Walmart has been the favorite bogeyman of many in this country because it used size, scale, and supply chain efficiencies to disrupt main street and undercut prices of mom and pop stores and local retail chains alike. Like it or not, Walmart achieved unparalleled success, changed the retailing business model for good, and brought savings to millions around the globe.
But today, Walmart finds itself on the financial ropes because it too is being disrupted. As part of last week’s earnings announcement, the retailing giant predicted that next year’s earnings could drop as much as 12 percent.
The stated reason: investments in people, platforms, and technology. But the real reason is that the Walmart business model is itself being disrupted. And the disruptor – Amazon — has revolutionized the distribution model and dramatically reduced the value of brick and mortar stores.
Digital distribution, simply put, is far less expensive than the overhead associated with staffing and maintaining thousands of warehouses. Two key stats highlight the difference: Walmart employs 2.2 million people; while Amazon has 154,000. At the same time, Amazon sells 250 million products, while Walmart sells 4.2 million.
With annual revenue growth of 23% in FY 2014, Amazon became more valuable than Walmart earlier this year.
To be sure, Walmart isn’t going anywhere, anytime soon. Even with its financial challenges, Walmart generated $485 billion in revenues in FY2014 and is profitable (something you can’t always say about Amazon). Based on the comments of CEO Doug McMillon, Walmart clearly understands the challenge and will invest millions in its online platform to better compete.
But the question is: will Walmart be able to do what is necessary to win over the long term? The challenge for companies with legacy business models is that they can’t afford to abandon what got them to the top in the first place. So Walmart will look for additional supply chain efficiencies, it will close facilities that aren’t as profitable as others, and it will double down on its online platforms and presence.
Two key stats highlight the difference: Walmart employs 2.2 million people; while Amazon has 154,000.
But Walmart won’t shut down every single retail outlet in the world and become a pure-play online store. That would be way too painful and wouldn’t be smart business. Walmart can go for years, if not decades, continuing to serve the public through a combination of online and brick and mortar – generating billions in value for its shareholders.
But over the long-term, the challenge from disruptors won’t go away. It will squeeze margins, siphon market share, and limit profitability. Some quarters will be good and others will be less so. But over time, the challenges will grow.
You can also expect that Walmart and Amazon will increasingly find themselves in proxy battles. The most notable case was earlier this year when the two giants went at it for a Black Friday-like sale. Expect legal and policy battles to heat up as well. That’s an inevitable result of the business-to-business conflict that emerges when there is a clash between disruptors and the disrupted.
The power of disruption
Here’s the bottom line: the power of disruption is that it can provide similar goods or services at less cost, with better service, and at greater scale. That’s precisely what Walmart did when it upended Main Street. And that’s precisely is what Amazon is doing to Walmart now.
Walmart understands the challenge. The questions is: how far will Walmart go to disrupt its own business model to adapt and change with the times?