Walmart’s New Plan to Defeat Amazon

When shoppers in San Antonio need a loaf of bread, the question isn't which supermarket to visit, it's which of 29 Walmarts. With light traffic, you can drive from this neighborhood park to 11 Walmart stores in under 15 minutes, 25 stores in under 20 minutes, and all 29 locations in less than 25. — 90% of Americans, famously, live within 10 miles of at least one, if not 29, of the company's 5,212 stores. You can find one in Kodiak, Alaska, population 5,500, and accessible only by boat or plane. You can find one in remote Williston, North Dakota, a full 2 hours from any other city. There's even one less than a mile from the Grand Canyon in tiny Page, Arizona. — It's safe to say Walmart has truly conquered the United States of America. And also, the world. Most of its stores are now located outside the US. There are another 5,700 in Canada, Asia, Latin America, and even Africa. It's quickly running out of continents to dominate. And that's a problem for a publicly traded company obliged by investors to continue growing indefinitely. Take its modest goal of 4% annual growth. Last year, the company earned $713 billion in revenue, $1. 48 bag of hamburger buns at a time. If it were a country, this would make it the 22nd largest economy in the world, ahead of Singapore, the UAE, and Sweden. Given this titanic scale, 4% growth translates to an additional $28 billion, meaning, just to meet expectations, it has to earn the total annual revenue of Southwest Airlines more than it earned last year. Then, in 2027, it has to earn an extra Paramount on top of that. Then Apollo, Capital One, and so on. Meanwhile, if Walmart has hardly anywhere to go but down, its biggest rival, Amazon, has nowhere to go but up as more and more shopping moves online. The latest casualty is health and beauty, a category that includes everything from toothpaste to shampoo and makeup. Historically, this has been Walmart's bread and butter. You visit one of its Supercenters for a $3 gallon of milk and leave with high-margin deodorant, face masks, or shaving cream. But, between 2019 and 2022, Amazon's market share in this category doubled, leaving Walmart with the scraps, the low-margin essentials and loss leaders. The average US household spends $3,000 a year on Amazon, and about 70% of all adults are Prime members. Amazon even recently surpassed Walmart in revenue, making many wonder not if but when the former will turn its rival into the next Kmart, Sears, or Toys R Us. There's just one obstacle in the way of Amazon's plan to conquer all of retail, and it's a big one. Groceries. The US market for groceries is worth $1 trillion a year. Americans collectively spend more at supermarkets, despite having just 1/4 the population, than China's 1. 4 billion consumers. For many of us, the grocery store is our most frequent point of commercial contact, giving the one we choose unprecedented control over the brands we see and buy. And the vast majority of this shopping still takes place in person. What Amazon is to online shopping, an unrivaled behemoth, Walmart is to groceries, and that doesn't seem to be changing. So, the real question is, who can bridge this gap first? Can Amazon conquer grocery before Walmart conquers e-commerce? A few years ago, the answer seemed obvious. With its opening salvo in 2017, Amazon seemed to win the game before it even began. Its acquisition of Whole Foods gave it an instant foothold of 456 locations, along with the brand's affluent cult following. In the days following this announcement, Amazon's market cap grew by more than the total cost of Whole Foods, $13 billion, making it look like the deal of the century. Walmart, meanwhile, was stubbornly resistant to change. Because store managers are given bonuses based on their sales, each stood to lose tens of thousands of dollars each year. They dragged their feet and lobbied internally for higher online prices

making walmart. com less competitive. Eventually, it gave up and in a desperate Hail Mary, acquired jet. com, an Amazon competitor, for 3. 3 billion. But just 4 years later, jet. com was permanently shuttered. Few Americans are even aware of its existence. Then came phase two of Amazon's plan. First, there was Amazon Books, physical bookstores stocked with algorithmically chosen bestsellers from amazon. com. Next came Amazon Go. These were convenience stores that used cameras and weight-sensitive shelves to track your purchases in real time. When it was time to check out, you could just walk out, and your Amazon account would automatically be charged. For affluent urban shoppers in a hurry, this was magic. You could walk across the street from your office on Wall Street or Seattle's Capitol Hill, grab a sandwich, and be back at your desk in minutes. Finally, there were full-size supermarkets called Amazon Fresh. You had the option of using a dash cart that scanned your items using built-in cameras as you shopped. Then, when it came time to leave, you could skip the checkout line and walk straight to your car. One by one, however, all of these ventures failed. Amazon Books, the least compelling of the three, closed in 2022. Unable to create a new or interesting experience, book lovers wondered why Amazon had even bothered. Meanwhile, all 57 Amazon Fresh and 15 Amazon Go stores were permanently closed with only days of warning earlier this year. — It was even revealed that Amazon's magical just walk-out technology was in fact largely powered by a team of a thousand workers in India who manually watched customers shop. After a full decade of trying, its foray into physical stores ended in complete and utter failure. It's the one glaringly stagnant line in its usually exponential story of growth. The one exception is Whole Foods, a brand it bought and didn't create. And while it remains successful, the problem is that there's a natural ceiling to its growth. Whole Foods loyalists love it precisely because it's so unique. It's pricey, exclusively organic produce, lack of high-sugar, high-calorie name brands, and its clean, relatively sparse aisles. Which means whatever it does to appeal to a wider, less affluent group of customers will almost certainly