I’ve attached an article about Amazon and Walmart. After reading the article, please write a paper analyzing the factors mentioned int he powerpoint. The most important is that all factors mentioned must be updated to the most current, specially the financials. Please use APA format rules for the entire paper citation.
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REV: MAY 31, 2018
Walmart Inc. Takes on Amazon.com
As Walmart entered 2018, it faced critical decisions about its future. Ecommerce was exploding, and
the industry leader, Amazon.com, had captured Walmart’s long-held crown as the most valuable
retailer in the world. Amazon grew revenue ten times in the past decade, compared to a 20% growth
in overall sales for Walmart. With the recent acquisition of Whole Foods for $13 billion, Amazon was
moving aggressively into the offline world and challenging Walmart in its biggest business (grocery).
Yet, Walmart was not standing still. It had bought Jet.com for $3 billion in 2016 and while its U.S.
ecommerce revenues had grown to $11.5 billion in 2017, there was no debate in Bentonville: Walmart
remained far behind. The question for Walmart CEO, Doug McMillan, and Marc Lore, the founder of
Jet.com and head of Walmart.com, was how the company should respond to its most aggressive
competitor (Exhibits 1a and 1b). 1
The Early Years 1994–2001
Jeff Bezos founded Amazon in 1994 to exploit the Internet, a technology introduced four years
earlier. He determined that selling books online had the most promise because the number of titles
available was greater than even the largest brick-and-mortar store could stock. Betting on this
advantage, Bezos and his wife drove west to start “Earth’s Biggest Bookstore” in Seattle, Washington.
Amazon offered 1 million titles for sale on its opening day in July 1995. Next year, the company had
over 2.5 million book titles for sale, with revenue doubling every quarter (Exhibits 2, 3a and b).
Amazon itself initially held little inventory in its warehouse, relying on a local book wholesaler to
source its vast selection. Beyond variety, Amazon also offered lower prices—Washington state had no
sales tax so when shipping to states with sales tax, prices were on average 6% lower—but Bezos’
philosophy was that “there are two kinds of companies, those that work to try to charge more and
those that work to charge less. We will be the second.” 2 To fund growth, Amazon went public in May
1997 at a valuation of $438 million. Money was invested in building out its own national network of
fulfillment centers, and acquiring IMDB whose movie data and reviews could jump start video sales.
Professors David Collis, Andy Wu, and Rembrand Koning and Research Associate Huaiyi Cici Sun prepared this case. This case was developed
from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases
are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
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Walmart Inc. Takes on Amazon.com
By 1997, believing in the absolute importance of being “Earth’s most customer-centric company,” 3
Amazon had introduced a secure and easy interface for first-time online buyers, online customer
reviews, a collaborative filtering algorithm that leveraged purchase history data to recommend books,
and filed a patent for its single-click “buy now” checkout process (Exhibit 4). In 1999 to broaden the
product categories offered on the site, Amazon launched zShops which let third-party merchants setup
their own “store fronts” for a fee. In the same year Bezos also introduced an auction platform and
signed partnerships to let internet startups list on Amazon under their own name, like pharmaceuticals
from Drugstore.com and pet supplies from pets.com.
The Internet Bubble Bursts: 2001–2005
Bezos’s focus was on the long term, noting in Amazon’s first annual report in 1997 that, “when
forced to choose between optimizing the appearance of our GAAP accounting and maximizing the
present value of future cash flows, we’ll take the cash flows.” However, with the bursting of the
Internet bubble in 2000, the market began to question whether Amazon would ever see future cash
flows. The company’s shares dropped from $100 to $20 as it lost $1.4 billion that year. Its strategic
partners filed for bankruptcy or were sold for pennies on the dollar.
