America's Own Double 11: Why Amazon Is the Second Company, After Walmart, to Reshape the Country

Every great company solves the same problem: shortening the time and distance it takes for goods to reach users. To serve consumers better, you have to get closer to them.

At the end of every year, the argument breaks out again over when Amazon will pass Walmart as the world's largest retailer. It gets loudest around Cyber Monday, when Amazon's believers can usually find something in the day's numbers to be excited about.

Cyber Monday, like China's Double 11, is a marketing occasion American retailers invented to get you to buy, buy, buy. The term was coined in 2005 for the first Monday after Thanksgiving, when people carry their Black Friday spending habit online. Now that offline retail keeps migrating to the web, Cyber Monday has become the single biggest retail day of the year in the US.

Cyber Monday matters to Amazon not only because Amazon largely brought the day into being, but because every online retailer strains every muscle that day — how Amazon performs on Cyber Monday is, in a sense, a reading of its standing and its clout in the industry.

As of press time, Amazon had not released its numbers for this year's Cyber Monday. According to comScore, 107 million Americans visited Amazon's site on Cyber Monday last year, and what they bought came to 36.1% of all Cyber Monday spending that year, leaving the No. 2 retailer, Best Buy, far behind at 5.5%.

People are wildly keen on Amazon's Cyber Monday deals. This year, Amazon posted its list of discounted categories on November 25 and it shot to the top of the trending lists on every major US news site.

Here is something curious. In China, when people talk about retail, they set Alibaba against offline retail as a whole. In the US, they talk instead about the fight between Amazon and Walmart. Everyone seems to have quietly agreed that Walmart is American offline retail.

That is more or less true.

Walmart, No. 1 on the Fortune 500, took in $482.1 billion in 2015 — about twice the revenue of No. 2, ExxonMobil, and roughly four times Amazon's sales.

But the bigger reason Walmart wears the crown is this: just as Amazon is now remaking how people shop and live through e-commerce, Walmart had already defined American consumer tastes before the 1990s through supercenters spread across the country. Everyday low prices, a vast selection that covered everything, and the thing that made both possible — a national network of outlets within easy reach.

More than a third of Americans shop at Walmart every week, and 93% of American households walk into a Walmart at least once a year. You will struggle to find an offline retailer with that kind of reach anywhere else in the world.

Walmart does it by putting more than 4,600 stores in every corner where people live. Half the US population lives within five miles of a Walmart; a 10-minute drive gets you to a supercenter of 6,400 to 24,200 square meters holding most of what you need. Ninety percent of Americans live within 15 miles of a Walmart. As The Wal-Mart Effect puts it, if you drive 15 minutes on an American interstate without passing a Walmart truck, that is a rare thing.

Stores everywhere give Walmart scale, which pushes prices down further and strengthens its hand in bargaining at every stage. Most important, it means that the moment someone needs to shop, Walmart is easy to find.

What is interesting is that although Amazon grew up in conditions nothing like Walmart's, the two widened their influence the same way in the end: by building "outlets" that reach everywhere, so that they themselves are within reach. It is only that in Amazon's case the outlet stopped being a store and became a fulfillment center.

Walmart has certainly earned the word "great," and every great company is at bottom solving the same problem: shortening the time and distance it takes for goods to reach users. To serve consumers better, you have to get closer to them. That is how Walmart reshaped American society, and as things look now, Amazon is the company most likely to be the next one to do it.

By the estimate of Piper Jaffray analyst Gene Munster, 44% of Americans now live within 20 miles of an Amazon fulfillment center. Look at the past few years and nearly everything Amazon has worked hardest at comes back to raising that number.

Between 2005 and 2016, the share of Americans living within 20 miles of an Amazon fulfillment center went from under 5% to 44%; as recently as 2014 it was only 26%. Amazon, in other words, is building its logistics network faster and faster.

Expanding logistics eats time, effort, people and, above all, money. Luckily, Jeff Bezos managed to convince Wall Street that today's spending on the delivery network will pay off later, much as Walmart's store expansion across America once did. Only when both service and goods sit within a consumer's reach does a company have the drive, and the staying power, to grow.

From 2013 to 2015, Amazon's logistics costs rose from $8.5 billion to $13.4 billion, climbing more than 25% in each of those years, and their share of sales went from 11.5% to 12.5%. Set 2015 against 2012 and Amazon's spending here more than doubled. In the first half of 2016, its spending on fulfillment centers grew 34% year on year, ahead of the 30% growth in revenue over the same months.

That expansion let Amazon offer more services others could not match, Prime above all, which has grown explosively. Prime is open to anyone: pay $99 a year and everything you buy on Amazon ships free in two days. Amazon now has more than 60 million Prime members, and their fees alone bring in nearly $6 billion a year.

Prime does something else for Amazon: it breeds loyal shoppers. Once people come to depend on the delivery speed Amazon gives them — or simply get used to it — the chance that another company can take them away falls.

Amazon offers Prime members free two-day shipping nationwide, and free same-day delivery on orders of $35 or more in more than 31 US cities. By building fulfillment centers without pause, Amazon controls how many hands a product passes through, and so cuts the time it takes to reach the buyer. This November it also launched two-hour delivery for Prime members in the Washington area.

