Wal-Mart’s Decision to Drop Amazon: Offline vs Online Retailers
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The debate over whether online retail will one day usurp the traditional or offline retail shopping centers registered its first case study of “head-on” confrontation earlier this year and one more towards the latter half. Perhaps it is the latter half that is more interesting as it pitted the largest online retailer Amazon (NASDAQ: AMZN) against the largest offline retailer, Wal-Mart (NYSE: WMT). In a clear sign of recognizing competition infiltrating its ranks, Target in May and Wal-Mart earlier this month decided to stop retailing Amazon’s much acclaimed eBook reader, Kindle.
In its statement, a representative for Wal-Mart stated that the largest retailer would not place fresh orders for the Kindle after exhausting its existing stock. Target too had issued a similar notification when they dropped the bomb on Amazon. Let us look at the decision and the effects on the largest companies in the online and offline segments.
The Logic
The reasoning behind Wal-Mart’s and Target decision is not very hard to understand and the only puzzle would be why it took them so long to get to this point in the first place!
Consider this, Amazon and Wal-Mart sell similar merchandise in their stores. This puts Amazon and Wal-Mart as competitors and not collaborators. By selling the Kindle, Wal-Mart was shooting itself in the foot as it lost its reading customers who chose to read eBooks on their Kindle rather than buy a hardcover or paperback book from the offline retailer. Now that Amazon has released the latest version, Kindle Fire HD where users can watch movies, games and eBooks from the company due to its latest inclusion: a web browser. So every time a customer picks a Kindle, he is actually subscribing to more from Amazon than Wal-Mart or any other retailer.
Moreover the margins received from the sale of the Kindle are much lower than that of the more expensive tablets from Apple’s iPad and other such devices. Although this could be a contributing factor, there is no doubt that the aforementioned view of seeing the online retail giant as a competitor set Wal-Mart to turn its back on the Kindle.
The consequence: Wal-Mart
With Amazon products off its shelves, Wal-Mart may not lose anything financially as sales from other high margin products should offset any loss from this decision. Analysts are of the opinion that the decision to drop these products from their line was more symbolic than anything else. Offline retailers have often held the position that they are being seen as showrooms for customers to try out their products before choosing to buy them from online retailers such as Amazon. With this, at least one major retailer has sent out a clear message that they were not going to be seen as party to cannibalizing its own business by promoting a competitor. The markets responded positively as Wal-Mart saw its shares increase by 0.5 percent to finish at $74.74 on the day of the announcement.
The consequence: Amazon
If there is anyone who is going to be hit hard by this decision, it would be Amazon. The company places a lot on having its products occupying a physical space and although a huge chunk of the Kindle is being sold through its website, the loss of exposure that it gets from offline retailers could deal a severe blow to its sales.
As of now, analysts predict that the company would see a slight dip in sales on the back of these decisions from major retailers. Overall however, it shouldn’t really be a cause for concern as other retailers such as Best Buy, RadioShack and Office Depot have confirmed that they would continue selling the Kindle through their retail stores.
With this, Amazon would be placed in a precarious situation. If the actions of the top retailers were going to trickle down to other retailers as well, then the company would find it hard to find shelves to stock their product. Then, they would have to either increase the margins that retailers would receive by selling the Kindle or go the Apple way and setup stores and give a complete “Amazon experience” to its customers. All that can be said now is that the battle lines are clearer than ever between online retailers and offline giants.
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ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
