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Amazon and Walmart sell Supply Chain

The actual product Amazon (AMZN) and Walmart (WMT) sell is supply chain. Or more precisely, access to a supply chain.

I discerned this reality because I needed a ream of copy paper. The two discounters in my town, Family Dollar, a Dollar Tree (DLTR) subsidiary, and Dollar General (DG) sell copy paper. However, there was no copy paper on the shelves of either store.

Yet, I could order over a ream of copy paper from Walmart.com (WMT) in less than a minute. Why? Walmart’s supply chain is far bigger and far more efficient than those of Dollar Tree and Dollar General.

Walmart (NYSE: WMT), for example, operated 195 distribution centers in the United States in 2020, MPVL International estimates. Those centers contained 143.108 billion square feature of storage and processing. Additionally, Walmart plans seven more distribution centers with 10,060 square feet in space.

Why You Cannot Compete with Amazon and Walmart

In comparison, Amazon (NASDAQ: AMZN) operates 110 active fulfillment centers in the United States and 185 fulfillment centers globally, FBA Help estimates. Consequently, FBA estimates express shipments can arrive at an Amazon fulfillment center in two to 10 working days.

In contrast, Dollar General (NYSE: DG) operates 28 distribution centers and Dollar Tree operates 25 distribution centers. Hence, Walmart’s supply chain is almost 10 times larger than Family Dollar or Dollar Tree’s. In contrast, Amazon’s supply chain capacity is about four times larger than Family Dollar or Dollar Tree’s.

Moreover, Walmart can magnify its supply chain by pulling merchandise from its 4,743 US stores. Statista estimates Walmart operates 3,570 supercenters, stores large enough to function as fulfillment centers, in the United States.

Consequently, I do not think Family Dollar, Dollar Tree, and other smaller brands can compete with Walmart and Amazon. To explain, Family Dollar and Dollar Tree lack the supply chain capacity to counter Amazon and Walmart.

Dollar General and Dollar Tree are not small companies. In fact, Dollar Tree claims to operate over 15,000 stores in the United States and Canada. Moreover, Statista estimates that Dollar General operated 16,368 stores in 45 states in March 2021.

Why Low Prices are Useless

Yet these companies cannot compete with Walmart and Amazon’s prices. Interestingly, Dollar Tree and Dollar can easily match Walmart and Amazon’s prices. However, both stores have difficultly keeping their shelves stocked.

A low price is useless if the product is unavailable. I find dollar stores often offer lower prices than Amazon and Walmart, yet I end up shopping at Amazon or Walmart because those retailers have the items in stock and offer larger quantities. Moreover, both Amazon and Walmart offer enormous selections.

Convenience, availability, selection, quality, and quantity often trump price for many shoppers. Walmart and Amazon outsell Family Dollar and Dollar General because they offer larger quantities of high-quality items at similar prices. Moreover, both Walmart and Amazon offer the convenience of having the item delivered to your porch.

How Walmart beats Dollar Tree

Additionally, Walmart’s prices are often better than Family Dollar’s. For example, the ream and a half (750 pages) of copy paper I ordered from Walmart cost $6.44 with free delivery.

Hence, Walmart can sell more paper at a lower price and provide that paper to me in a more convenient manner. IE the FedEx guy will drop it off at my house.

Therefore, I have to wonder how retailers such as Dollar Tree and Dollar General can survive. My suspicion is that those retailers will either collapse or get absorbed by larger organizations such as Kroger (KR) or Walmart (WMT).

How Kroger Will Kill Many Retailers

My prediction is that only enormous retailers such as Kroger and Home Depot (HD) can compete with Amazon and Walmart. Notably, Kroger and the Ocado Group PLC (LON: OCDO) are building next generation Customer Fulfillment Centers (CFC) that use vertical integration, machine learning, and robots to pull and pack delivery orders.

Kroger opened the first CFC in Monroe, Ohio, in April, a press release reveals. Each CFC will use over 1,000 robots to pull groceries and giant 3D grids to manage the process. Each CFC can support grocery delivery in a 90 square mile area, Kroger claims.

Kroger has plans for 10 CFCS throughout the United States. Hence, Kroger could deliver groceries in areas of up to 90 square miles. Kroger will service those areas with refrigerated vans that can carry up to 20 grocery orders.

Moreover, Kroger could ship dozens or hundreds of orders from a CFC to its stores. Kroger vans or customers could pick the grocery orders up from the stores.

Hence, Kroger will increase the pressure on chains such as Dollar General and Dollar Tree and hasten their demise. The pressure will increase because Kroger is dramatically upgrading its supply chain.

Supply Chain is the Secret to Retail Success

One strong that possibility, I foresee, is that Kroger will start buying smaller weaker chains, such as Target (TGT) as its supply chain becomes more efficient. Hence, Kroger will survive and thrive because its management understands that Walmart and Amazon’s product is the supply chain.

 

A danger Target faces Kroger expanding its inventory to include dry goods such as clothing, hardware, and appliances. Notably, Kroger already sells many of those items in its Marketplace super centers.

 

Thus Kroger could offer home delivery groceries and dry goods such as office supplies, housewares and clothes. Another possibility is that Kroger could deliver hot meals made in its stores as well as groceries and dry goods.

 

On the other hand, brands such as Target, Dollar Tree, and Dollar General could collapse because their management concentrates on price rather than supply chain. Retailers that focus on service such as Macy’s (M) and Nordstrom (JWN) rather than supply chain face even greater pressures.

 

The secret to retail success in today’s economy is supply chain. Unfortunately, only a few retail managers grasp that secret. Hence, many retailers face doom because their management does not understand supply chain.

 

Smart investors will seek retailers that are good at supply chain. Hence, the $3,345.01 Mr. Market paid for Amazon (AMZN) on 17 June 2021, is rational.

Originally published at https://marketmadhouse.com on June 17, 2021.