5 August 2016
Written by Luisa Eymer and Henriëtte Hoving
A new milestone for the tech industry was reached this week, as online retailer Amazon surpassed ExxonMobil as the fourth largest US company by market capitalization. With this, the top spots in this ranking, previously dominated by oil companies and manufacturers, are now almost completely covered by tech companies. While Apple takes the lead with a dazzling $571B market capitalization, Alphabet and Microsoft follow, with Amazon now to join the list. Amazon has had a dream year so far, breaking investor expectation for the third consecutive quarter and realizing a profit increase of 800% compared to the same quarter last year.
As for why Amazon is on such a winning streak, many point to the big steps the e-commerce giant is taking in instant gratification, one of the last strongholds of traditional retailing. This too however seems to be changing, as Amazon is rolling out PrimeNow. Through an easy-to-use mobile app, PrimeNow delivers a large number of Amazon products to your doorstep within the hour. Together with AmazonFresh, the online grocery, this is a duo to be reckoned with.
Especially Walmart, who came to be the world’s largest retailer after its successful disruption of US retailing in the past century, is getting very anxious. Almost half of its top line comes from groceries and the number 2 in e-commerce is already struggling to keep up. In the last months Walmart introduced ShippingPass as its answer to AmazonPrime in two-day delivery and announced adding 1 million items per month to its third-party marketplace.
However, the second reason behind Amazon’s winning streak gives even more reason for companies as Walmart to step up their game. It is the fundamentally different strategy pure players such as Amazon take on compared to traditional retailers such as Walmart: investing big for big growth versus optimizing today’s bottom-line. Despite Walmart’s real efforts to add features that today’s omnichannel consumer values, such as ShippingPass and WalmartPay, the company continues following a fundamentally different approach to growth than Amazon.
Typical for online pure players with ambitions far wider than their pockets are deep, Amazon has always invested its profits back into its operations, be it in to build new warehouses enabling faster shipping or to fund IT projects such as the one that brought us personal assistant Amazon Echo. Still now, with profit levels on a record high, investments keep echoing Amazon’s growth strategy: investing big for big growth. For example, Amazon has announced heavy investments in its digital video streaming service, to take on the battle with Netflix.
This way of thinking about growth does not come natural for many traditional retailers. While Walmart has been an early and dedicated player in e-commerce, it is holding on to the formula that brought it success: cutting costs to deliver the lowest prices. As a response to disappointing sales figures, Walmart has stepped up its cost cutting game by introducing a ‘price matching policy’ that guarantees customers the lowest price on the market. Going further down the lane of falling prices and shrunk costs, Walmart recently announced to close down more than 150 stores in America and continues to focus on rendering its operations more efficient. Although a cost leadership strategy can perfectly fit in the digital landscape, as for example newcomer Jet.com shows, winning in digital requires a relentless focus on investing in sustainable future growth.
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