July 2, 2012, 10:17 AM

Publisher's letter: When will Amazon outsell Wal-Mart?

When will Amazon outsell Wal-Mart?

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I like to think of our economy's century-defining transition—from a physical process to a digital one and from store-based retailing to e-retailing—as a battle between the Titans of Retailing: Wal-Mart Stores Inc., which dominates store sales, and Amazon.com Inc., which dominates web retailing.

At first blush, it seems the two do not compare at all. In its fiscal year 2012 (ended Jan. 31, 2012), Wal-Mart's global sales totaled $444 billion, making it the world's largest retailer by revenue. If Wal-Mart were a country, its economy would be the world's 28th-largest, just ahead of Austria. By comparison, Amazon finished 2011 with sales of $48 billion—about one-tenth of Wal-Mart's sales.

Yet this matter of retailing dominance is not something one measures according to where these companies are today. It's a matter of how fast they are growing into the future. In the last 10 years, Wal-Mart grew at a compound annual growth rate (CAGR) of 8.24%. Amazon, by comparison, has grown at a 31.4% CAGR for the last 10 years—almost four times as fast as Wal-Mart.

In Wal-Mart's defense, it's far harder for the world's largest retailer to grow at an Amazon rate because it's growing from a much larger base. The best small companies typically grow faster than the best large ones for that very reason.

But what do we see if we look at both of these companies when they were small? That would have been when they each went public. In the year before it went public in 1970, Wal-Mart generated total sales of just $31 million. When Amazon went public in May 1997, it was reporting 1996 sales of only $16 million.

At the end of its first 15 years as a public company, Wal-Mart had stunned the retailing world by generating sales of $6.4 billion—easily the fastest growth rate ever recorded by a retail chain. But it pales in comparison to Amazon's growth in its first 15 public years. During that period, Amazon grew from a standing start to $48 billion in annual sales—fully 7.5 times the size Wal-Mart reached during its first 15 years as a public company.

That brings us to projecting how these two titans of retailing will grow during the next 15 years. It's reasonable to project Wal-Mart's future growth at 9% per year, slightly faster than its actual growth rate in the last 10 years. Amazon, however, could be expected to grow at 30% annually during the next 15 years. It grew 31.4% per year in the last decade and at a 35% CAGR since 2007, even as the U.S. economy weathered the Great Recession. Furthermore, in its second 15 years as a public company, Wal-Mart grew at a 23.6% CAGR, a rate equivalent to 55% of its annual growth during its first 15 public years. If Amazon's growth rate slows by the same amount in its second 15 years as a public company, it would grow at an astonishing rate of 39% per year.

If these comparative 15-year growth projections are accurate, Amazon becomes a larger company than Wal-Mart in 2023, just 11 years from now. This may not happen, of course, but it is where the trend lines are leading. And you can bet this is exactly the scenario Amazon wants to happen. Its strategy does not envision playing second fiddle to Wal-Mart or anyone else. Wal-Mart's challenge is to prevent this forecast from being realized. But in order to do that, the Titan of Store Retailing must make online retailing its top priority, because stores are not the path to growth in retailing in the 21st century.

Jack Love, Publisher

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