Size Matters

10/12/2021

Who is the largest seller of toys in the United States? Who is the largest seller of everything else?

There’s not much doubt as to who the two largest sellers are in both cases, Amazon and Walmart, but the order they are in is more difficult to determine than you might think. A few years ago, there was a spate of stories in the press stating that Amazon had passed Walmart to become America’s largest retailer, but that pronouncement was highly misleading.

If you got past the headlines and drilled down a little bit, you found that Amazon was bigger than Walmart in just one particular location, and that was Wall Street. The online merchant had passed the big box giant in terms of “market capitalization,” or the total valuation of all its shares of stock.

By that metric, Tesla would be the largest automaker in the world, bigger than General Motors and Ford combined. In sales volume, as well as profitability, Ford’s North American pickup truck business is by itself far larger than Tesla.

When most of us consider the size of a company, we measure it by sales. It’s logical to look at profit, assets, market share, number of employees and other factors, but sales is the benchmark.

So it got my attention when, on August 17th, I read the following headline in The New York Times: “People Now Spend More at Amazon than at Walmart.” Apparently, the upstart had finally ascended to the throne. 

But not so fast. Once again, when I got down to the fine print, the story was not quite so black and white. Well over half of the transactions on Amazon’s website are fulfilled by third parties through what it calls its marketplace function. Amazon never touches the merchandise, but simply processes the payment and takes a commission for itself.

When Amazon reports its sales, it only counts those commissions, not the total amount paid for those products. The net effect of that accounting is that sales appear to be much lower than receipts indicate, but profitability looks very high in relation to sales.

Amazon uses that lower sales number to argue that it is not any sort of monopoly. As recently as last summer, Jeff Bezos testified to Congress that Walmart was twice its size.

When Wall Street bankers estimate Amazon’s size, however, they apply what they call “gross merchandise value” to add back in the full price of everything Amazon sells. While Amazon reports its sales over the past year as about $390 billion, Wall Street pegs that at $610 billion. That exceeds Walmart’s sales of about $570 billion.

In terms of employees, Amazon has added a half-million new jobs in the past two years alone, for a total of 1.3 million. Walmart is the largest private employer in the world, with a workforce of 1.6 million. Walmart is also larger in both infrastructure and inventory, and has in recent years become a major internet player.

Although it is still not in Amazon’s class, Walmart will do about $75 billion in online sales this year, making it the number-two internet merchant. Almost all of those sales are directly from Walmart to the consumer, filled from its own inventory. Down the road, it is expected to follow Amazon’s model and conduct more third-party fulfillment.

As Walmart becomes a little more like Amazon, the reverse will also be true. That development was confirmed by an August 19 article in The Wall Street Journal entitled “Amazon Plans to Open Large Retail Locations Akin to Department Stores.”

The company has dabbled in brick-and-mortar retail for a number of years, but mostly in small venues such as bookstores (echoing the original rollout of the online business in 1994). Its first venture into large-scale physical retailing was its acquisition of the grocery chain Whole Foods Market in 2017.

Now, according to the old “people familiar with the matter,” Amazon will soon launch its first two department stores, one each in California and Ohio. They are expected to occupy around 30,000 square feet, which is double the average Walgreens but nowhere near a 200,000 square-foot Walmart.

The product mix has yet to be determined (or hasn’t yet been leaked), but everyone would be surprised if it does not include a lot of the company’s private label merchandise. We could also presume that it would include high-volume categories such as clothing, furniture and electronics. 

Stepping back a little from those details, you may be tempted to wonder whether the new initiatives from the two retail tyrannosauruses, and their titanic struggle for primacy, really matters. Isn’t there room enough for everybody?

Well, it certainly matters to them, and no, there isn’t. Just ask Woolworth’s, Sears, or Kmart how being number two worked out. As far as Amazon is concerned, growth has been its prime directive from day one, and that growth has been spectacular, relentless, and destructive of anyone working in any space that Amazon has targeted for expansion. There is no way it could maintain that pace of growth without taking business from other retailers.

Ironically, as Amazon searches for new worlds to conquer, it seems to be circling back to look at niches that it flattened on its way up. That would explain its foray into bookstores a couple of years ago, as well as this reported development of compact department stores.

It may be ironic but it makes sense. In spite of the rapid growth of online shopping, especially over the past year-and-a-half, brick and mortar is still something like four times larger. When the pandemic is behind us, conventional retailers expect to regain some of the market share that they gave up to e-commerce, while holding on to the gains they made online.

Amazon already has the lion’s share of online sales, so if the growth of e-commerce levels off the company is going to have a tough time maintaining its own growth rate. Walmart, on the other hand, is in position to grow both online and off.

From what I can gather, Amazon became what it is today through a combination of three basic strengths: price, convenience and trust. It still has those strengths, but they are no longer such a distinction from everyone else.

So who sells the most toys in the United States? I don’t know, but I know that, ultimately, it will be the company that best manages those three issues. The efforts of our two largest retailers to do so matter to all of us. 

The largest seller of toys in the world, by the way, is a Chinese company called Alibaba. It is about twice the size of Amazon.


You can e-mail Kevin at kfahy@fwpi.com.

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