Amazon.com, Inc. (NASDAQ:AMZN) is the undisputed king of Internet retail. Wal-Mart Stores, Inc. (NYSE:WMT) is the world’s leader in brick and mortar retail. Although Amazon has no intention of building stores, Wal-Mart has been trying to take on Amazon on the net for years. Could the low-cost leader’s stores be the Amazon killer?
Missing the Boat
There’s no question that Wal-Mart Stores, Inc. (NYSE:WMT) missed the boat on the internet retail revolution. Since there are so many other brick and mortar stores that made the same mistake, it’s in good company. However, that doesn’t mean it’s looking the other way. The company has been surveying the retail landscape and its operations, looking for the right way to integrate its brick and mortar and online businesses.
Owning physical stores is an expensive proposition, and one that creates an instant disadvantage. For example, Best Buy Co., Inc. (NYSE:BBY) has famously been fighting the “showrooming” effect. Since the electronics retailer basically sells commodities, customers often go into its stores to look at items and then order them online at a cheaper price.
This trend has forced the company to compete more aggressively on price and to rework its business model. That’s been bad for Best Buy and helps to explain why the company has been bleeding red ink. The company’s shares have advanced from the low teens to over $25 over the last six months or so, but it still faces huge headwinds.
Best Buy is making the right moves, but it isn’t clear that it will be able to compete with both online retailers and brick and mortar competitors. For example, the company’s profit margins reached a high of about 5.5% in 2007, but have more than halved since. That’s a huge drop, and even if it can regain some of that lost ground, the business isn’t what it once was. Investors should sit on the sidelines until the bottom line gets stronger.
The Magic of Stores
Macy’s, Inc. (NYSE:M), meanwhile, has used its stores to good advantage. While it too sells commodities, it has shifted its selling approach since the 2007 to 2009 recession. It has been pushing salespeople to engage with customers to improve the shopping experience, turning Macy’s into a store in which customers want to shop.