The more convenient the service, the better the experience, and the more likely customers are to stay — a virtuous circle, potentially. This is why Alibaba has been in such a hurry to build Cainiao Network: it needs better service to hold on to its own shoppers against whatever rivals, large or small, turn up later.

JD.com copied the Amazon model from the start and spent just as heavily on logistics, which is a large part of why it broke through in e-commerce. Now JD.com plans to open that network to third parties in exchange for more revenue.

To put it at its most extreme: the day Amazon's logistics network is developed enough to offer two-hour delivery across a national market, it will have breached the last fortress offline retail holds. For now, after all, only offline retail can offer pay and take it home.

Some analysts think Amazon can eventually place fulfillment centers near 70% to 80% of the US population. The remaining 20% to 30% live where demand for online shopping is simply too thin.

That 70% to 80% is, without question, where Amazon will keep pouring money.

Over the past year Amazon added 86,800 employees, a 47% increase, and fulfillment centers did most of the hiring. In its third-quarter 2016 results, Amazon said fourth-quarter sales might come in below expectations, and might even produce a loss, but that it would still spend more on warehouses and logistics to deliver faster.

Since late last year Amazon has also been leasing aircraft and building its own air-cargo operation to push the delivery system further. In the third quarter of 2016 alone it built 18 new warehouse and fulfillment centers.

Bezos saw how much logistics efficiency mattered from Amazon's earliest days. According to Richard L. Brandt's One Click, within two years of its founding Amazon had poached 15 employees from Walmart, using their experience to build "the most efficient high-tech distribution centers in the world." In 1998 Walmart sued Amazon over it, claiming Amazon had caused it "economic harm."

Amazon built its barrier out of the head start it had in e-commerce, but that does not mean the future belongs to Amazon. Walmart still has a chance, even if taking it will be exhausting and very expensive.

Before its investor meeting this October, Walmart said it would open fewer new stores and planned to raise the number of its mega distribution warehouses to 10 by the end of 2016 — far faster than the eight-by-the-end-of-2017 that industry analysts had expected.

Fighting Amazon on logistics is hard for Walmart because a warehouse-to-consumer system is not a warehouse-to-store system, and the second is what Walmart is good at. Enter e-commerce and it faces delivery routes of extreme complexity; neither the transport routes to be optimized nor the cost control involved in reaching consumers directly is familiar ground. That is the barrier Amazon has built. And if Amazon wants to move into offline retail — which it is doing — it will have to face the barrier that a stronger Walmart has built there.

Which is exactly why we say Walmart still has a chance. The decisive factor is that Walmart holds a commanding lead in certain categories. Morgan Stanley data puts grocery at a fifth of all US retail, yet online sales in that category come to just 2% of the category's total. More than half of Walmart's sales, by contrast, come from it.

Do the arithmetic: US e-commerce retail in 2015 came to about $294.5 billion, and a 2% grocery share puts online grocery sales at roughly $5.9 billion. At Walmart, 56% of sales come from that category, so against 2015 sales of $482.1 billion, groceries alone brought in about $270 billion — more than 45 times the online market for the same goods. No online retailer, Amazon included, can reach that scale any time soon.

The category matters for another reason: people buy groceries often, and groceries are the most common thing that sets off a shopping trip in ordinary life. Think about it. How many times have you walked into a supermarket or opened a shopping site because you wanted one bag of snacks, and walked out with more?

Amazon is trying to make itself felt here. Its plan is to open 20 grocery-focused stores in the US over the next two years, and Business Insider reports that Amazon sees room for as many as 2,000 stores in this market over the next decade — about half of Walmart's current store count. Amazon has also launched Amazon Fresh, its fresh-food delivery service, in 17 cities.

Note that of the 10 physical stores, half will run on a buy-online, pick-up-offline model — what we usually call O2O — and the other half will be ordinary supermarkets. That new O2O model is also, at bottom, a way of simplifying shopping: cut out the step of picking items off the shelf yourself and the whole thing takes less time.

Walmart is putting more into grocery O2O as well. In the US it offers 30,000 to 40,000 grocery items that customers can order and pay for online, then collect in person in more than 30 cities. According to The Wall Street Journal, Walmart has already set aside pickup space in 1,000 of its 4,600 US stores, and expects eventually to get the whole pickup process under five minutes. For now only about 200 stores can actually handle the service — still far ahead of anything Amazon has in place.

The grocery O2O plans at both Amazon and Walmart answer the same demand for convenience: people want to spend less time waiting for nothing and get their goods as fast as they can. In one sense, expanding O2O is an extension of the basic service Walmart already provides through its 4,600 stores. The advantage it once built on the move to the suburbs and the spread of the car has been worn down by e-commerce, and its competitiveness from here will rest on offering better service. Amazon, spending enormous sums on fulfillment centers to save shipping time, arrives at the same place by a different road.

O2O may turn out to be a small part of the story in the contest to come between Amazon and Walmart. But as with the paths that carried both companies up, the problem they still have to solve is the same: how to hold more goods, and get them into a consumer's hands across the shortest physical distance in the least time.

On that, each has found in the other a formidable rival.

(Graphics: Wu Lingwei)

Cover image from Pixabay