Wal-Mart’s E-Commerce Offensive Makes It A Buy

We took advantage of the recent drop in price of Wal-Mart (WMT) to make a small investment in the company for our portfolio. We believe Wal-Mart is one of the few retailers with the capital and scale to take on Amazon (AMZN). We like that the new CEO (well, relatively new, he took over in early 2014) is focused on e-commerce and shifted the retailer from playing defense to playing offense. Here are the four main reasons why we see an opportunity in Wal-Mart.

First, the US retail sector is massive. Last year retail sales totaled $5.5T. Amazon had retail sales of around $107B, meaning that Amazon accounted for 1.95% of the total US retail market. By comparison, Wal-Mart did approximately $364B in total sales in the US (6.6% of total retail spending). There is clearly room for multiple retailers in the economy. The retail industry is not a “winner take all” sector. Amazon’s success does not prevent Wal-Mart from also being successful.

Second, Wal-Mart is one of the few companies with the necessary scale and distribution infrastructure to be able to take on Amazon. Wal-Mart has approximately 5,000 locations in the US and Puerto Rico of which about 3,500 are super centers. This means that the company is well-positioned to compete with Amazon when it comes to offering same-day delivery. About 70% of the US population lives within five miles of a Wal-Mart and 90% lives within 10 miles. With this infrastructure already in place, Wal-Mart has about 100,000 SKUs that would have same-day delivery availability.

It’s this “last mile” delivery network that is the most crucial and the most expensive to build out. Wal-Mart already has a large part of this in place. Amazon, on the other hand, needed to make an acquisition to begin to establish a potential last-mile delivery network, paying $13.7B for Whole Foods’ (WFM) 460 stores. The move by Amazon into bricks and mortar should be evidence enough of just how important a last-mile distribution system will be. In fact, last-mile delivery is so expensive that it can be more profitable for companies to pay consumers to come pick up their order. For instance, Wal-Mart offers online shoppers a discount of around 5% if they pick up items at a store. Right now, the offer is for a limited amount of items but the company plans to eventually offer discounts on 1M of its most popular SKUs.

You can read the rest of the article on SeekingAlpha.com by clicking here.

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