Commentary: Amazon + Wal-Mart = Win/Win

When a Mar. 4 news report said Inc. (AMZN ) was close to signing a deal with giant Wal-Mart Stores Inc. (WMT ), it looked like the most promising development in some time for the ailing Internet retailer. Amazon, facing concerns it might run out of money, would run the Web site and distribution for Wal-Mart's struggling online unit in return for fees, in-store promotion, and possibly cash. Investors cheered, boosting the stock 26% in a day, to 12 5/8.

But hold on. According to one source close to the talks, no deal was ever agreed upon--and none is on the front burner now. Too bad, because such a deal would be, well, such a deal--for Wal-Mart, for Amazon and its beleaguered shareholders, and for consumers. Amazon may be the biggest online brand, but it needs real-world retailing expertise and exposure. At the same time, brick-and-mortar chains such as Wal-Mart now realize how tough e-tailing is. And it's clear consumers want to shop both at stores and on the Web. Linking the retailing kings could give shoppers unprecedented choice of how to buy, receive, and return merchandise.

GOODIES. This kind of alliance has already succeeded. Last year, Amazon teamed with Toys `R' Us. (TOY ) The toy chain supplies inventory, while Amazon runs the Web site and delivers the goods from its six U.S. distribution centers. The combined store brought in $124 million in sales this past holiday season. Perhaps more important, Amazon avoided an inventory writedown that whacked its profits by $39 million the previous year. In fact, it cut inventories by 21%--to $175 million--in the fourth quarter, even as sales rose 44%, to $972 million. And Toys `R' Us didn't have customers slamming it for late deliveries, as in 1999.

Hard-pressed Amazon would benefit the most from a Wal-Mart deal. Ideally, it would get a bundle of goodies. Through in-store signs and kiosks where customers could order goods Wal-Mart doesn't stock, Amazon could acquire customers for far less than its already low $13 apiece. It could offload the costs of inventory, as it did with Toys `R' Us, while filling its distribution centers, which now run at less than 40% of capacity. And it could tap Wal-Mart's expertise in judging product demand and keeping inventories low--not to mention its singular pricing power. All that could ease persistent concerns it might run out of capital before it turns the profit it has promised by yearend. A move sure to calm nervous investors, it might also reassure shoppers who have slowed online spending. As Laurie Windham, CEO of e-commerce researcher Cognitiative Inc., puts it: "You would have the ultimate consumer-value proposition in retailing."

For Wal-Mart, the advantages are less clear-cut. E-commerce sales are a rounding error compared with its $191 billion in sales last year, so it could take the time to perfect its site and build its own fulfillment system. But badly needs a boost. According to a Cognitiative survey, 100% of holiday customers cited one or more problems shopping on the site, ranging from shipping costs to orders that never arrived. Amazon was nowhere near perfect, either, with 55% running into a problem--but that's the best performance of any online retailer. And Amazon's reach among U.S. online shoppers tops 30% vs.'s 11.7%.

Besides, even though Amazon and Wal-Mart are often held up as archrivals, their online businesses are complementary. Their customer bases couldn't be more different: Amazon has captured the yuppie crowd that values time and convenience, while Wal-Mart attracts everyone else, meaning value shoppers who watch their wallets.

There's no doubt an Amazon-Wal-Mart alliance would be hard to pull off. Their disparate cultures, size, and target customers may present too wide a gulf to bridge. But both could win if they join forces, largely because it would please the folks that matter: their customers.

By Rob Hof

Senior Writer Hof covers technology issues from San Mateo, Calif.

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