E-tailing update: Brick-and-mortar retailers struck back

This represents the seventh Insights column about the evolution of consumer-based e-commerce. Their purpose is to chronicle the evolution of e-tailing from the eyes of a supply chain analyst. They are primarily focused on the battle between the heavy-weights—brick-and-mortar Walmart versus e-tailer Amazon—as a reflection of what has been happening in the retail industry.

For the past two years my focus has been on the planning changes that would be needed to accommodate uncertainties and severe supply shortages such as those experienced during the COVID-19 pandemic. To wit, my last Insights e-tailing update was two years ago in the September/October 2022 issue (titled “Annual e-tailing update: growth, with a muddled future”).

That column assessed where the overall market was from both a demand-side and supply-side perspective. It also discussed the evolution of Amazon and Walmart since the prior update. It concluded that e-tailing grew more rapidly during the pandemic as more consumers chose the convenience of ordering online when stores closed down. However, brick-and-mortar retailers were beginning to win back some market share from e-tailers through innovation. Still, uncertainties abounded with respect to what recent trends would continue, and how to capitalize on them.

This Insights update discusses what has transpired during the past two years in terms of the activities of Walmart and Amazon and provides a market assessment.

What has been happening at Walmart?

The pandemic put both Walmart and Amazon in very good positions. They both ensured that they always had the goods, as well as the employee labor needed during the pandemic. Since then, Walmart has done a fair amount relative to its competitiveness vis a vis Amazon. This view is supported by the following six articles from the Wall Street Journal (WSJ).

• “Walmart+ Steps Up its Battle with Prime” (8/23/2024).
• “Walmart to Provide Logistics for Sales Off its Site” (8/28/2024).
• “Walmart Attracts Discerning New Customers, But its Strategy to Keep Them Goes Beyond Prices” (5/17/2024).
• “Walmart’s Reign is Under Threat”  (5/16/2024).
• “Walmart to Sell Freight Fleet to J.B. Hunt in Shipping Deal” (2/23/2024).
• “Walmart in Talks to Buy Smart-TV Firm Vizio” (2/14/2024).

Sales at Amazon have been growing much faster over the past decade and may soon surpass those of Walmart—the largest retailer. While they compete directly, their sources of revenue are different. Amazon’s profits are driven by non-retail operations such as advertising and its cloud computing division. Walmart gets the bulk of its sales and profits from U.S. stores while growing side businesses like advertising and digital sales. 

Because it is said that 90% of Americans already shop at Walmart, it is hard-pressed to stem Amazon’s sales tide based entirely on attracting new customers. Its customer base has grown beyond its traditional low- and middle-income shoppers. That is, those shopping to get “everyday low prices.” Post-pandemic, customers are now able to pick up their online orders or get them delivered to their home. (Walmart’s delivery business now exceeds its pickup business.)

Along the way, Walmart picked up some new affluent customers that care more about the convenience of home delivery. Can it keep them coming? It is hoping to do so by its introduction of a new line of premium food called Bettergoods. It has also improved its checkout lines, which were previously (and notoriously) known for long customer wait times. In addition, the services included in Walmart+ have been beefed up to compete more directly with Amazon’s Prime service. These include free shipping, Paramount+ streaming, and discounts at Burger King. However, the challenge for Walmart in keeping these new customers is whether they can partner with the consumer-branded suppliers that these customers want to buy from. Traditionally, these suppliers have not wanted to be associated with Walmart’s pledge of “everyday low prices.” 

Logistically, all of Walmart’s e-tailing fulfillment operations are now managed at the store level. In addition, Walmart has opened its fulfillment services to merchants looking to fill customer orders placed on outside marketplaces in a direct bid to compete with Amazon.com, the WSJ noted. These services are part of the Walmart Fulfillment Services division, and might include filling orders from Target, Etsy, and even Amazon. To reduce its owned transportation operations footprint, Walmart sold its intermodal and chassis fleets to J.B. Hunt Transport Services earlier this year as part of a broader multi-year intermodal service agreement. 

Lastly, looking to boost its advertising platforms, Walmart bought smart-TV manufacturer Vizio. Evidently Walmart, including Sam’s Club, have been the manufacturer’s largest customer, and it represents Walmart’s best-selling TV.

What about Amazon?                                                                     

Certainly, Amazon has always been positioned as the top dog in e-tailing with home delivery. Its holy grail long-term goal is to achieve same-day delivery for the lion’s share of its customers. It has expanded, fine-tuned, and digitized its logistical network to achieve a fast-shipping goal—getting closer to the customer and shipping rapidly.

This view is supported by the following four articles from the WSJ.

• “Amazon Revamps Network to Make Deliveries Faster and Less Expensive” (9/15/2023).
• “Amazon Expands Fast Delivery in Rural Areas, taking on USPS” (7/31/2024).
• “Amazon, Pressed by Rivals, Revives Effort to Expand Warehouse Chain” (5/23/2024).
• “Why Amazon Isn’t Checking Out of Groceries” (5/13/2024).

As mentioned previously, the bulk of Amazon’s profits come from non-retail operations, but it earns market share through its fast shipping. The WSJ reported that its “post pandemic pullback in logistics expansion is over as the company turns competition for consumer spending into a battle about real estate.” This translates into more distribution centers (DCs) to get closer to its customers. Logistics consultant MWPVL International noted that Amazon operates more than 1,000 facilities across the United States, which allows it “to offer both fast speeds and lower” cost-to-serve; and to increase the number of customers that are delivered “within a day or even hours,” the WSJ wrote.

