Amazon, Walmart, and the Long Tail of Retail

The all-out price battle between Walmart and Amazon is an opening skirmish in a larger war to win the “long tail” of a $674B retail market. In order to win in a Long Tail business (credit: Chris Anderson), you must a) make everything available and b) help people find it (i.e., catalogue, or better yet, anticipate customer demand). What happened Friday was a deft response by Amazon to make everything available – a response to Walmart’s earlier acquisition of

I want to think through the “long tail” war of retail. Amazon and Walmart will be used as proxy for “brick-and-mortar” and “digital-first” companies. The goal is to illustrate the dynamics between physical, hybrid, and digital retailers in the long tail race towards infinite variety.

Amazon is buying competency into brick-and-mortar economics. Note that Amazon tried to learn brick-and-mortar economics on its own (and in its own way) with Amazon Go, which hopes to make checkout lines a thing of thing of the past, Amazon Bookstores, which according to a New Yorker article is not for people who actually read, and now Prime Wardrobe (beta), a.k.a, Amazon’s fitting room as a service. There are few kinks to work out but building out a hybrid retail experience doesn’t happen overnight, especially for the grocery market.

So queue the Whole Food’s $13.7B acquisition, a deal 10X bigger than any other Amazon deal. Whole Foods, with its zero-growth, 450 stores, and 15.72B in net sales, doesn’t make it an obvious buy. And it get’s worse. Whole Foods, once the second-most valuable food retailer in the U.S., behind Walmart in the Fall of 2013, took a beating this year from cutthroat competition and price gouging, both of which have eaten away at earnings. Same-store sales growth fell from 8 percent to 4 percent, and its share price tumbled 10 percent (50% since 2015).

So what’s going on? Economist Paul Romer’s says a “crisis is a terrible thing to waste” and I think that’s what we have here. Amazon purchased Whole Foods for its logistics and infrastructure, customer base, market data, and physical stores for bargain (~$42/share roughly 3% of its enterprise value). And furthermore, Amazon has plans to leverage e-commerce to lower the unit economic costs of the retail business model. If Amazon succeeds, it will become a top 5 grocer.

As an aside, I have met John Mackey (CEO of Whole Foods) many times, and I am friends with Raj Sisoda, the economist behind Conscious Capitalism, co-written by Mackey. Congrats to both of them for the acquisition. I highly respect both of these gentlemen for their mindful stance on the role of business in society.

Walmart is buying competency into a new digital-first environment. Yes, less tech-savvy than Amazon, but Walmart is no underdog. The company is second only to the U.S. government in size, and one in every 100 working Americans collects a paycheck from either Walmart or Sam's Club. Walmart’s motto is “everyday low prices” and it means it. The company has been running price-comparison tests in 1,200 stores across the U.S. to guarantee that it has the lowest prices in 80% of head-to-head offerings (granted Amazon has been running price algorithms of its own, and undercutting Walmart with success).

Enter the acquisition of to help Walmart build its digital bench. So far, so good. Walmart now offers free two-day shipping and has seen online sales grow 63% over the last year. Yet Wal-Mart is not done. Enter Bonobos, the men’s fashion brand, which was acquired for $310M or ~2x projected revenue in 2017.

The shopping spree seems like a splurge if you consider the combined $166 million spent on fashion startups ModCloth and but these investments are crucial if Walmart wants to stay relevant in a digital-first world. From a cash expenditure point of view, it is easier to become a digital-first retailer, than to build (and acquire) brick-and-mortar shops – a boon for Walmart.

Who will win the long tail of retail? Companies that quickly build or buy competency in both “brick-and-mortar” and “digital-first” strategies. Between, Amazon and Walmart. I’ll invest in both, rooting for the underdog (i.e.,Walmart) but expecting Amazon to win because even with Walmart’s head-start (i.e., more of the long tail and lower costs for user acquisition), Amazon doesn’t have 55 years of corporate culture to unravel and Amazon has a larger commerce vision to become “the everything store," according to Brad Stone – so, not just retail, but the entire value chain of creating, buying, and selling goods and services.

That said, I’m watching Amazon with a bit of trepidation over the next 2 years because Whole Foods is a significant investment and possibly, Bezos’ largest blunder. Retail is hard and Amazon is climbing uphill the long tail of a power law curve that looks a bit Sisyphean. While Walmart is trying to slide down the tail without tumbling over itself.