Amazon's Supply Chain Kicking The SKUs Out Of Walmart's

After some 19 years of struggling with E-Commerce, Walmart (NYSE:WMT) is once again learning that managing a merged channel retail strategy is almost never going to beat a well-run pureplay e-tailer like Amazon (NASDAQ:AMZN) when it comes to online sales. Was reminded of this point courtesy of a wonderful stat in a Wall Street Journal story that ran Wednesday (June 19), which compared Amazon and Walmart's supply chain costs: "Wal-Mart's online shipping can cost $5 to $7 per parcel, while Amazon averages $3 to $4 per parcel, analysts say—a big difference considering some of Wal-Mart's popular purchases are low-cost items like $10 packs of underwear."

There are many factors behind those numbers, but it really comes down to the fact that Walmart's massive global supply chain needs to support more than 4,000 physical stores—a feat that Amazon need not worry about.

Given that huge physical burden, Walmart's costs are quite impressive. But no one ever said that fighting against a pure play was particularly fair.

Like all major chains, Walmart initially had two choices. Run the chain as one big happy merged channel family or separate and run online and offline as separate companies.

Neither approach is perfect. The single-happy-family strategy means that online would always play second fiddle to physical stores, which are certainly likely to generate far more revenue for quite a few more years. The separate-but-equal strategy—which is what Walmart deployed—puts online in the unenviable position of having to compete with its physical counterparts. That competition is officially for corporate resources and attention, but there have been plenty of instances of offline-online conflicts in the stores during deployments.

As the Journal reminds us—citing Internet Retailer stats—Walmart has yet to even get close to catching up to Amazon. In 2012, the paper said, Amazon posted Web sales of $61 billion, compared to an estimated $7.7 billion for Wal-Mart.

The supply chain, which ironically has been the weapon Walmart has historically used to destroy legions of physical retail rivals, is where Amazon has an amazing edge. There is no strategy that makes sense for Walmart's E-Commerce group to create its own duplicate supply chain. It really needs to leverage the physical chain's supply chain, which means absorbing its costs.

What Walmart can do—and is indeed trying to do—is flip the model. It wants to draw people into its stores, where the Web will provide infinite inventory. This requires a huge rethinking of the store experience. Given Walmart's borderline self-service environment—where most, if not the overwhelming majority, of shopping trips involve no interactions with associates—it's going to be difficult to guide shoppers into a different kind of experience.

Mobile is the likely answer. The more shoppers look to their mobile devices—and, hopefully, the Walmart app they have already installed—to act as a virtual associate guiding them through their trip, the easier it will be to integrate online into the purchase plans.

In short, Amazon has a single-minded, focused online-only supply chain that Walmart simply can never match. But Walmart has thousands of stores—in almost every neighborhood—that Amazon can never hope to match.

Amazon is pushing its same-day delivery approach—for that matter, so is Walmart—as a way to combat the immediacy of the local store.

That may push some sales, but it can never truly compete with a well-stocked convenient store with pleasant and helpful associates. (OK, that last part has never been Walmart's store strength, but still…)

This will come down to whether Amazon or Walmart (sort of a Goliath Versus An Even Bigger Goliath story) will leverage its advantage better. Walmart's technology deployments and acquisitions make it look promising, but it's efforts thus far at getting its stores to be anything beyond local stores—remember its disastrous local Facebook site effort?—have been lackluster.

There's also the question of what the objective of Walmart online should be. Should it be the world's dominant commerce-Commerce site? Or would its efforts be better spent on boosting revenue and profit for all of Walmart? Might it deliver more profits by having a modest online site and using technology to boost store profits?