The Elephant Fight in Retail

 

For quite a while now, Wal-Mart has been described as the company that changed American retail in the 1970’s and 1980’s while Amazon over the last 20 years has simply changed the way we shop, period. I would agree with both statements.

 

There are many small cities and villages who saw their local retailers go under as Wal-Mart rolled into town with EDLP—Every Day Low Pricing. Amazon took a different approach and was arguably the most consumer centric large company on earth. Jeff Bezos, Amazon founder, did not make a lot of profit for many years but grew the business exponentially.

 

There is also a growing feeling that so many Americans are getting used to the 1-click Amazon experience and that Wal-Mart is on a downward spiral. Looking at a few variables, we find:

 

1)  Sales—Amazon now has more sales than Wal-Mart.

 

2)  Innovation—Amazon clearly leads here with their big advantage in robotics and Artificial Intelligence. Wal-Mart has made big strides in the past few years but are not a digitally driven company as is Amazon or even Nike.

 

3)  Locations—the nod goes to Wal-Mart as some 90% of Americans live within 10 miles of one of their locations.

 

4)  Supply chain—close to a draw as Wal-Mart invented cross-docking and Amazon has amazing logistics.

 

5)  Customer Service—Amazon is the leader here. In 20 years of purchases, speaking personally, I have had only two minor issues that they resolved immediately. Wal-Mart is working on delivery in many areas and is improving for sure. In-store service is lacking at Wal-Mart.

 

6)  Sustainability—Wal-Mart is unusually transparent here and they continue to add solar panels to virtually every location around the world. Amazon is either not doing as much or is secretive about it. Nod easily goes to Wal-Mart.

 

7)  Pricing—for 14 years, I have conducted a “market basket of goods” analysis comparing pricing at Wal-Mart vs. Target, Safeway, Walgreens, CVS and some local grocery stores. Wal-Mart ALWAYS wins. The range has been a win for Wal-Mart of 12-27%. Amazon pricing can vary. The single click is enticing but, if you shop around a bit, you may find better value for a variety of goods elsewhere. On balance, Wal-Mart is usually but not always, a better buy.

 

When Amazon bought Whole Foods, there seemed to be some confusion in the trade press. At best, Whole Foods has 2% of the grocery market while Wal-Mart has over 50% in most US market areas. The press often said this was an opening salvo in Amazon taking over the grocery market. I saw it differently. What always has impressed me about Whole Foods was their site selection process. They look at a metro area and put stores in zip codes the have the highest percentage of people with graduate or professional degrees. They are open to organic produce and can afford to pay top dollar for groceries. That is one reason why Whole Foods is sometimes referred to as “Whole Paycheck.” Also, there was very likely an unusually high correlation between Whole Foods customers and Amazon Prime members so once they had Whole Foods on board they could get some really “big data” on these affluent and highly educated people. They not only knew what they ordered on line but what they ate and drank as well.

 

Can anyone compete with Amazon? Of course. Specialty retailers with over-the-top service can continue to do well. One surprise to me is how retailers who cater to the exclusive 1% are embracing online tactics and that portion of their businesses are soaring.

 

By now, virtually all of you have heard of Bernard Arnault, CEO of LVMH, who recently became the wealthiest man in the world as Tesla and Amazon stock prices cratered. Among the brands that this high-end player owns are Dom Perignon, Moet, Hennessey, Louis Vuitton, Veuve Clicquot, Cloudy Bay, Belvedere, Berluti, Dior, Pucci, Givenchy, Tiffany, Tag Heuer, and Bulgari among others.

 

Lesser known is Swiss based Compagnie Financiere Richemont which has a brand stable including Cartier, IWC, Montblanc, Van Cleef & Arpels, dunhill, Purdey, and Serapian.

 

Both of these luxury brand conglomerates are devoting significant attention to online sales and are experiencing double digit increases for that part of their businesses. Admittedly, they were late to the digital game but the growth is very real. The assumption was that such high-end products (other than the liquors) had to be sold in their stores in New York, London, Paris or Shanghai. Not so any longer!

 

The next recession (2023?) will wipe out more retailers. Amazon, Wal-Mart, Costco and the Dollar Stores  (which have hurt Wal-Mart to a degree) will still be standing. Will Amazon eventually cripple Wal-Mart? At the moment, as I write, Amazon shares are selling for half of what they did a year ago. Wal-Mart stock is down about 10%. Is the market telling us something?

 

Years ago, I worked with a man who had handled many beer brands in his career. At the time, his beat was some struggling brands that were largely regional. Budweiser (Anheuser-Busch) was locked in a huge conflict with Miller Beer. Bud had recently signed a five-year deal with fledgling cable channel ESPN. They ran a minute of commercials per hour minimum on the 24-hour sports channel. The deal was structured to give ESPN much needed cash as they grew so billing by year was $9,7,5,3,1 million per year respectively. By the end of the five-year commitment ESPN had exploded, so it may have been the greatest buy in electronic media history. Miller, their arch-rival, did a lesser but still big buy on USA Network, which early on was a sports channel.