alienate those it already has. It can't please both. That's why Amazon Fresh made sense. With its demise, Amazon is back at square one with only a tiny corner of the $1 trillion market for groceries. Now, for decades, Walmart has faced a similar dilemma in the opposite direction. By prioritizing low prices above everything else, convenience, cleanliness, freshness, and customer service, the company has driven away anyone who values the latter. Where Amazon is all about customer satisfaction, Walmart didn't really care what you thought. It knew its faithful customers came for deals. Take Apple and Google Pay for instance. Many shoppers consider these table stakes, yet Walmart stubbornly refused to give Apple or Google a cut of its margins, asking its typically older, less technically literate shoppers to use its proprietary and confusing Walmart Pay instead. But, that's beginning to change. Between 8:00 and 10:00 a. m. every day, for example, its stores now feature quiet hours during which the lights are dimmed and the music turned off for those with sensory impairments or who just want a quieter, more pleasant experience. Its new stores are designed with wider aisles and upgraded, more private pharmacies. For $40 a year, Walmart even offers in-home delivery. Someone will enter your house while you're at work or school, unpack your groceries, and organize them in your fridge or pantry. It now carries designer fashion brands and fragrances from Gucci, Dior, and Marc Jacobs. It struck a deal with Apple to sell a special, lower-cost version of the MacBook Air, a product that not long ago would have been considered too premium for such a budget retailer. It updated its logo, is redesigning its store brand Great Value, and launched a new premium generic line called Better Goods, catering to the wealthier Trader Joe's going crowd with lots of organic, vegan, and gluten-free foods. And, believe it or not, it's working. 75% of Walmart's recent growth has been among households earning over $100,000 a

year. These days, even upper-middle-class households feel pinched by inflation, a stagnant labor market, and the rising cost of housing. Americans are increasingly looking for deals, and Walmart has them. Now, there are still many customers who simply do not shop at Walmart. Just as you won't find many truck-driving conservatives at Ben & Jerry's, Walmart has long been the bête noire of the college-educated, city-dwelling progressive. It's may never convince these many wealthy customers to step foot in its stores. But, here's where things get interesting. It may not have to. The American Express Platinum is an $895 luxury credit card. For this astronomical annual fee, its holders, plus any family members who pay an additional $195, get access to things like fancy airport lounges with free-flowing cocktails, spa credit when they travel, and discounted Equinox, a premium health club that costs between two and $400 a month. So, it seemed like a strange fit when Amex announced a new perk in 2021, free Walmart Plus membership. How many people, after all, were calling the Amex Platinum concierge to book their next ticket to the opera and also buying Great Value brand American cheese singles? But, it actually makes a lot more sense than you might think at first glance. In fact, it's genius. As the kind of person who spends nearly a thousand dollars a year on a luxury credit card, you value convenience. You probably don't waste your time shopping at Walmart. Odds are you don't waste much of your time shopping at all. You have your groceries delivered. Sure, Amazon will do that for you, but even with Prime it costs extra. And since Whole Foods doesn't carry the most popular brands, you'll still have to make a second order or trip to the store. But with Walmart Plus, you can get unlimited same-day grocery deliveries. There's no fee on orders over $35, prices are the same as in store, and because you're likely closer to one of Walmart's 5,000 stores than Whole Foods' 500, delivery is often faster than Amazon. Since you never step foot inside the store anyway, and since Walmart increasingly stocks the same premium products, the experience is largely the same. The same organic grapes arrive at your doorstep either way, either in a Walmart bag for three times less, or an Amazon more. — And remember, Walmart will even enter your apartment, if you wish, and cool those grapes in your fridge for you. Walmart arguably offers the more convenient solution, and it's faster, and it's cheaper, and it's already included with your credit card. Now, for some customers, the Walmart brand is simply too ethically compromised. From union busting to low wages and monopolizing small towns and driving out local businesses, Walmart is the original evil corporation. But here it has one big advantage. Its main competitor, Amazon, has been accused of all the same things, and more recently. Walmart may seem like the lesser or equal of two evils. And much of the stigma fades when you're shopping from your phone in the privacy of your own home. What this means is that it can simultaneously deliver two entirely separate experiences. One for lower-income customers in person, and another for higher-income customers online. And it can serve both using the very same physical infrastructure. It's network of 5,000 US stores. Walmart is succeeding where Amazon failed. It's attracting millions of new deep-pocketed customers without losing its current ones. And groceries are just the tip of the iceberg. There's not much profit, recall, in selling bananas or yogurt. The real prize is to get customers buying other non-perishable goods at the same time. And as these millions of new high-income shoppers use Walmart for grocery delivery, they'll increasingly see other items they need in the same place, the Walmart app and website, tempting them to buy it there rather than Amazon, especially because it helps them cross the $35 order minimum to qualify for free delivery. Say you urgently need some olive oil to cook dinner. You can get a $6 bottle delivered in just hours for free if you stock up on, say, $29 worth of vitamins you otherwise would have bought from Amazon at the same time.