Bezos diagnosed those failures in his annual letter to shareholders:
We believed passionately in the ‘‘land rush’’ metaphor for the Internet. Indeed, that
metaphor was an extraordinarily useful decision aid for several years starting in 1994. In
retrospect, we significantly underestimated how difficult it would be for single-category
e-commerce companies to achieve the scale necessary to succeed. Online selling is a scale
business characterized by high fixed costs and relatively low variable costs. This makes it
difficult to be a medium-sized e-commerce company. 4
As a consequence, Bezos doubled-down on building out Amazon’s scale (Exhibit 5). He improved its
logistics capabilities by hiring top talent from Black & Decker, Delta Air Lines, and Walmart who
applied data analytics to identify unprofitable or expensive-to-ship items. It then introduced free
shipping for three to five day delivery for orders over $100.
Bezos also shifted Amazon’s strategy from a multi-store to single-store vision. Amazon itself
systematically expanded into additional categories, extending from books into consumer electronics,
CDs, and sporting goods. Amazon Marketplace was launched allowing third-parties to sell products
that would be displayed alongside Amazon’s own offerings and shipped using Amazon’s logistics
network for a 15% fee plus fulfillment costs of about $5 per item that depended on the weight of the
item and the time spent in the Amazon warehouse (merchants paid shipping to the Amazon fulfillment
centre). An alternative program allowed merchants to list on Amazon for the 15% fee but with delivery
arranged and paid by merchants themselves. Amazon tended to give preferential listings to vendors
that used Amazon’s system but was believed to identify, and then list itself, best-selling items offered
by other vendors. Later it began to sell its own private label products, Happy Belly (pasta), Wickedly
Prime (snacks), and Mama Bear (baby food).
Building Platforms: 2006-2016
Amazon always thought of itself as a technology company. As Bezos noted,” we’ve had three big
ideas at Amazon that we’ve stuck with . . . and they’re the reason we are successful: Put the customer
first. Invent. And be patient.” 5 This came with a belief in taking risks since, “a small number of winners
pay for dozens, hundreds of failures.” 6
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Walmart Inc. Takes on Amazon.com
Amazon Prime was introduced in 2005: an annual subscription service that provided free two-day
delivery on millions of Amazon items. Six years later Amazon was still losing $10 per Prime customer, 7
but by 2016 each customer was spending an average of $1,200 per year, double the non-Prime customer
spending rate. 8 By 2017, Prime also included music and video streaming, photo storage, and two-hour
delivery for some items with Prime Now; a package estimated to be worth more than $700. 9 However,
Prime’s $99 annual subscription price encouraged purchases of single items that were expensive to
ship. In 2017 Amazon shipped over 1.2 billion separate packages in the US, 10 and one estimate was that
fulfillment costs could approach 18% of a single item’s retail price. 11
Amazon offered its first version of e-books in 2000, but its entry into digital media did not get
traction until the launch of the Kindle e-reader in 2007. By 2017 sales of digital books were larger than
physical books and Amazon had an 83% share of all online book sales. 12 Similarly, Amazon’s video
streaming service took off when it was included in the Prime offering. By 2017 the service was offered
globally and Amazon was not only competing with Netflix with a $6 billion content acquisition budget,
but also in production through Amazon Studios, launched in 2010.
Amazon entered the consumer hardware market, with mixed results. The Kindle e-reader launched
in 2007 for $399, sold out in under six hours. While Amazon made no profit on the devices, Kindle
owners spent four times non-owners on both digital and paper books. 13 In contrast, the Fire
smartphone sold only 35,000 units its first 20 days and demand never took off even when offered for
$1 with a service contract. 14 The failure did not reduce the appetite for experimentation and in 2014
Amazon introduced the smart voice assistants Echo and, the seemingly ubiquitous “Alexa,” along with
Dash buttons for single-click ordering that had over 200 brand partners by 2017.
The relentless focus on customers and technology did not just apply to internal innovation. In 2009
Amazon acquired Zappos, an online shoe retailer that offered free shipping, free returns, and
personalized customer service leading to a “customer obsession” which Bezos wanted Amazon to
learn. 15 On the technology front Amazon acquired Twitch, a video-game streaming service, and Body
Labs whose artificial intelligence (AI) modelling created 3D body shapes for the apparel industry. 16
Amazon introduced Amazon Web Services (AWS) in 2006. The idea originated during an executive
retreat at Bezos’s house that identified one of Amazon’s core competences as running the web
infrastructure—databases, server provisioning, physical data centers—to support its e-commerce
operation. 17 After three years developing a plan, Amazon offered Simple Storage Services, allowing
firms to store data on its server farms for a per gigabyte price. By 2017, having invested at a rate
estimated to be approaching $10 billion per year, 18 AWS had nearly 35% of the global market for cloud
infrastructure, more than the combined share of its five closest competitors, 19 and was used by
companies like Netflix and Unilever. AWS was Amazon’s largest source of operating income.
