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Amazon Nears Walmart in Overall Sales, Yet Lags Behind in One Essential Aspect

4 Mins read

Amazon Nears Walmart in Overall Sales, Yet Lags Behind in One Essential Aspect

After announcing blockbuster financial results from the holiday quarter and its largest operating profit ever last week, Amazon is now worth nearly $1.8 trillion.

The tech giant’s market value is four times higher than Walmart and, depending on what Walmart reveals when it reports its own fourth-quarter results on February 20, Amazon may have just topped Walmart in quarterly sales for the first time ever too. (Even if Amazon doesn’t now, it will likely surpass Walmart in overall sales sometime over the next year.)

And yet, there is one key area of Amazon’s retail business where it is still chasing Walmart from far behind: grocery sales. And yes, key Amazon executives care very much about growing their business in this sector now, just like they have for many, many years.

First, let’s be clear: There’s a lot that Walmart, in turn, admires in Amazon. Walmart surely wishes it had something close to Amazon’s giant AWS cloud computing business, which topped $90 billion in 2023 revenue and is one of the tech giant’s most profitable segments. AWS is also a major reason why investors value Amazon like a tech stock and not a retail stock.

Walmart is also chasing Amazon from way behind in online advertising – another highly profitable segment and a main contributor to Amazon’s soaring market cap. Amazon’s ad business grew 27% in the fourth quarter and topped $46 billion in 2023 revenue. While Walmart is making progress in this space, its ad business is still a small fraction of Amazon’s.

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Then, of course, there’s Amazon’s third-party seller services business – basically, all of the fees it charges small and mid-sized merchants to list their wares on Amazon sites, pack and ship their orders to customer doors, and handle customer inquiries afterward if something goes wrong. That business topped $90 billion in 2023 as the share of total Amazon goods sold by these sellers crossed the 60% mark for the first time in the company’s history. Walmart has been building its own similar offerings in this area too and many Amazon sellers have welcomed the retailer’s efforts as they search for any possible outlet to diversify their online sales and lessen their reliance on Amazon.

But groceries have been Amazon’s Achilles heel for some time. All the way back in 2005, Amazon’s current consumer CEO Doug Herrington pitched Jeff Bezos on what would eventually become the Amazon Fresh grocery delivery service. Herrington’s appeal centered on his belief that the company could never build a truly massive Everything Store if it didn’t sell the items that customers buy most frequently: perishable groceries and consumer-packaged goods.

“Selling a book or a TV is great and super helpful,” Herrington told me in an interview for my recent book Winner Sells All, about the Amazon/Walmart rivalry. “[But] how many times do I buy a book or TV each week versus how many times do I buy a packaged goods item, or some toilet paper or some food?”

Frequency of purchase breeds customer loyalty. And customer loyalty breeds high lifetime value for a corporation. Selling groceries at good prices also can make a retail business more recession-proof. When the economy sags, people cut back on nice-to-haves and prioritize spending on what they must have. Walmart understood this and expanded into groceries decades ago. Now it accounts for nearly 30% of all U.S. grocery sales, including revenue from its subsidiary Sam’s Club.

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But one of the main challenges for Amazon, which accounts for just 3% of U.S. grocery sales, in selling groceries and other CPG products online is that they typically have thin profit margins. Add shipping or delivery costs to the equation, and it’s almost impossible to generate a profit unless it’s a very large order. The key to Amazon’s online retail domination has been Amazon Prime, but Prime breeds fewer items per order because of its simplicity of free shipping with no minimum spend requirement. In groceries and packaged goods categories though, retailers want customers to order many items at a time. It’s one defect of Prime.

So Amazon bought Whole Foods in 2017 for nearly $14 billion to try to make a dent. The results at the chain of approximately 500 stores have been mostly uninspiring to date. Amazon also started building its own grocery store chain – Amazon Fresh – targeting a more mainstream customer. The company, under CEO Andy Jassy, paused this expansion and is now remodeling a few of its 40-plus stores before deciding on the best way to proceed.

“The results so far are very promising,” Jassy said on a call with analysts on Thursday.

Last year, Amazon also closed at least eight of its more than 30 Amazon Go locations, small-format convenience stores outfitted with an expensive cocktail of cameras, sensors, and computer vision that let customers just walk out after grabbing goods off of a shelf and automatically be charged for the items later.

A former UK grocery executive, Tony Hoggett, now leads all of Amazon’s grocery initiatives, so the experience at the top is there. Amazon’s physical store sales, the majority of which come from Whole Foods, grew 4% year over year to $5.1 billion in the fourth quarter of 2023.

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And finally, Amazon believes the continued buildout of its same-day and overnight delivery will make the sale of low-priced packaged foods more affordable. Making money on a single six-pack of Coke or bottle of shampoo or Clorox if you have to ship it a long distance is nearly impossible. But if it’s stored in a warehouse close to a dense population of customers, the calculus might change. Unsurprisingly then, both Jassy and the company’s chief financial officer, Brian Olsavsky, talked up this fact in remarks to both reporters and analysts this week.

For now, though, it continues to be perhaps the only remaining area where Amazon truly trails Walmart – and in a big way.

 

 

 

 

 

Source: Yahoo Finance

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