And here Walmart has another strength. It all comes from the same place. If you order a coffee machine and some fresh produce at the same time from Amazon, the company pays twice the cost of shipping. One product is sent from its warehouse, the rest from Whole Foods. There's no economy of scale. If you place that order from Walmart, it's all sent from one of its 200,000 square foot supercenters. This is critical because while shipping is free for you and I, it definitely isn't for them. Delivering groceries typically cost Walmart or Amazon somewhere around $10 per order. — Which means if you buy $35 worth of groceries, they need a whopping 28% margin just to break even on the delivery costs alone. That's unheard of in the realm of supermarkets, where the typical margin is around 1 to 3%. If this works, if higher-income households continue flocking to Walmart, the company may finally succeed in penetrating the last and coveted 10% of America. — Cities from which it was once banished. There's currently no Walmart within the city limits of San Francisco, Boston, Seattle, or New York, for instance. The latter alone represents an untapped market of 8 million of America's wealthiest consumers. If it built the same number of supercenters per capita as San Antonio, the five boroughs could support a whopping 162 locations. New York, of course, can't actually absorb 162 200,000 square foot supercenters. The city's one and only IKEA, for example, is nestled far away in a quiet corner of Brooklyn. Besides, there's no way New York's politicians, unions, and opinionated consumers would let Walmart roll into town unopposed. We can say this with confidence because it tried and quickly failed as recently as 2013. Except, it doesn't need to open a single store to conquer, say, Boston or New York City. All it needs are fulfillment centers, giant invisible warehouses from which groceries and other items could be delivered. Without a physical storefront, it'd be hard to stop Walmart from doing exactly what Amazon already does. In fact, you might not even notice it was happening. — If you've ever strolled past the Empire State Building on West 34th, you probably had no idea the nondescript tower next door houses a 50,000 square foot Amazon fulfillment center serving Manhattan. — Mhm. That could just as easily be a secret Walmart. And why stop there? Walmart could hide its stores inside the Statue of Liberty, the Met, and Central Park. Just kidding. Hopefully. At least for now, Central Park remains a peaceful oasis, a shockingly commercial-free zone nestled within a shockingly commercial city. Speaking of which, City Beautiful made a fantastic mini-documentary explaining how and why the park was created. And if that interests you, you'll love Neo's How the Twin Towers Were Built, which features these incredible 3D models. In it, I learned that one of the biggest challenges of building the Twin Towers were the elevators. At a certain height, building enough of them took up more floor space than was gained from adding additional floors. Watch the video to learn about the engineers' clever solution. On a different note, I've just recently released the first episode in my new three-part series, A Grand Theory of Xi Jinping, in which I read, listen, and watch nearly everything we know about one of the most powerful men on the planet to understand who he truly is as a person and what drives him. All of these are exclusively available on today's sponsor, Nebula. There's so much exclusive content on Nebula, from travel competitions to comedy shows, in addition to the explainer series you know and love. Nebula is ad-free and even gives you guest passes so you can let your friends and family watch, too, for free. Now, normally Nebula costs $6 a month, but you can get it for less than half that by signing up for a year with a link on screen or in the description now. That's just $30 per year, effectively $2. 50 a month to watch my new exclusive series and much, much more. Plus, if you're not a fan of subscriptions, you can also get $200 off Nebula lifetime with the lifetime link below.