave. Technology does all the backend work like billing. Amazon’s ability to remove human effort from the equation will provide it with a cost advantage that will be difficult to compete with.

  • Employment Issues: Lastly, employment issues have been adding to Wal-Mart’s woes. It is known to be a bargain basement employer who pays minimum wage to its people. Employees have been unionizing to demand higher wages for quite some time. It seems that they are likely to succeed and that this will exert pressure on the already deteriorating profit margins of the company.

    Wal-Mart has been laying off a lot of people from its head office lately. This string of layoffs is likely to continue given the bleak business situation confronting Wal-Mart.

    Amazon has also run into labor issues but of a different kind. Amazon typically employs high-end tech workers. There have been complaints of Amazon pushing these people to the brink. Several over-worked employees have called Amazon a cut throat employer, that burns out employees and then gets rid of them. However, apart from public relations issues, Amazon is unlikely to see any significant negative impact related to this issue.

To sum it up, Amazon seems to be firmly in the lead as far as the battle between retail and e-tail is concerned. Wal-Mart seems to be heading towards irrelevance as its business gets taken over by the new kid on the block.

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