Amazon and Walmart have dominated as the world’s largest retailers. Walmart has replaced small brick-and-mortar retail stores in cities and towns all across America. Now Amazon is set to do the same with big box stores all around the country.
One of the main reasons these two retail giants have taken over this industry is their low prices. The locally owned clothing store on Main Street has had a hard time maintaining an edge with the low costs of similar clothing and more choices at the local Walmart.
The same goes for Amazon. Amazon’s marketplace has leveled the playing field for consumers by lowering prices to almost unprofitable numbers, but have displaced small retailers in the process.
Amazon and Walmart Lose Money
One interesting phenomena that has taken place is that Amazon and Walmart routinely lose money on many of their products. The interesting part is that they don’t seem to mind. In fact, they do it on purpose.
There are different reasons a retailer may not mind losing money on certain items. Here are a few reasons why and the strategy behind it.
1. Traffic
There are certain staples that everyone needs. Things like milk, toilet paper, and diapers (if you have a baby). These are staples that are also things that are sold in high volumes.
One of the main reasons these retail giants don’t mind losing money on these is that it brings people into the store, or in the case of Amazon, it gets them to their website.
If someone runs out of toilet paper, they have no other option but to go to the store. They will typically go to the store where they know they have the lowest prices because most chains carry the same brands.
Once they’re in Walmart, they will pass shelves and shelves of other products on-route to the toilet paper aisle. They may also think of other things they can buy while they’re there.
2. Cash Is King
In many ways, Amazon and Walmart are banks that make interest off of their cash. Let me explain.
Amazon routinely loses money on the orders from their suppliers. Let’s take one of their basic items like smartphone chargers. Let’s say Amazon buys a huge shipment for $11 per charger. Often, they will turn around and sell that charger for $10. Why would they do that?
They’ll order an incredibly large order from their supplier, and because it’s such a large order, Amazon has all the leverage in negotiating terms. Amazon will negotiate terms so they don’t have to pay the supplier for 90 days.
That means Amazon has the shipment in their warehouses and they can sell the chargers right away. But they won’t pay the supplier for 3 months.
Let’s say they sell out of the chargers all within 30 days. That means they have all of the cash from the sales at $10 per unit, but they don’t have to pay back the supplier for another 60 days. They have 60 days to play with that cash.
They’ll use the cash to reinvest in more profitable enterprises and will make money off that cash while they have it. By the time they pay their supplier, they have made interest on that cash that exceeds the $1 per unit they lost on that deal.
It’s like if I bought a computer from you for $1,000 under the condition that I would pay you in 3 months. Then I turned around and sold it for $900 today. I’d have $900 to play with for 3 months.
I could take that $900 and trade in the stock market and make $300 profit over the 3 months. I’d have $1,200 in cash. Then I’d pay you at the end of 3 months the $1,000 and have made $200 off of that cash. That’s a 20% return on money I didn’t initially have.
Or maybe I took the $900 and bought a website that immediately generated $400 per month. I’d end up with $1,200 at the end of 3 months. I’d pay you the $1,000 and would have made $200 without any money out of my pocket. That’s what Amazon and Walmart do on a mass scale.
3. Opportunities for Merchants
This has been seen as a problem for merchants for a long time. If Amazon and Walmart are selling products at below cost, how are they ever able to compete and make a profit? Small retailers can’t negotiate 90-day terms like the big giants. And they can’t sell inventory that fast either.
The only option is to stay away from selling products where Amazon and Walmart utilize that strategy. But how do you know when Amazon and Walmart are selling below cost to drive out competition?
If you’re an eCommerce merchant, there are platforms that will give you this type of data so you know what products to stay away from and what products have potential. Platforms like Magento Enterprise, Shopify Plus, 3dcart Enterprise and ChannelAdvisor will provide the insights and market data that will help you steer clear of these giants.
Amazon and Walmart will not go away. They are too big to try to compete with, especially because they utilize tactics like this that are impossible to compete with as a smaller or even medium-sized merchant.
The best strategy is to stay out of their way and exploit opportunities that are too small for these giants to pay attention to, but may still be enormously profitable for you.
