Editor's Note: Below are a selections of excerpts from an institutional research note written by Hedgeye Demography Sector Head Neil Howe. To read the entire note email sales@hedgeye.com. On Thursday 8/10, Howe will be appearing the MacroVoices podcast, hosted by hedge fund manager Erik Townsend. Click here to listen in once it's released.
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MARKET WATCH: What’s Happening? Amazon has entered the grocery market in earnest with its recent acquisition of Whole Foods. Walmart is making deals on Amazon’s turf by scaling up its own e-commerce operations. But which company has the upper hand? Our Take: While investors are siding with Amazon, it will be a closer battle than most people think. Walmart is larger, more profitable, starting to compete with Amazon online—and is a vastly better value. Moreover, the Millennial shoppers whom everyone assumes are pro-Amazon actually hold Walmart in equally high regard. |
Amazon turned heads last month when it acquired Whole Foods for a lofty $13.7 billion. On the exact same day, Walmart made a deal that flew under the radar: The Bentonville-based giant bought men’s clothing e-tailer Bonobos for $310 million.
The timing is no coincidence: As the de facto leaders of U.S. retail, Amazon and Walmart are each spending heavily in an attempt to unseat the other.
AMAZON: STRENGTHS
E-commerce domination. Amazon is miles ahead of the pack when it comes to e-commerce—which sets the firm apart in an era when ever-more sales are moving online.
Since 2010, U.S. e-commerce sales have more than doubled as a share of all sales. While retail has been plodding along at a modest clip since the end of the Great Recession (average YOY growth since Q1 2010: 4.3%), e-commerce sales have been skyrocketing (15.2%).
AMAZON: WEAKNESSES
Show me the money. But for all of its success, Amazon has yet to generate much in the way of actual profits.
Amazon cultists insist that Jeff Bezos’ long game has never been about near-term profits, but rather about keeping prices low in order to steadily gain market share—that is, grow faster than its competitors. Clearly, given the company’s insane P/E ratio of 187.8 and its stock price of $1,000-plus per share, investors are on board with this strategy—betting that Bezos will someday choose to earn a hefty profit.
But such a massive bet on deferred earnings is fraught with downside risk.
WALMART: STRENGTHS
So what’s the argument for Walmart?
A combination of size, profitability, and affordability. First, Walmart is still a much larger company, with revenues of nearly half a trillion dollars—nearly four times Amazon’s. That scale alone enables it to put a much bigger squeeze on suppliers than Jeff Bezos. Consider that, during the latest Amazon Prime Day, Walmart was able to offer many of the lowest prices around.
WALMART: WEAKNESSES
Cultural handicap. For all of its size, Walmart has managed to keep its distinct small-town identity intact. The company was founded—and still keeps its headquarters—in Bentonville, Arkansas, a city with a population of less than 50,000. What’s more, Walmart’s operating philosophy has not changed in the half-century that it has been in business: Methodically acquire physical scale, eschew any cost that doesn’t add value to the consumer, and use that scale and efficiency to grind out the highest profit.
But Walmart’s culture is self-defeating in two ways. First, its management may not be capable of thinking and operating like a fast-acting, dynamic Silicon Valley tech giant. For all of its e-commerce dealings, Walmart retains plenty of long-tenured C-suiters who don’t want the company to abandon the strategy that made it into a global leader. Retail expert Mark Cohen is bearish on Walmart’s about-face for this very reason: “You’re talking about the changing of the tide, and not just from the product development point of view. Walmart has thousands of stores and thousands of people.”
Second, critics say that a 50-plus-year reputation as small-town penny-pinchers may prove to be a fatal handicap in attracting young, hip, tech-savvy new consumers. People simply don’t associate a brand built on old-economy principles with the digital, networked America of the twenty-first century. Aren’t Walmart’s handful of e-commerce acquisitions just a phony add on?
CHOOSING A WINNER
(To read all the investing takeaways email sales@hedgeye.com.)
The takeaway: Walmart and Amazon may both well outperform the broader retail market in the years to come. But don’t be too surprised if Walmart eventually emerges on top. And even if the homely Bentonville retailer does no more than stick around, that makes it a big long-short winner relative to its bleeding-edge Seattle-based rival.
