Analysis & Comment

Opinion | Amazon Prime Day, Walmart Plus Week and the Battle of the Retail Giants

When titans clash, the ground shakes and televisions get a lot cheaper. I’m referring, of course, to this week’s Christmas-in-July sales competition between Walmart and Amazon, the biggest and second-biggest private employers in the United States.

To me, the most interesting thing about the competition is the (partial) convergence of two companies that were once extremely different. Walmart: Middle America, blue-collar, nothing too fancy. Amazon: West Coast, upscale, high-tech. From Dec. 31, 1999, to its peak of July 8, 2021, Amazon’s stock price rose 4,797 percent, compared with only 102 percent over the same period for Walmart’s.

But Walmart has been learning some of Amazon’s tricks. “In 2016, Walmart aggressively moved into the world of e-commerce,” the journalist Jason Del Rey wrote in a book published last month, “Winner Sells All: Amazon, Walmart and the Battle for Our Wallets.” It bought, an e-commerce innovator, that year. “Over time, Walmart began stepping up its online pricing game, at times giving Amazon a run for its money,” Del Rey wrote.

As a response to Amazon’s hugely successful Prime membership program, Walmart created its own version, Walmart Plus. Walmart has a smaller selection than Amazon, but lower prices. Amazon’s shares plunged after their pandemic-related surge topped out in July 2021, and though they have bounced back this year they’re still down 31 percent from their peak, while Walmart’s shares have tacked on another 11 percent as of Tuesday. Amazon announced in March that it was laying off 9,000 employees, in addition to the 18,000 it cut late last year and in January. (Walmart has laid off about 2,300 warehouse workers this year.)

This week the titans are going toe to toe. Amazon’s Prime Days are Tuesday and Wednesday. Walmart began Walmart Plus Week a day earlier and is continuing it a day longer. (Target and Nordstrom are also doing big summer sales. Probably some other retailers are, too.) There are some big discounts. Amazon is selling a limited quantity of its Fire Omni 43-inch TV for $99, 75 percent off, in an invitation-only sale for customers with Prime subscriptions. Walmart has Samsung Buds+ True Wireless Headphones for $49, which is about 50 percent off the regular price.

I asked some economists and e-commerce experts to size up the battle. Rick Watson, who runs an e-commerce consulting firm called RMW Commerce Consulting, told me that the companies put on sales in July because it’s otherwise a slow time, and because they need to clear shelves to make way for fall and winter inventories. He said the sales are aimed at building customer loyalty: rewarding Amazon Prime members and attracting Walmart Plus members.

“From Amazon and Walmart’s point of view it’s very hard to be a profitable retailer on retail alone so the battle has moved to everything but the goods themselves — namely, services,” Watson wrote in a follow-up email. “For Amazon, that’s computing (Amazon Web Services), advertising and fulfillment/Marketplace. Walmart doesn’t have A.W.S. but is copying all the other Amazon elements.”

Amazon’s Prime service still beats Walmart Plus. It costs more, at $139 a year, compared to $98 for Walmart Plus, but it also offers more, including unlimited streaming of movies and TV episodes. Amazon Prime had 168 million customers in the United States in June 2022, while Walmart Plus had 11.5 million in January 2022, according to reports by Consumer Intelligence Research Partners.

Where Walmart tends to win is on price, bricks and mortar. Lower prices are especially valued when times are tough, Watson said. Plus, he said, some people just like shopping in an actual store: “Shopping is still a social activity. Browsing from your bed is never going to replace that.” You can’t palpate an avocado or a pineapple on the internet. Or try on a dress. A customer who orders 10 clothing items online and ships back nine of them is much more costly to a retailer than a customer who brings 10 items to the dressing room, tries on three and buys one.

“Historically, up to the mid-2010s, Amazon did lead with price,” but now it leads with convenience and selection, Eric Youngstrom, the chief executive of Onramp Funds, a lender to small e-commerce operations, told me. Refocusing customers away from price alone is a smart move for Amazon, Rafi Mohammed, who founded a pricing consultancy in Cambridge, Mass., called Culture of Profit, told me. If Walmart does have lower prices than Amazon, “it needs to clearly articulate that,” Mohammed said.

I started to realize that Walmart and Amazon don’t have identical strategies because they aren’t going after identical customers. Walmart customers, on average, have lower incomes and are more price sensitive. Amazon customers are willing to pay more for the variety — both from Amazon itself and from the vast array of third-party sellers doing business on Amazon Marketplace.

Sharmistha Sikdar, an assistant professor of business administration at Dartmouth College’s Tuck School of Business, is studying the pricing strategies of Walmart and Amazon alongside Vrinda Kadiyali of Cornell’s Johnson Graduate School of Management and Prasad Vana of Tuck. Sikdar told me that of 238 products they tracked that were sold by both retailers in 2020 and 2021, Amazon’s average price was $14.46 and Walmart’s was $8.50. That’s a big gap. “The strategy for Walmart is fairly clear. They follow everyday low pricing,” Sikdar said. “Walmart maintains a very controlled presence of third-party sellers. Mostly it is itself the retailer.”

Amazon, in contrast, puts fewer limits on its third-party sellers. If there is a category in which Amazon itself doesn’t have a product, and there are no reasonably low-priced options from third-party sellers, Amazon will not select any seller for its “Add to Cart” feature, known as the buy box. Instead, it will simply list several options and leave it to the consumers to pick one, Sikdar said. In earlier work, Sikdar, along with Kadiyali of Cornell and Giles Hooker of the University of Pennsylvania, found that when Amazon does feature a seller in its buy box, it’s typically not the lowest-priced option. Amazon’s algorithm takes into account the seller’s reputation and tenure. “Additionally,” Sikdar wrote in an email, “on the Amazon marketplace, despite multiple sellers offering the same item, there is limited evidence for price competition between sellers of any item.” She added, “the sellers seem to respond more to price changes by sellers of rival brand items than to rival sellers of their own item.”

During the pandemic there were sellers on the Amazon platform offering $10 bottles of Lysol for $53, she said. Essentially, Amazon allowed price to ration scarce goods. Walmart, in contrast, told online shoppers they would have to buy scarce goods in the store, where there was typically a limit of one per customer. “Amazon’s ratings did not suffer, which means they did something right,” Sikdar said.

Walmart and Amazon surely do compete. But because they are going after somewhat different customers, they can probably coexist.

Elsewhere: Pay Differences Have Narrowed

Since 2009, civilian workers near the bottom of the pay scale have enjoyed faster earnings growth than their counterparts at the middle and near the top of the pay scale, according to an analysis of data released by the Bureau of Labor Statistics. Total compensation including benefits has risen 21 percent, adjusted for inflation, for workers in the 10th percentile of the distribution, i.e., those earning more than 10 percent of all workers. That compares to a 3 percent increase for those at the 90th percentile, who earn more than 90 percent of all workers. As the table shows, those near the top still earn five times as much as those near the bottom.

Quote of the Day

“Antitrust enforcement had become increasingly hamstrung by the ideological application of economic principles that were largely unmoored from empirical facts and maybe even some degree of economic hubris in antitrust enforcement, this notion that we’re really good at measuring things, and that seemed to somehow morph in the legal context into judges thinking, well, if you can’t measure it really precisely, it must not be something that’s very important, or maybe it doesn’t even happen.”

— Nancy Rose in a podcast with the Federal Reserve Bank of St. Louis released on March 31, 2021.

Peter Coy has covered business for more than 40 years. Email him at [email protected] or follow him on Twitter. @petercoy

Source: Read Full Article