Amazon continually upgraded its distribution infrastructure and logistics operations. It acquired
Kiva Systems, a manufacturer of warehouse picking and packing robots, and by 2017 had installed
45,000 Kiva robots across its facilities. Robots reduced the “click to ship” cycle from 65 to 15 minutes
and supported 50% more inventory per square foot. 20
Amazon’s classic distribution network was originally optimized to minimize state sales taxes, not
shipping costs, 21 having a few large fulfillment centers which used FedEx and UPS to ship across the
country, often by plane, and for local delivery by van direct to homes. Nor did its traditional logistics
system have any local delivery points. However, by the end of 2013 Amazon decided to start collecting
sales tax. At the same time, the company shifted from a focus on massive fulfillment centers in remote
locations with low cost and low sales tax towards a fulfillment network positioned close to large
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Walmart Inc. Takes on Amazon.com
metropolitan areas. a By 2017 Amazon had a fulfillment node within 20 miles of 50% of the U.S.
population up from 5% in 2015. It was establishing smaller sort centers where products would be sorted
by zip code for pallet delivery to a local U.S. post office as a cheaper way to get two or more day
delivery into the home. The company was also investing $1.5 billion in an air cargo hub in Kentucky
for its fleet of forty leased Prime Air planes that were substituting for FedEx and UPS on long-haul
shipments. 22 In 2017 more than 90% of goods still went through fulfillment centers. 23
Amazon was complementing its online fulfillment logistics system with physical stores and local
delivery capability. By 2017, Amazon had opened 13 retail book stores. More futuristically, it opened an
1,800-square-foot Amazon Go retail store in 2016 in Seattle that used computer vision to track what
shoppers put in their baskets; eliminating the need for cashiers and checkout. 24 But the main Amazon
moves towards local distribution enabling same-day delivery concerned the grocery business.
Amazon Enters Retail Grocery: 2017
In 2017, U.S. consumers spent $675 billion on groceries with only 2% of those sales taking place on
the Internet 25—the equivalent of sales from 764 grocery stores. Indeed, online grocers had a history of
epic failures, with companies like Webvan going bankrupt in the dotcom bust after raising a billion
dollars in financing. Nevertheless 12% of U.S. consumers shopped for groceries online at least once
during 2016, 26 and an estimated 43% of millennials expected to buy groceries from the web in 2017. 27
Amazon had been experimenting with online grocery delivery since launching Amazon Fresh in an
affluent Seattle suburb in 2007. By 2017, positioned under the tagline: “Convenience, Delivered.”
Amazon Fresh was available for $299 per year for same-day delivery of groceries and 500,000 other
Amazon items in seven major urban areas. Prime Now initially launched in New York City offered a
limited selection of products delivered within one hour for $7.99 and within two hours for no
additional fee. By 2017, Prime Now was available in dozens of large cities and customers could have
over 25,000 items, including goods from brick and mortar stores and food from local restaurants,
delivered, sometimes using Amazon Flex workers to do last-mile delivery. 28 Outcomes were mixed,
Amazon Fresh, for example, suspended operation in November 2017 in parts of several states. 29
Amazon’s internal grocery experiments were eclipsed on June 2017 when it purchased Whole Foods
Markets for $13.4 billion. 30 Whole Foods dominated the organic groceries niche, with EBITDA margins
of 9.5% compared to the conventional supermarket margin of 4.5%. Known colloquially as “Whole
Paycheck,” its prices were estimated to be 19% to 37% higher than Walmart’s. 31
Amazon’s first move upon acquiring Whole Foods was to lower prices nearly 30% on some select
products, such as organic bananas, avocados, and organic rotisserie chicken. 32 Longer term, it was
expected that Amazon would provide deals to Prime members—60% of Whole Foods shoppers were
already Amazon Prime subscribers 33—and launch Whole Food’s “365” private label online. Amazon
could also gain valuable data on grocery purchase trends and habits. 34 And it now had access to Whole
Foods’ network of 11 distribution centers, its grocery supply chain and 18 million square feet of fresh
food storage space, as well as 465 stores.
