How will smaller rivals survive in an Amazon and Walmart world?
The strong get stronger and the weak either sell their businesses or close up shop. That’s always been the way in retail and a new report by analysts at Moody’s asserts that, in today’s marketplace, fierce competition between Amazon.com and Walmart is creating even more competitive disparities.
“Battles for market share are always difficult for smaller retailers, which generally operate with less financial flexibility than their larger peers on multiple fronts,” said Charlie O’Shea, Moody’s lead retail analyst and author of the report in a statement. “If they engage in the promotional battle, margins will suffer; avoid the promotions, and you risk losing revenue, market share and customer loyalty.”
Even minor gains by the two retailing behemoths can have a profound effect on smaller rivals. In the first quarter, Amazon ($2.9 billion) and Walmart ($2.5 billion) combined to generate $5.4 billion in incremental revenue growth over the same period the previous year. While the combined percentage gains made by the two retailers slowed year-over-year in the quarter, the actual revenue was still more than what many others, such as Michael’s ($5.2 billion), Neiman Marcus ($4.7 billion), Abercrombie & Fitch ($3.3 billion) and J. Crew ($2.4 billion), produce on an annual basis.
Amazon’s effect on its rivals is in many ways, according to Moody’s, more profound than its share numbers. As more and more consumers buy online, rivals are forced to make the large investments necessary to compete for those dollars. Large chains, including Walmart, Target, Best Buy, Nordstrom and Staples, often are judged on their success by “who finishes second to Amazon.”
Others in weaker financial positions have “little chance” to compete online, and drops in revenue make it difficult to meet their debt obligations as they make needed investments to support e-commerce operations.
Part of the issue, according to Moody’s, is that retailers fail to understand their competition. An upscale apparel retailer may see its competition as a similar chain when in fact “meaningful” share is being captured by “tertiary players” such as Gilt, Net-a-Porter and Rent-the-Runway.
- Moody’s: As large retailers such as Walmart and Amazon battle for market share, smaller retailers will experience collateral damage – Moody’s Investor Service
DISCUSSION QUESTIONS: How do smaller rivals survive in a retail environment dominated by large players such as Amazon and Walmart? Do you agree that retailers that struggle often do so because they are doing a poor job of understanding their competition?