Can Wal-Mart Combat Amazon Post Whole Foods Buyout?

While the dotcom era was all about small exciting tech startups, 2017 was possibly the year when getting bigger became truly better. It was also a year when competitors decided that imitation was the best form of offence. So Facebook (NASDAQ:FB) adopted some of Snap Inc.’s (NYSE:SNAP) Snapchat’s best features. Also, Microsoft Corporation (NASDAQ:MSFT) entered Apple Inc.’s (NASDAQ:AAPL) arena and Alphabet Inc. (NASDAQ:GOOGL) ventured into creating its own line of products.

But a single deal stands out amongst all of this year’s apparently unrelated diversification moves. Amazon.com, Inc.’s (NASDAQ:AMZN) $13.7 billion buyout of Whole Foods is a development that has changed the retail landscape for good. And looking at its fallout, it’s safe to say that it is likely to transform vast swathes of the entire economy.

Transformational Move or Hidden Acknowledgement?

Immediately after taking over Whole Foods, Amazon triggered a price war by cutting prices. Smaller competitors like The Kroger Co. (NYSE:KR) had to follow suit in the wake of falling share prices. Amazon has also indicated that its Prime Members may receive further discounts, a move which is likely to set off an intense price war.

And it didn’t stop there. The likes of Target Corporation (NYSE:TGT) are hurrying to enter into agreements which will allow their customers to shop using Google’s Express platform, a move aimed at countering Amazon’s Echo line of products. Moreover, grocery delivery startups are now suddenly in vogue with Target snagging Shipt for $550 million. (Read: Grocery Gunfight: Can Incumbents Fend Off Amazon?)

But was the Whole Foods deal simply Amazon’s way of conceding that it needs to become more and more of a large format retailer like Wal-Mart Stores, Inc. (NYSE:WMT) ? Surely Amazon’s efforts to develop an online-offline model mimic the Wal-Mart success story in more way than one. Incidentally, both Amazon and Wal-Mart have had a banner year at the bourses, surging by 58.3% and 42.9% year to date.

Online-Offline Approach Holds the Edge

The Whole Foods buy has given Amazon access to 450 stores across the United States, effectively giving it enough offline muscle. However, there’s still a long way to go for Amazon in this area. For example, it offers grocery pickups from only two locations in Seattle. Also, it is yet to perfect the grocery logistics process, which is exactly why the Whole Foods purchase happened in the first place.

In fact, Amazon had little choice but to add a chain like Whole Foods to its arsenal. Most of its technology driven food sales initiatives have been ridden with flaws. Even its much vaunted Amazon Go launch has met with little success.

Meanwhile, Wal-Mart has intensely focused on its online initiatives this year. Starting 2017, it is offering free two day shipping for all purchases above $35. This is clearly a move designed to counter Amazon Prime’s two-day free shipping feature. Also, it has almost tripled its range of products available offline, which have jumped from eight million to 23 million as of now.

All of these initiatives have helped Wal-Mart expand its e-commerce sales by more than 60%. And its offline presence remains as formidable as ever. For instance, it offers grocery pickups from more than 1,100 locations as against only two for Amazon.

Could Wal-Mart be a Better Bet Than Amazon?

In fact Wal-Mart has been sharpening its grocery delivery chops through a service it launched in China. Its acquisition of Jet.com seems have to made all the difference in this area with Marc Lore, Jet’s erstwhile boss heading its e-commerce initiatives. Further, the big-box retailer will be known as “Walmart Inc." effective Feb 1, 2018.

Management stated that the company’s current name is used only in few legal places as it is more popular as just “Walmart”, given its seamless operations across stores, online as well as its app. Thus, this name change will bring uniformity and reveal Walmart’s unified and omni-channel existence universally. (Read: Wal-Mart Stores to Walmart: What's Behind the Name Change?)

The only snag for Wal-Mart could its surging valuations, which at a PEG value of 3.46 is significantly greater than the S&P 500’s figure of 2.01. But with a PEG ratio of 7.11, Amazon is clearly even pricier. The ongoing bull market has dispelled such concerns over valuation time and time again.

Tech majors have delivered ever stronger earnings performances, as was in evidence during Wal-Mart’s third quarter results, to justify such exorbitant valuations. Wal-Mart has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Last Word

Amazon’s buyout has signaled a tectonic shift in the retail sector and has set many traditional retailers scurrying for cover. But this is not a universal truth, since the likes of Wal-Mart could put up more than a stiff fight. In fact, with its strong offline-online model, Wal-Mart might just give Amazon a run for its money.

5 Medical Stocks to Buy Now

Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia, and other conditions.

New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.

Click here to see the 5 stocks >>

Amazon.com, Inc. (AMZN): Free Stock Analysis Report

Facebook, Inc. (FB): Free Stock Analysis Report

Alphabet Inc. (GOOGL): Free Stock Analysis Report

Snap Inc. (SNAP): Get Free Report

Apple Inc. (AAPL): Free Stock Analysis Report

Microsoft Corporation (MSFT): Free Stock Analysis Report

Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report

Target Corporation (TGT): Free Stock Analysis Report

Kroger Company (The) (KR): Free Stock Analysis Report

Original post

Zacks Investment Research