Walmart and Amazon.com: Unstoppable?

Walmart and Amazon.com have been the leading lights of retail innovation since before the 21st century began. Each company has offered customers a wider selection of products at better prices than ever before, creating astonishingly convenient shopping experiences, one predominantly in physical stores and one exclusively online.

In retrospect the success of Walmart and Amazon.com looks inevitable. It's easy to miss the fact that they've followed -- not created -- larger scale economic trends. Let's look at a few in more detail.

Economies of Scale and Scope

America may have invented the chain store. Starting in the 1950s, with hotel chains and McDonald's restaurants, entrepreneurs realized the potential to expand in scope -- with locations dotted along the highways and cities of the US -- and in scale -- obtaining bulk discounts on massive orders and setting up centralized supply centers. David Halberstam's excellent history, The Fifties, details the rise of the great chains.

Walmart and Amazon.com have taken the scale to all new levels. In so doing, they are continuing a decades long trend in business.

Outsourcing and Hollowing Out

Unionized labor lost its hard-earned hold in America, and one could do worse than pin the date to 1968, near the peak of 20th Century salaries and benefits for working class Americans. Precisely because it was the peak, liberal commentators often choose that baseline to declare that real earnings for most Americans have declined. If they'd chosen an earlier year, 1968 would look like an historical aberration.

Walmart has famously fought against unionization in order to secure cheaper labor, and has sourced its products from the lowest priced producers in less regulated countries with vastly lower incomes and living standards. As in the broader US economy, a few executives at the top earn out-sized pay, while the most familiar workers standing at the cash registers take home close to minimum wage.

Amazon.com represents the opposite end of the hollowing out, with a highly skilled workforce of software engineers powering the logistical engine of customer service. A substantial number of laborers work in the warehouses and fulfillment centers, but they constitute a much smaller share of the total than at Walmart.

Meanwhile Walmart also has highly skilled workers in its offices, running all aspects of operations as well as Walmart.com. They're evidence of the necessity of education and skill to escape from a low wage life.

IT and Automation

Both Walmart and Amazon.com have seized on every advantage of information technology in order to optimize their operations, warehouses, supply chains, billing systems, payments, human resources, catalogues, merchandise selections, pricing, discounts and promotions.

Economist Tyler Cowen believes the biggest advances have already been made, both in outsourcing and automation, a thesis he advances in The Great Stagnation. For an opposing viewpoint, see Race Against the Machine. The authors contend that with computing power doubling every 18-24 months, we haven't seen anything yet.

As with economies of scale, economies of scope, outsourcing and hollowing out, Walmart and Amazon.com have benefited from larger trends. They've seized on them and led the way, certainly, with a host of innovations that have given them a long lasting advantage. But the key trends were already underway, with or without them.

Implications for the Future

For decades to come, rising incomes in developing countries will increase the number of people who can consume from mega-retailers. As economies reach the level of the US and Europe,  economies of scale and scope will reach their limits, as income growth slows in accord with macroeconomic models like the Solow-Swan growth model.

The benefits of economies of scale and scope will not vanish. Small stores may not be coming back, except as higher priced boutiques and narrowly focused outlets catering to the educated economic elite.

Likewise, the continued hollowing out of the economy favors mega retailers. For many types of products, purely virtual storefronts like Walmart.com and Amazon.com will have an advantage even after consumers start paying sales tax, provided shipping remains cheap, and purchases are not urgent. Services like Amazon Prime address two of those caveats.

Contra Tyler Cowen, I do not believe the cost reductions from IT and automation have already been exhausted. Walmart can further hollow out its workforce by aggressively pushing self-checkout, eliminating the need for cashiers. In the warehouses of Amazon.com and Walmart both, robots already stock the shelves. With continued advances in robotics, the need for low-skilled human labor likely can and will continue to dwindle.

As a result, Walmart may eventually reduce its workforce from 4 million to half that number -- while continuing to increase its sales. That's news that won't thrill the critics of big box stores, gutted main streets and low-paying retail jobs.

Innovation and Economic Trends

Behind every great innovation is a huge economic trend. Sometimes the trends are so world-changing that it's easy to focus on them and miss the many innovations that make some companies, like Walmart and Amazon.com, the winners. Their competitors -- whether the small companies they've driven out of business, or the large chains they've out-performed -- have failed to innovate as well.

Big businesses are built on big trends as well as innovation and execution.

Related posts:
Amazon.com Expands Robotics

Thanks to Bindu Reddy (@bindupreddy), CEO of MyLikes, for the inspiration for this post.