3 Advantages Wal-Mart Has Over Amazon

By Jeremy Bowman Markets Fool.com

There's no question who the king of retail is these days -- at least according to Wall Street.

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Amazon.com(NASDAQ: AMZN), the e-commerce player that grew up with the internet, now carries a market cap of $425 billion, nearly double that ofWal-Mart Stores, Inc.(NYSE: WMT), the most valuable brick-and-mortar retailer.

Amazon managed to achieve that status, which makes it one of the most valuable companies in the world, with much less revenue than Wal-Mart, and barely any profit until two years ago. Instead, Amazon's premium is based on its extraordinary growth and the network of competitive advantages that have evolved out of its Prime membership service, its network of fulfillment centers, and Amazon Web Services, its cloud computing division.

Image source: Wal-Mart.

Wal-Mart, however, has finally begun fighting back under CEO Doug McMillon. The company has scaled back on new store openings to invest in current ones and raised wages to improve service. It's also accelerated its grocery pickup service with plans to have nearly 1,000 kiosks in store parking lots by the end of the year. More importantly, the company signaled its focus on e-commerce by spending $3.3 billion on Jet.com last summer, which brought in Jet Founder Marc Lore. Since then, the company's e-commerce sales have accelerated as it's made smaller e-commerce acquisitions like Moosejaw and ModCloth, and has begun offering free two-day shipping on orders of $35 or more.

Though Wal-Mart is still widely considered the underdog in this retail battle, the company is not without advantages. Here are three of them.

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1. Profits

Thanks to Jeff Bezos's long-term mantra, Amazon has been able to earn a valuation above $400 billion with little to show on the bottom line as Wall Street has given it a special allowance.

Wal-Mart's profits not only underpin the stock's value, but also give the company the ability to outbid Amazon for potential acquisitions and more money to invest in growth. Last year, Wal-Mart had $13.6 billion net income compared to Amazon's $2.4 billion. On a free cash flow basis, Wal-Mart had nearly $21 billion against $9.7 billion for Amazon.

Though Wal-Mart pays out about $6 billion annually in dividends, the company still has about $15 billion in cash flow left over. Those profits also give the company an advantage in a potential price war with Amazon, which seems increasingly likely as the e-commerce giant pushes aggressively into groceries. Wal-Mart could better survive such a competition as it has a larger profit cushion.

Wal-Mart's own investors also seem more willing to give it some leeway to invest in itself, as the company has previously said that profits would ebb as it hikes wages and cleans up stores. After a dip following the announcement, the stock has rebounded.

2. Store network

Amazon built its empire on e-commerce, but the company is increasingly looking to brick-and-mortar real estate to drive growth. It's opened up pop-up shops in malls to sell gadgets and a handful of AmazonBooks stores which sell books as well as gadgets, and it's experimenting with different brick-and-mortar grocery formats including Amazon Go and AmazonFresh Pickup.

Wal-Mart, on the other hand, has already blanketed the country with stores, claiming that there's a Wal-Mart within 5 miles of 70% of the U.S. population. At one point, e-commerce was seen as more efficient than brick-and-mortar retail, but the high shipping costs involved in last-mile delivery mean that retailers often make higher margins on in-store sales than online. That store network has given Wal-Mart an advantage with services like grocery pickup, which it can implement by simply adding kiosks to store parking lots, unlike Amazon which has to build such facilities from scratch. Wal-Mart's stores can further assist the company's e-commerce distribution and support services like buy online/pick-up in store.

3. Size

Despite Amazon's impressive revenue growth, Wal-Mart is still much bigger, with nearly four times the revenue of Amazon. That gives the world's largest retailer a level of clout with suppliers that is hard to match. According toRecode, both Wal-Mart and Amazon are putting the squeeze on suppliers in an effort to lower their own prices and win market share.

Amazon, as part of its focus on growing grocery sales, has been pressuring suppliers likeGeneral Mills, Mondelez,and others to adapt packaging to e-commerce, which could mean eliminating colorful boxes and changing materials to make such items lighter and smaller to save on shipping.But Wal-Mart still controls nearly 10% of non-automotive retail spending in the country, meaning when it talks suppliers listen. Despite the growth of e-commerce, the vast majority of retail sales still take place in stores. Though Amazon's growth is certainly appealing, Wal-Mart is too big for the consumer packaged goods companies to ignore.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.