As one analyst noted “I suspect Amazon’s ambitions stretch further: Amazon Grocery will be wellplaced to start supplying restaurants, gaining Amazon access to another big cut of economic activity.” 35
Next on the potential list of categories for Amazon to enter was the $412 billion pharmaceutical market.
a A company with operations in a state is by law required to collect sales tax for that state.
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Walmart Inc. Takes on Amazon.com
Retail Stores
In 1962, contrary to conventional wisdom that discount stores could only survive big cities, Sam
Walton opened his first-ever Walmart discount store in rural Rogers, Arkansas. 36 The company’s early
success and continuous growth built on a core set of Sam Walton’s ideas, including “buy it low, stack
it, and sell it cheap” (Exhibit 6). Walmart practiced the policy of “everyday low price,” offering a full
set of products at low prices all year round, rather than lowering prices of a few products for
promotional purposes. Walmart’s prices were on average between 2% and 10% lower than competitors.
The remote, isolated locations of many early Walmart stores made it costly for distributors to
directly supply those stores. Between 1970, the year that the first Walmart distribution center was
constructed, and 2017, a total of 173 such centers were built in the U.S., extending over 125.8 million
square feet. Each distribution center was a hub in Walmart’s network, supplying all Walmart stores
within a radius of about 150 miles with about 140,000 SKUs. By 2017, about 80% of Walmart’s sales
went through its own warehouses. The remainder was Direct Store Delivery (DSD) distributed directly
to stores by suppliers 37.
After 1976, Walmart introduced merchandise assembly, cross-docking, computerized inventory
tracking, and data-driven storage optimization, all improving inventory turnover which reached 11.5
times in 2011 compared to Amazon’s 9.6 times. 38
Through the 1980s, Walmart introduced electronic data interchange (EDI) with suppliers. This
provided real-time information on the sale of a product in store, available warehouse storage capacity,
notification of shipment, and forecasting. EDI also provided Walmart with the latest market trends,
enabling it to make rapid adjustments to pricing and supply.
Entering supercenters in 1988, Walmart combined traditional discount retailer merchandise,
clothes, household goods and electronics, with grocery. By 2017, the majority of its stores were
supercenters and 56% of Walmart’s total sales in the US (including Walmart.com) were grocery
(Exhibit 7). 39 In 1983, Walmart entered the warehouse clubs business with its Sam’s chain, and by 2017
this accounted for 16% of North American retail sales; international sales was 24%.
In 2000, Walmart opened its own online shopping platform, placing its e-commerce headquarters
in Silicon Valley, in the hopes of benefiting from the area’s technological resources and human capital.
By 2004, in the face of continuous losses, Walmart.com continued to grow sales. CEO Lee Scott admired
the success of Amazon and e-Bay, but did not view Wal-Mart’s online business model as similar. WalMart focused Internet operations on supporting Wal-Mart physical stores and Sam’s Club to service its
customers, by helping customers understand the quality and price of items in the stores and enabling
them to buy there or online. 40 From 2007 onwards, Walmart.com introduced free in-store pickup for
items ordered online at over 750 of its U.S. stores. 41 Mike Smith, director of Walmart.com, noted that
when customers went to stores to pick up their online order, nearly half of them would spend an
additional $60 in the store. 42 Walmart continued to explore improvements to the efficiency of in-store
pickup, such as building a drive-through window.
Wal-Mart.com did not create a marketplace for third-party vendors until 2009, when it allowed a
select group of vendors, such as ebags.com, to sell on its website. 43 That year, Walmart.com’s growth
began accelerating when it implemente …
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