Amazon's Big Problem

May 7 2014, 8:15pm CDT | by

Amazon has a big problem–Wal-Mart.

For years, Amazon has been expanding the scale and scope of its operation, both horizontally and vertically—a strategy that resembles that of Standard Oil’s in the late 19th century.

The problem is that Amazon competes in a different industry, and during a different era, from Standard Oil. And its winner take all strategy for the click and the brick world is turning costly – because a strategy like that requires a great deal of investment for warehouses, transportation gear, content acquisition, and so on.

Worse, it pits the company against giants like Wal-Mart, and Wal-Mart has been fighting back.

Recently, Wal-Mart scored a big win against Amazon.com: Wal-Mart’s on-line sales growth outpaced the sales of Amazon.com for the period ended Dec.31.

Wal-Mart’s gains against Amazon.com follow a well-crafted strategy, which includes the acquisition of on-line search technologies and the building of warehouses.In 2013, for instance, @WalmartLabs, Wal-Marts e-commerce technology arm, acquired four start-ups: Torbit, a cloud-based website accelerator service; Inkiru, a predictive intelligence platform; OneOps, a cloud based automation technology; and Tasty Labs.

Currently, Wal-Mart is about to acquire Adchemy, a search engine marketer.

Amazon remains the on-line leader, beating Wal-Mart by 7-1. Nonetheless, Wal-Mart’s strategy demonstrates that Amazon doesn’t have a sustainable competitive advantage. Any retailer with deep pockets to recruit or acquire the best talent can make a foray into its markets.

And Wal-Mart isn’t just any retailer. It is the biggest retailer in the world. And it got there by competing on pricing.

That’s what makes Amazon’s problem big. It has been accustomed to competing on razor-thin margins, focusing on sales growth rather than profitability. Wal-Mart’s foray into Amazon’s markets may change the rules of the game— it will become extremely difficult for Amazon to raise the price of its “bundle,” or worse, it could fuel a price war that may extinguish Amazon’s thin profit margins.

Amazon.com versus Wal-Mart Stores

Company Amazon.com Wal-Mart Stores
Forward PE 91 13.58
Profit Margin 0.38% 3.34%
Operating Margin 0.91% 5.64%
Return on Assets (ttm) 1.37% 8.24%
Operating Cash 5.34B 23.26B
Revenue (ttm) 78.12B 476.29B

Source: Yahoo.Finance.com

Either prospect isn’t good for Wall Street, which has been on edge since Amazon’s last earnings report, sending its shares south.

Amazon has a serious problem to solve.

 
 

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