Wal-Mart and Amazon Are in a Retail Turf War

By Harsh Chauhan Markets Fool.com

The line between online and offline retail is blurring as Amazon (NASDAQ: AMZN) and Wal-Mart (NYSE: WMT) aggressively vie for consumers dollars. Amazon wants to get into grocery sales by building physical stores (Amazon Go), along with a distribution network to support AmazonFresh, its model for ordering online and picking up in-store.Wal-Mart already has a solid physical presence in the grocery market with 600 locations spread across 100 markets, and its items are also cheaper.

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This isn't going to keep Amazon from making a bigger bet in offline retail as the company is reportedly interested in buying warehouse retailer BJ's Wholesale Club, according to the New York Post.

Why Amazon could be interested in buying BJ's

According to The Post's sources, the private equity investors controlling BJ's are looking to fetch a price of $4 billion for the warehouse retailer, which went private in 2011. The New York Post's source goes on to state that Amazon has "recently discussed evaluating BJ's as an acquisition target," though it is not known if the online retailer is going to make a bid.

Amazon's bid for BJ's shouldn't be ruled out because the move would fast-track its ambition of getting into offline retail. BJ's operates 213 warehouse clubs and 130 gas stations spread across 15 states in the U.S., selling merchandise such as electronics, groceries, auto parts, and other home-related items.

As it turns out, Amazon is facing difficulty in building warehouses quickly enough to satisfy the booming demand for an ever-growing product selection. This has led to a massive jump in order fulfillment costs in recent quarters, forcing the company to spend more money to ensure faster delivery of goods.

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The only way Amazon can bring down its fulfillment costs is by building more warehouses. Its fulfillment costs in the fourth quarter of 2016 fell over 20% year over year as 23 of 26 new warehouses were added in the second half. By comparison, the company's fulfillment costs had jumped 34% in the first half of 2016.

BJ's Wholesale might give Amazon the much-needed warehouse space it needs to slash fulfillment costs, while also supporting the company's grocery ambitions. BJ's could also become the springboard for Amazon's rumored move into furniture and home appliances.

Image source: Amazon.

According to a New York Times report, Amazon is exploring the idea of selling furniture and home appliances through physical retail stores, allowing people to figure out how a piece of furniture will look inside their home using augmented or virtual reality. BJ's Wholesale Club, then, could play multiple roles for Amazon as it tries to expand its offline presence and go head-to-head with Wal-Mart across different categories.

Wal-Mart's latest salvo

Industry sources cited by The Guardian indicate that Wal-Mart is on track to buy online men's fashion retailer Bonobos for $300 million, which has a hybrid online and offline retail operation. Customers can walk into its physical locations that work as fitting rooms, carrying no inventory inside the store and fulfilling no orders on site, with purchases sent directly to customers from warehouses.

Bonobos' business model has gained rapid traction in just a few years, with the company's 2015 sales being pegged at $100 million as against $40 million in 2012. Wal-Mart, therefore, could try to leverage the platform's growing popularity to shake Amazon's dominance in the apparel space, but this isn't going to be easy.Investment bank Cowen and Company believesAmazon is on track to becomethe largest apparel retailer in the U.S. this year.

Wal-Mart sold $23 billion worth of apparel last year, so investors will expect it to use the existing infrastructure to push online clothing sales. But this seems like a long shot as just 3% of the big-box retailer's total sales come from the online channel, so its online apparel sales could be less than $700 million at this rate.

Wal-Mart's success in the apparel space is far from guaranteed even if it acquires Bonobos, given Amazon's strong lead. However, if Amazon ends up taking over BJ's Wholesale Club, then not only can it push its physical retail ambitions and take the fight to Wal-Mart, but it can also boost its bottom line by reducing fulfillment costs.

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