 

I asked my colleague what would happen in this “beer war.” He told me to shut the door. I did, he smiled and said, “ Don, in an elephant fight, only the ants get killed.”

 

Amazon and Wal-Mart are both here to stay.

 

Happy Holidays to MR readers around the world !

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Urban/Rural Divide

 

Our mid-year elections in the United States are finally over and a careful look at results once more shows the stark differences in attitudes, voting preferences and lifestyles among people who live in large cities and suburbs as opposed to those in most rural areas.

 

I have seen this trend growing stronger over the years. And, some of it has been with my own two eyes. I am somewhat unusual in that I have actually set foot in all 50 US states and both career travel and some vacations have taken me to all major US cities but also a number of rural outposts. I remember vividly driving through one city as a teenager and now find that this oasis has one third of the population that it had five decades ago. Thousands of homes are vacant.

 

Rural life is getting harder. They are not high paying jobs for many locals and while most of the western countries are aging, many rural areas in America barely have minimal infrastructure left. Rural hospitals have been closing, an ambulance driver might be in his early 70’s and schools in small towns often cannot field a football team anymore.

 

Conversely, as the “knowledge economy” has boomed, then Austin, Seattle, New York, Boston, Washington, San Francisco and even Boise have boomed causing sharply rising real estate prices and serving as a magnet for ambitious young adults.

 

Take a look at a map of the recent congressional elections in America. If you look simply at geography, it appears that Republicans dominated in a huge way. Yet, actually, their majority is paper thin. Democrats tend to win in urban and many suburban areas while Republicans dominate in less populated areas.

 

A good example was the reelection for a third term of the controversial Dr. Rand Paul, Senator from Kentucky. A “landslide” is generally defined as an election where the winner garners more than 60% of the vote. Dr. Paul won easily with 61.8% of votes cast. Break the results down by county and you see that the Bowling Green ophthalmologist won all but three counties in the state. The three that he lost were highly populated jurisdictions housing Louisville, Lexington, and state capital Frankfort.

 

Rural voters appear to feel left out and ignored by politicians. A few upsets have occurred in recent years where the winning candidate made sure to spend time in EVERY county in a state or congressional district despite very low populations. Rural people felt somewhat genuinely cared about them and the presence, even brief, of the insurgent helped.

 

This urban/rural divide has had many theorists to consider the revamping of the composition of the United States Senate. A widely used argument is that rural states have way too much power in US politics. They ask why should California with 39 million people have 52 members in the House of Representatives but two senators while Wyoming with 580 thousand people have one member of the house but two senators? (The only reason that we have a Senate is that the founders wanted to make the smaller states feel comfortable by giving them equal representation in the upper chamber. Little Delaware was the first state to ratify the Constitution while my home state of Rhode Island, the smallest state, was the last of the 13 states to join. Interestingly, we did not have direct election of US Senators until 1913 when the 17^th amendment was passed. Prior to that, state legislatures chose who would represent their state in the Senate).

 

Do these reformers have a case? Maybe but it is a hopeless dream in my view. Changing the makeup of the Senate would require a constitutional amendment and 38 states would have to approve it. Would the smaller states say yes, it is only fair for us to lose a Senator and for California, Texas, Florida and New York to pick up another one or two? Would sitting Senators from smaller states cheerfully encourage people at home to extinguish them out of existence? Ain’t going to happen.

 

So, it appears that rural areas will have disproportionate political clout compared to their populations and economic strength. They have also picked up strength in Republican controlled legislatures with a tactic known as Gerrymandering. Elbridge Gerry was a Massachusetts congressman, governor, and Vice President under James Madison. He is credited with a tactic of “creative redistricting” which is still used to this day. There are two approaches---Cracking and Packing. Cracking divides a district up in some bizarre ways (on a map) but spreads strongholds of the opposing party across several districts. Packing puts as many of your opponents in a single district as possible making other districts more competitive for your party. The GOP has gerrymandered districts in Wisconsin, North Carolina and Texas while Democrats have been guilty recently in New York state and Maryland. Reformers are asking that district lines not be set up by state legislatures but by independent commissions. Right now, rural areas benefit in GOP states and Urban in Democratic strongholds.

 

Some say rural voters have a chip on their shoulders. Young people leave in droves as job and social prospects tend to be much better in major metropolitan areas. A few 20 something MR readers wrote to me saying it was fun to return home to their tiny hometowns during the height of Covid 19 and work remotely. Fun, for a few weeks. All said they could not wait to get back to New York and Boston as they felt socially stymied.

 

Under our present political system and with an aging population and other demographic shifts moving forward, I do not see how this urban/rural divide can be remedied.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a comment on the blog.