The two biggest names in retail right now are Wal-Mart (NYSE: WMT) and Amazon.com (NASDAQ: AMZN). These two dominate the retail business; Wal-Mart is the biggest retailer in the world, while Amazon is generating massive growth in the online retail space.
Wal-Mart has dominated the retail landscape for years, but this is starting to change. Lately it has suffered a deteriorating image among consumers for its employee treatment practices and its underperforming stores.
Meanwhile, Amazon offers shoppers the convenience of at-home shopping, fast delivery, and low prices.
Amazon is starting to encroach on Wal-Mart’s turf, but Wal-Mart isn’t taking this lying down. It recently announced two-day shipping. The key question for investors is whether Wal-Mart can compete with an increasingly Internet-oriented consumer.
Wal-Mart Delivers a Blow
Amazon’s momentum seems unstoppable. Sales soared 22% in the fourth quarter last year, and 28% in the first quarter 2016. It is putting enormous pressure on brick-and-mortar retailers like Wal-Mart.
But Wal-Mart is fighting back. It recently announced two-day shipping for its ShippingPass service, which competes directly with Amazon Prime. Wal-Mart has its own e-commerce ambitions; its e-commerce business posted 7% growth last quarter.
ShippingPass is currently a pilot program, but it has a great deal of promise. If there were a retailer with the scale and fulfillment infrastructure to seriously compete against Amazon in Internet retail, it’s Wal-Mart.
ShippingPass is actually far cheaper than Amazon Prime—it costs $49 per year, compared to $99 per year for Prime. Plus, ShippingPass supports free returns and has no minimum purchase requirements.
Wal-Mart’s decision to reduce shipping to match Amazon Prime’s offering really evens the playing field between the two, and perhaps gives Wal-Mart the edge.
The one advantage Amazon Prime still has is that it includes a variety of services, including access to media such as books, movies, music, and TV shows. Wal-Mart’s ShippingPass service only includes delivery of products.
Still, this could add even more momentum to Wal-Mart, which reported better-than-expected earnings on Thursday. The retail giant posted $0.98 per share in earnings. While that was down from $1.03 per share from the same quarter last year, it exceeded analyst estimates by $0.10 per share.
Revenue clocked in at $115.9 billion, which was up 1% from the year-ago period. Wal-Mart’s comparable sales, which measures sales at stores open at least one year, rose 1%. Analysts were only expecting 0.5% growth.
Wal-Mart noted its performance in the U.S. came in above projections, which could be an indication that U.S. consumers are coming back to the brand.
Wal-Mart’s surprising earnings beat caused the stock to jump 8% on a day in which the Dow Jones Industrial Average sank 150 points at the open, so it’s clear investors are starting to feel more confident about the company’s future prospects.
Wal-Mart vs. Amazon
It seems that Amazon is simply taking over the world, as far as retail is concerned. But this conclusion may be premature. While consumers undoubtedly love the convenience and low prices that Amazon offers, there are hiccups in the Internet retail model.
First, Internet retail has a higher rate of product returns than physical retail. Over time, this could lead consumers to once again embrace the brick-and-mortar retailers, where they can at least inspect items in person.
Second, for more higher-value items, consumers typically want to ask questions before buying. This is an edge that a physical retailer like Wal-Mart has over Amazon, because its staff can answer questions and help consumers make better purchasing decisions.
This explains why Wal-Mart announced a significant new round of investment in its stores and employee training last year, and judging by its first-quarter results, it appears these investments are paying off. Whether this will be enough to reverse Amazon’s seemingly unstoppable momentum remains to be seen.
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