NEW YORK - Amazon and Wal-Mart might once have existed in parallel universes, but these days they're in a price war. Both giants are now seeking to make acquisitions to compete on the other's turf.
Amazon.com Inc. is going to have a significant brick-and-mortar presence. The only remaining question is when and how. Perhaps it'll be a new high-tech store created by Amazon wizardry, like Amazon Go grocery store, which was announced early this year. The company is slowly rolling out physical bookstores. But last week there were signs that Amazon could accelerate that push via an acquisition in one form or another. First was the report that Amazon considered buying Whole Foods last fall. And then over the weekend there was a report that BJ's Wholesale Club is putting itself up for sale, with Amazon showing some interest.
Amazon's logic is straightforward: It wants to sell to consumers wherever consumers want to buy, and plenty of sales still happen in stores. Amazon's revenue in 2016, which includes all of its businesses, not just selling goods to consumers, was $136 billion, still barely more than a quarter of Wal-Mart's $486 billion. Whole Foods and BJ's each have annual revenue north of $10 billion. Assuming Amazon does make a big push into stores, it would be following the path blazed by Sears a century ago, when it took advantage of an expanded railroad network - the internet of its time - to build a catalog business that eventually led to a large physical retail presence.
Wal-Mart Stores Inc. is hardly the hapless dinosaur some think. Doug McMillon, who at 50 is younger than Jeff Bezos of Amazon, became the company's CEO in 2014. One of his first moves was announcing pay increases for employees in February 2015. At the time some saw it as a political move, to take heat off the company for its reputation in some circles as bad for communities and workers. When investors realized how much the wage increase would affect the company's bottom line, they crushed the stock. In 2015 Wal-Mart stock finished down 28.6 percent, one of the worst performers of the Dow Jones Industrial Average.
But the wage increase showed that Wal-Mart understood something before most of its brick-and-mortar competitors did. First, the labor market was tightening, especially for lower-wage service workers, and Wal-Mart wanted to ensure it had good workers. And second, the in-store experience for shoppers had slipped, and needed to improve if Wal-Mart hoped to stabilize its business.
Wal-Mart then turned to the online threat posed by Amazon and others. Last August, it bought the fast-growing e-commerce startup Jet.com for $3.3 billion. As part of the deal, Jet.com's CEO, Marc Lore, took over Wal-Mart's online operations. In his first several months in that role, Lore has made a few small acquisitions - including ModCloth, MooseJaw and ShoeBuy.
But it's the report that Wal-Mart is looking to buy online men's fashion retailer Bonobos that starts to give the company's strategy a little more clarity. Amazon might have created the most powerful and frictionless e-commerce machine in history, but it's been less successful at creating its own brands. That gives Wal-Mart an opening. Wal-Mart may be building a portfolio of online brands, for which it could then conceivably control distribution -- online, offline or both. Perhaps one day shoppers will be able to buy Bonobos in physical Wal-Mart stores, but not at any other store.
Wal-Mart's ownership structure and cash flow position allow it to employ an Amazon-like patient, long-term strategy. The Walton family still owns 51 percent of the company's shares. Good luck to any activist investor trying to shake that grip. And with annual profits north of $10 billion, it can afford to make calculated acquisitions as it tweaks its online strategy.
Amazon and Wal-Mart as a quasi-duopoly, both investing billions for the long term, is terrible news for the rest of the retail industry. Malls and big-box stores may be left cutting costs endlessly and squabbling over fewer and fewer retail dollars. Unless they can sell themselves to Amazon or Wal-Mart.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a columnist for Bloomberg View.
