Amazon/Wal-Mart pact may show road to success

A few weeks ago, I wrote about options for the king of pure-play consumer e-commerce, Amazon.com Inc., to get into the physical-store business. During the past few months, the retail industry has come to realize that those businesses that offer multiple channels -- physical stores, Web sites, and catalogs -- have significant advantages over single-channel businesses.

Customers of pure-play companies can't take their purchases back to the store and return them. They can't just run out to the store to buy something they need right now. And the companies cannot use other channels to promote their Web business.

Although pure-plays have yet to dive into the physical-store business, the idea of physical stores has become more appealing to executives at those companies.

So it's not surprising to hear an unconfirmed news report that Amazon.com is looking to partner with an established physical-store business. Last week a news report out of the United Kingdom stated that Amazon.com is engaged in secret talks with Wal-Mart to form an alliance.

According to the published report, Amazon would become Wal-Mart's e-commerce supplier, offering the discount brick-and-mortar retailer access to Amazon's years of online sales and fulfillment expertise.

In return, the report stated, Amazon would gain a presence in Wal-Mart's thousands of physical stores, a cash sum, and a percentage of sales made through Wal-Mart.

Such a deal makes sense for Amazon. After all, it created a similar alliance with Toys "R" Us. Amazon has experience partnering with physical-store companies.

In a physical world full of bookstores, Amazon could only benefit from a presence in retail stores. The company could also reach new segments of customers: those who shop at Wal-Mart but not at Amazon.

But does the Amazon deal make sense for Wal-Mart? Sure, the online arm of the giant discount retailer has endured some bumpy times. The company shut down the site for a few weeks last fall to revamp the front end and incorporate the commerce engine it had gained in the acquisition of another troubled dot-com earlier in 2000. Some observers speculated that any site shutdown so close to the holidays was a mistake.

When the site relaunched, however, it was greeted with rave reviews by industry observers and consumers alike. Site traffic grew astronomically after the redesign -- by 570 percent, according to Nielsen//NetRatings. But even more importantly, Walmart.com raised its conversion rates significantly -- from about 1 percent to 5 percent, according to Nielsen// NetRatings. In online retail jargon, conversion rate refers to the percentage of site visitors who actually buy something. Five percent is a very high number for online retailers.

Yet just a week before news of the secret Amazon/Wal-Mart talks surfaced, Walmart.com announced that it would lay off 24 of its 250 employees. Perhaps the layoffs and word of the secret Amazon talks signal some other underlying problems. Maybe fulfillment has proved difficult. Or maybe the staff is having a tough time figuring out which products yield the highest margins. Or maybe running the Web site has turned out to be a much more expensive proposition than Walmart.com executives envisioned.

But even if that's true, does it make sense for Walmart.com to cut its losses by outsourcing to Amazon? What about all the investment it has made to redesign the site, migrate to a new commerce platform, and take a few weeks off from selling to do that? Those strategies have proved effective for sales.

Reports from the London Sunday Times state that the Amazon/Wal-Mart deal could be announced in the next six weeks.

Until that happens we can only speculate about what may be wrong behind the scenes at Walmart.com.

Jessica Davis is an editor at large in InfoWorld's news department. Contact her at jessica_davis@infoworld.com.

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