Amazon-Walmart battle explains modern economy
With Amazon buying Whole Foods, something retail analysts have known for years is now apparent to everyone: The online retailer is on a collision course with Walmart to try to be the predominant seller of pretty much everything you buy.
Each one is trying to become more like the other — Walmart by investing heavily in its technology, Amazon by opening physical bookstores and now buying physical supermarkets. But this is more than a battle between two business titans. Their rivalry sheds light on the shifting economics of nearly every major industry, replete with winner-take-all effects and huge advantages that accrue to the biggest and best-run organizations, to the detriment of upstarts and second-fiddle players.
That in turn has been a boon for consumers but also has more worrying implications for jobs, wages and inequality.
To understand this epic shift, you can look not just to the grocery business, but to another retail acquisition announced Friday morning: Walmart is buying Bonobos, a men’s clothing company.
Men’s dress clothing can be a little boring. Like many male office workers, I lean toward clothes that are sharp but not at all showy.
I used to buy my dress shirts from a Hong Kong tailor. They fit perfectly, but required an awkward meeting with a visiting salesman in a hotel suite. They took six weeks to arrive, and cost around $120, which adds up fast when you need to buy eight or 10 a year.
Eventually, I realized that a company called Bonobos made shirts that fit nearly as well, that were often sold three for $220, or $73 each, and would arrive in two days.
Recently, Amazon moved into the upperend men’s shirt game. The Buttoned Down line, offered to Amazon Prime customers, uses highquality fabric and is a good value at $40 for basic shirts.
Walmart’s move to buy Bonobos might seem strange. The Arkansas company is not a retailer people typically turn to for $88 summer-weight shirts in Ruby Wynwood Plaid or $750 Italian wool suits. Then again, Amazon is best known as a reseller of goods made by others.
Walmart and Amazon have had their sights on each other for years, each trying to be the dominant seller of goods — however shoppers of the future want to buy them. It increasingly looks like that “however” is a combination of physical stores and online ordering, and each company is coming at the goal from a different starting point.
Amazon dominates online sales, and is particularly strong among affluent consumers in major cities, even as it experiments with physical store formats.
Walmart has thousands of stores that sell hundreds of billions of dollars’ worth of goods. It is particularly strong in suburban and rural areas and among low- and middle-income consumers, but it’s playing catchup with online sales and affluent urbanites.
Why are these two mega-retailers both trying to sell us shirts? The short answer is because they both want to sell everything.
More specifically, Bonobos is known as an innovator in exactly this type of hybrid of online and physical store sales. Its website and online customer service are excellent, and it operates stores in major cities where you can try on garments and order items to be shipped directly. Because all the inventory is in a central location, the stores themselves can occupy minimal space.
So the acquisition may help Walmart build expertise in the very areas where it is trying to gain on Amazon. You can look at the Amazon acquisition of Whole Foods through the same lens. The grocery business has a whole different set of challenges from the types of goods that Amazon has specialized in; you can’t store a steak or a banana the way you do books or toys. And people want to be able to make purchases and take them home on the spur of the moment.
Just as Walmart is using Bonobos to get access to higher-end shoppers and a more technologically savvy way of selling clothes, Amazon is using Whole Foods to get the expertise and physical presence it takes to sell fresh foods.
But bigger dimensions of the modern economy also come into play.
The apparel business has long been a highly competitive industry in which countless companies could find a niche. Any insight that one shirt maker developed could be rapidly copied by others, and prices reflected the retailer’s real estate costs and branding approach as much as anything.
That helps explain why there are thousands of options worldwide for someone who wants a decent-quality men’s shirt. In that world, any company that tried to get too big rapidly faced diminishing returns. It would have to pay more and more to lease the real estate for far-flung stores, and would have to outbid competitors to hire all the experienced shirt makers. The expansion wouldn’t offer any meaningful savings and would entail a lot more headaches trying to manage it all.
But more and more businesses in the modern economy, rather than reflecting those diminishing returns to scale, show positive returns to scale: The biggest companies have a huge advantage.
Already, retailers need to figure out how to manage sophisticated supply chains connecting Southeast Asia with stores in big U.S. cities so that they rarely run out of products. They need apps and websites that offer a seamless user experience so that nothing stops an order.
Larger companies can spread those more-or-less fixed costs around more total sales, enabling them to keep prices lower than a niche firm and entrench their advantage.
If retail were the only industry becoming more concentrated, it would be one thing. But a relative few winners are taking a disproportionate share of business in a wide range of industries, including banking, airlines and telecommunications. A study by the Obama White House’s Council of Economic Advisers found that in 12 of 13 industry sectors, the share of revenue earned by the 50 largest firms rose between 1997 and 2012.
That may help explain why the income gap has widened in recent years. Essentially, the corporate world is splitting between winners and losers, with big implications for their workers.
Research by Jae Song of the Social Security Administration and four colleagues found that most of the rise of inequality in pay from 1978 to 2013 was because some companies were paying more than others — not because of a wider gap between high-paid and low-paid workers within a company.
“Employees inside winning companies enjoy rising incomes and interesting cognitive challenges,” Stanford economist Nicholas Bloom, one of the co-authors of that paper, wrote recently in Harvard Business Review. “Workers outside this charmed circle experience something quite different.”