Amazon’s Showrooming Impact And Quick Growth Threaten Wal-Mart

Due to the toughening competition between the online and physical retailers, Wal-Mart (NYSE:WMT) has decided to stop selling Amazon’s (NASDAQ:AMZN) private label Kindle Fire tablets. However, it will continue to sell similar electronics from the other brands such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). ^[1] It appears that the decision was mainly inspired by the launch of Amazon’s mobile app for its customers to compare the price of the products at the retail stores with Amazon’s price using barcode scanning. This gave way to “showrooming”, a situation when the customers check the products in the store and buy them online. Although, this decision might not have a significant effect on the Wal-Mart’s sales, its intentions are clear that it does not want to facilitate the shift of sales to Amazon.

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Stiff Competition From Amazon

The physical stores such as Wal-Mart are more likely to go out of stock on some products than the online retailers such as Amazon. According to a survey conducted by Kantar Retail (a London based firm) in June 2012, the Wal-Mart stores were out of stock on 14% items whereas Amazon had all its items in stock. ^[2] Shoppers are starting to follow the idea that ‘online shopping is cheaper’ and thus, are increasingly buying online without checking the prices in the stores. Recently, Amazon registered a sale of 20% more than Wal-Mart on commodities such as edible/non-edible grocery, health, beauty care and general merchandises. ^[2]

Wal-Mart, being a physical retailer, has to collect sales tax from its customers, whereas Amazon enjoys the liberty of tax exemption in many states in the U.S. However, recently Amazon has decided to start collecting taxes from Nevada, New Jersey, Indiana, Tennessee and Virginia within the next two years. ^[3] This will likely result in an increase in Amazon’s prices. ^[2]

Amazon’s Aggressive Expansion A Concern For Wal-Mart

Amazon has been growing at a much brisker pace and is known for its willingness to sacrifice margins in the pursuit of growth.

As of September 2012, Wal-Mart stood at the TTM (Trailing Twelve Months) sales of $460 billion compared to Amazon’s $54 billion. ^[3] However, with a faster pace of growth, Amazon is expected to catch up with the world’s largest retailer within a period of 8 years. ^[4] Kicking the Kindle Fire out of the store is just a small step as Wal-Mart clearly feels threatened by the online retailer.

The decision to stop selling Kindle Fire was mainly due to the potential threat from Amazon and the loss of sales due to showrooming. This will dent Amazon’s sales of Kindle Fire only to a limited extent as most of the customers buy it online anyway. Discontinuing the sales of a single product of the electronics segment, which otherwise offers a wide range, will have no noticeable effect on Wal-Mart.

We expect that the customers will continue to compare the prices of the products; however, there might be an imperceptible improvement in Wal-Mart’s sales. As Amazon continues to grow at a brisk pace, Wal-Mart will have to focus more on pushing its online sales and improving the services at its stores. Furthermore, Wal-Mart will have to utilize its buying power to narrow down the online retailer’s price advantage.

Our price estimate for Wal-Mart stands at $70, implying a discount of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Wal-Mart to drop Amazon’s Kindle, Wall Street Journal, Sept 21 2012 [↩]
2. Study Finds Walmart Beats Amazon on Price, Retail wire, June 20 2012 [↩] [↩] [↩]
3. I want it today, Slate, July 11 2012 [↩] [↩]
4. Amazon: The future growth implied by its price to sales ratio, Seeking Alpha, Sept 25, 2012 [↩]