Two of the biggest retailers are raising the bar for what it means to be a true one-stop-shop. While some companies have downsized their inventories and closed physical locations, retail giants, namely Amazon and Walmart, are giving customers a broader array of both products and services.

Walmart reigns supreme in brick-and-mortar retail, while Amazon dominates e-commerce. Both retailers set themselves apart by doing more than selling merchandise. They also generate revenue from categories like financial and clinical services, third-party sellers and subscriptions.

“Both Walmart and Amazon have gotten to such a point where they’re both, not only credible, but they have developed a huge amount of trust, amongst their followers and their consumers,” said Arthur Dong, teaching professor of strategy and economics at Georgetown University’s McDonough School of Business. “I think they’re just scratching the surface now.”

Amazon and Walmart have increasingly produced revenue streams outside of their core businesses. In recent years, both companies have been building out their ecosystem designed to win more of their consumers’ spending dollars.

Walmart opened a “Walmart Health center” in its Dallas, Georgia store, and about 100 in-store veterinary clinics in 2019. And just last month, the Bentonville, Arkansas-based retailer announced plans to launch a fintech startup in partnership with Ribbit Capital. Bloomberg recently reported that Walmart hired two senior bankers from Goldman Sachs to operate the startup, moving the retailer closer to becoming a financial service provider.

President and CEO Doug McMillon said in an earnings call a few weeks ago that Walmart is in the early stages of building a new customer-focused business model, built to thrive in the next couple of years. “Over time, we believe the big winners in retail will be those that deliver a unique interrelated ecosystem,” he said.

Meanwhile, Amazon, which started as an online bookstore, now sells almost everything and more. It’s also a cloud provider, has a collection of subscription services and collects commission from third-party sellers.

“You have to consider the fact that both companies are huge data companies, and that we all know that the future of retail is the fact that you have information on all your consumers [and] what their buying preferences are,” Dong said about Walmart and Amazon. “That is the, in a sense, the oil and gold in the decades to come.”

Following the money

The pandemic has altered where and how retailers invest their money. Dong said some retailers have now entered the service space due to its low operation cost, unlike selling goods that require fulfillment and shipping fees.

Retailers are “going to pick and choose their spaces wisely,” he said. “There are certain services that they certainly can’t really deliver and deliver well.”

Even so, Dong said the retail sector will continue to drive consumer purchases, citing that personal consumption expenditures still account for about two-thirds of the U.S. economy. And based on Amazon and Walmart’s financial reports, that seems to be the case.

Caroline Jansen for Retail Dive; Source: company documents

Amazon has significantly expanded its business over the last couple of years. Its latest annual report shows that online store sales remain the bedrock of Amazon’s business with about $197.35 billion in net revenue by the end of 2020 — that’s a little over half (51.1%) of its total sales. Its physical stores earned the lowest in 2020 at $16.23 billion or 4.2%.

Its cloud computing business, Amazon Web Service, led previously by soon-to-be Amazon CEO Andy Jassy, was responsible for over $13.53 billion or 59.1% of its operating income in 2020. With $45.37 billion in annual revenue, AWS has a year-over-year growth of about 30%.

On the other hand, Walmart does not break out the individual cost of its business ventures.

For fiscal 2020, Walmart’s grocery and general merchandise categories were still the foundation of its net sales at $190.55 billion (55.9%) and $109.60 billion (32.1%), respectively. Meanwhile, its health and wellness category — which includes its pharmacy, optical and clinical services — drove $37.51 billion in net sales in the same year.

Caroline Jansen for Retail Dive; Source: company documents

Some pandemic-driven initiatives have born fruit. Only five months after the launch of Walmart+, the retailer’s subscription service, between 7.4 million and 8.2 million customers were willing to pay $98 a year for its perks, according to Consumer Intelligence Research Partners’ estimates. That means that the subscription service could generate up to $803.6 million a year in revenue.

Forming partnerships is a popular method retailers use to enter markets they don’t specialize in. But in Amazon and Walmart’s case, their goal may be to build these businesses in-house, said Jon Reily, president of Dentsu Commerce.

“They move away from their core business of selling products to being their own manufacturer,” he said. “The recurring theme of all of this is that all retailers are trying to expand, not necessarily to find new ways to serve their customers, but to find new ways of finding revenue.”

When retailers don’t rely on third-party firms, it insulates them from the economic woes affecting the industry, said Reily. It protects them from the long-term and short-term possibilities of their partner going bankrupt or acquired by a competitor, he said.

But whether this strategy is financially sustainable “remains to be seen,” he said, adding that it may not pay off anytime soon.

“That’s not an easy thing to do, and it’s expensive,” he said about the risks of entering new business categories, adding that it’s hard to attribute how much value it brings to the company. “You play in the market knowing that it is working but you can’t really draw a line on an Excel spreadsheet and say this dollar is responsible for these dollars.”

Caroline Jansen for Retail Dive; Source: company documents

Setting the trend

The pandemic has proven that firms need to re-evaluate some retail concepts and strategies, experts say.

Because they have more financial wiggle room and a larger consumer base, retail giants are able to experiment and potentially set trends for their smaller counterparts.

Diversifying away from their core retail business naturally starts with larger retailers but others may soon do the same in some way, said Meyar Sheik, Kibo’s chief commerce officer and Certona founder. Smaller brands likely won’t operate on the same scale as industry giants, but the bottom line is to get a higher share of their customers’ wallets, he said.

For smaller retailers, following the playbook at Amazon or Walmart of offering a wide assortment or adding services makes little sense, Sheik said. “It’s really about valuing your customer base, understanding [and] knowing them.”

That alone is enough of a challenge. A recent survey from Forrester showed that only a few brands can anticipate and effectively respond to their customers’ needs. The report found that too many brands still rely on manual data collection methods, and in most cases, they don’t update that customer data in real time.

To create an effective ecosystem, retailers must establish an effective team to gather data and market research, said Tim Derdenger, associate professor of marketing and strategy at Carnegie Mellon University.

“Data is the number one driver of what enables the ecosystem slash platforms to scale, and to provide value back to the end users,” he said. “If you have terrible data, you won’t be able to facilitate an interaction that provides value for both end-users.”

Risk of this strategy

The idea of becoming the go-to store for all essential products is not a new concept. However, many of those businesses that tried to capitalize on a broad variety of markets are now downsizing and becoming more niche.

“Oftentimes, when these companies try to do too much in the depth and the breadth of what they’re doing, you start to dilute actually your focus,” said Dong. “A lot of it has to do with whether or not you have the human capability and the management capability to keep up with all the various activities that you want to engage in — all you’re doing is adding complexity.”

About a decade ago, Sears Holdings also offered a large array of products and services. At that time, it had more than 3,900 stores under its name and it owned a plethora of brands and companies — from credit cards to insurance. But in recent years, it has slowly liquidated its footprint.

Other retailers, once commended for their size and scale, have also downsized. Macy’s announced 125 store closures a year ago, and while J.C. Penney has exited bankruptcy, it moved to close 144 stores in the process.

“It’s a little bit dangerous, and shareholders have a right to be skeptical when companies try to overstep and overreach,” Dong said. “Generally, there’s not a lot of history, and if there’s anything that’s going on in modern business history, that is, it’s the big that are getting smaller.

Source: Retail Dive