Over the past several years, to keep transportation costs down while shrinking delivery times, Amazon has been handling its own packages, surpassing both UPS and FedEx by some measures. For example, the share of Amazon’s U.S. packages handled by the U.S. Postal Service and UPS shrunk from about 49% in 2019 to 17% in 2023 (source: ShipMatrix). In addition, it’s focus on creating more efficient warehouses, the use of contract drivers, and mom-and-pop shops allow it to make more inroads to rural America, the WSJ said.

The publication discussing grocery, is subtitled: “The e-commerce pioneer had hardly made a dent in the grocery business. Success will require a huge push.” In the U.S., Amazon’s grocery business is ranked 7th. Walmart, the leader has 30.2% of the U.S. market while Amazon trails by a wide margin at a meager 3.3% of the market. This despite the fact the brick-and-mortar chains account for 90% of the U.S. grocery market. While many customers shifted to online grocery shopping during the pandemic, in-person shopping has returned in force.

In 2017, Amazon bought the Whole Foods store chain to add brick-and-mortar grocery shoppers to its customer business. At the time, I thought it was a good idea because many of the Whole Foods shoppers were affluent, and thus likely Amazon customers already.

In my opinion, the chain—nicknamed “Whole Paycheck”—was a bit unique. It was mission-oriented to promote organic, wholesome food to consumers. It also took an ethical stance in refusing to sell live lobsters. Thus, Whole Foods would only sell frozen lobsters. New Englanders (including me) prefer eating live lobsters that we cook ourselves by throwing a live lobster into a hot pot. (I recall eventually, the state of Maine forced Whole Foods to sell live lobsters by threatening to negate their license to sell anything in the state.)

Amazon has done a good job of integrating Whole Foods into its website and making it more affordable by creating a private-label brand. For example, Amazon.com customers can return goods bought online to a grocery store location. I believe, however, much of this has done little to build a grocery presence.

Market assessment: Amazon at a junction point  

My limited history of retailing recalls that Sears and Roebuck was likely the first substantial two-channel retailer with: 1) brick-and-mortar stores and 2) a legacy (and fabled) catalog business. Much of the Wild West’s growth can be attributed to customers mail ordering the goods they needed, and Sears delivering those goods. It was amazing that a customer in the West could order a whole house kit. Sears would deliver all the items needed to assemble a house—including the nuts, bolts, and nails needed to build it—with instructions enclosed. In my day, many wanted to get a copy of its very large annual catalog. They would use it to benchmark Sears pricing against other retail stores.

I would say that Walmart is now the biggest two-channel retailer, with 1) traditional purchases from store shelves and 2) online ordering with home delivery or pickup at the store. While Amazon is amazing, it is far removed from being a significant two-channel retailer.

In the “E-Commerce Saves Bricks and Mortar” article (WSJ, 5/8/24), it states that: “Now, more brick-and-mortar stores are thriving after integrating their properties with the online shopping experience.” Also, “that nearly 42% of e-commerce orders last year involved stores, up from about 27% in 2015, according to GlobalData.” The article also mentioned Walmart’s, Kohl’s, and Target’s successes with this merchandising approach.       

A typical U.S. family with both parents working, and a few children might be reluctant to rely on Amazon for their goods without it having a strong brick-and-mortar grocery presence. Groceries would provide the impetus for a family to go to a physical store in contrast to only its virtual stores. Why? Because people have to eat and go somewhere to buy groceries and/or prepared meals. This is why (per the WSJ article) “Amazon isn’t Checking out of Groceries.”

By and large, Amazon customers go to its online ordering site knowing exactly what items they want to buy, and might not have even touched nor felt them. The first time they find out what they ordered is when they open the boxes delivered. Basically, shopping from Amazon’s website is a virtual experience to get what you already know you want or need.

Relatively tedious, buying on a website is devoid of the contentment many shoppers get by browsing around a store; and discovering something they want or need, that they possibly weren’t aware of. (I dislike shopping generally, but I do like browsing around a hardware store to find something I did not know I needed or wanted, until I actually saw it.)       

Two-channel stores apparently the trend

Because the typical family has to stock up at a grocery store at least a few times a month, there is a better shopping option than just online ordering with home delivery. A family might instead order some items online that they want to make sure are going to be there during a store visit. Then pick the items up along with the groceries and other household goods they need. The couple could declare these family “shopping” events by having lunch or dinner there as well.

Many shoppers like these one-stop shopping visits which are enjoyable and allow one to browse. Similar to the shopping models of Walmart (the #1 grocer), Costco (#3), and Target (#8).

My summary assessment is that e-commerce online ordering and brick-and-mortar shopping have to be fully integrated in the emerging retail business model. Companies like Walmart, Costco, and Target are now success stories using this approach with grocery. Meanwhile, Amazon recognizes that it has fallen short with its grocery initiatives. I suspect that Amazon now views this issue as existential because if it doesn’t address it, the Amazon.com platform could become the new Sears catalog. Customers would come to the site only to benchmark the price of an item to get a better price at a store. So, look for Amazon to make a big move, in grocery or not. Either way don’t count Amazon out in the long run.

About the author

Dr. Lapide is a lecturer at the University of Massachusetts and former MIT Research Affiliate. He has extensive experience in industry, consulting, business research, and academia as well as a broad range of forecasting, planning, and supply chain experiences. He was an industry forecaster for many years, led supply chain consulting projects for clients across a variety of industries, and has researched supply chain and forecasting software as an analyst. He is the recipient of the inaugural Lifetime Achievement in Business Forecasting & Planning Award from the IBF. He welcomes comments on his columns at Lawrence_ [email protected].

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