QUESTION: Begin by preparing your SWOT analysis to get a core understanding of where Amazon and Walmart were as companies in 2017.

AMAZON AND WALMART ON COLLISION COURSE (CASE A)

AMAZON AND WALMART ON COLLISION COURSE (CASE A) On 20 February 2018 Walmart made history by becoming the first corporation to record annual revenues of half a trillion dollars, almost at par with the GDP of the 25th largest economy in the world. Its e-commerce sales were also on a promising upswing, having grown by 63% in 2016 and 44% in 2017. Despite these successes, the company's stock price dropped by 15% in the first quarter of 2018 as investors womed about stagnant sales and declining operating margins. In contrast, Amazon, the largest online retailer world-wide, at one-third the size of Walmart in terms of revenues, and less than 2% of Walmart's operating income in 2017, had recorded double-digit growth in sales over the last 20 years. Its stock price had risen by 24% over the first quarter of 2018 On 31 March 2018, Amazon's US$700 billion market capitalisation dwarfed the US$262 billion market value of Walmart (refer to Exhibit 1 for Amazon and Walmart 2017 financials). As two of the most successful retailers in history, Amazon and Walmart had transformed the retail industry by redefining customer orientation, supplier-retailer relationships, and the use of information technology. Both retailers had tremendous power over their suppliers, and leveraged it effectively to offer prices as low as possible. Historically, the two did not compete directly because of their differing focus. While Walmart dominated the shrinking' brick & mortar retail that comprised 90% of the US retail industry, Amazon led the growing e-commerce sector that contributed the remaining 10% in 2018. The unique value chain networks of the two retailers were optimised to enable their dominance of the respective offline and online retail channels in the US. In 2016, 95% of all US consumers had shopped at a Walmart store, and 42% had shopped at Amazon. However, the changing customer preference for omni-channel retailing, an integrated platform that seamlessly comprised digital and physical retail, was compelling the two companies to making substantive investments for developing capabilities and acquiring resources in what was hitherto the other's domain. Walmart hoped that online expansion and ability to leverage its massive physical network (offering flexible delivery and pick-up/retur services on online orders) would fuel its growth. Amazon, on the other hand, was driven towards establishing a brick & mortar presence in order to sustain its high rate of growth. The inherent limitations of an online model had so far hindered Amazon's ability to penetrate deeper into the two large retail categories of grocery and apparel that favoured a hybrid approach. Consequently, every step towards omni-channel by the two retail giants saw them increasingly confront each other head-on. Would this race towards an integrated retail platform make Walmart and Amazon clones of each other, or would one emerge as a clear winner? The challenge for Walmart would be to embrace the lower-margin online model while retaining investor confidence; and for Amazon it would be to establish a capital-intensive physical footprint without eroding its marginal profitability any further. Would their respective existing world-class capabilities help or hinder them in effectively evolving towards an omni-channel model? And, how could other US retailers survive in the face of what some saw as a knock-down, drag out clash of the two retail titans, with no end in sight? The Growth of E-commerce In 2017, e-commerce sales worldwide grew to US$2.3 trillion, a 24.8% increase over the previous year, and made up 10.2% share of the total retail sales (US$22.6 trillion). Over the next four years, through 2021, the annual average growth rate of global retail sales was expected to be 5.3%, while that of e-commerce was estimated to be 20%, signifying a continued increase in the share of online sales. The US had exhibited rapid growth in e-commerce, with the share of online sales in the country's total retail projected to grow from 10% in 2017 to around 14% (US$779.5 billion) in 2021 (refer to Exhibit 2 for details on growth of e-commerce over 2001-2017). E-commerce in the US was predominantly led by Amazon, whose online sales were not only the highest in the country, but in 2016, more than the online sales of the next 49 retailers put together (refer to Exhibit 3 for details on shoppers preferred online platforms).* A 2018 survey indicated that US consumers, when shopping online, started the search most frequently on Amazon (54.3%), Google (14.5%) and Walmart (5.5%) Shoppers' preference for online stores because they were open 24/7 (72%), saved time (71%), offered larger selection (63%) and lower prices (50%) led to the shrinking of the brick & mortar presence. In 2017, more than 8600 stores were shut down in US (JCPenney, Macy's, Sears, and Kohl's closed 15 to 20% of their stores) with at least 3800 more to follow in 2018 (refer to Exhibit 4 for financial performance of top US retailers). Many traditional retailers such as Walmart, Nordstrom, Target and Gap had adopted the digital model and embarked on an omni-channel fulfilment strategy by leveraging their store locations and in-store inventory. Despite its seemingly wide-spread presence, the e-retail penetration differed significantly across product categories, with music, videos, books and magazines commanding the highest online share at 49-55% of the total category sales, followed by consumer electronics at 25-30%, apparel at 18- 20%, and the grocery at only at 1-2%. Despite their low online penetration, apparel (around US$328 billion) and groceries (approximately US$1.5 trillion) were two of the largest categories in the US. Observing this discrepancy, Jeff Bezos, founder and chief executive officer of Amazon, had remarked early in Amazon's history: "In order to be a two hundred billion dollar company, we have got to leam how to sell clothes and food."*30 E-commerce for Grocery The US grocery market was expected to grow at 3.6% per annum to reach a forecasted US$1.7 trillion in 2022." In 2017, the bulk of grocery sales took place via customers' weekly trips to physical stores. According to an online survey, 97% customers preferred to buy in stores, with only 18% buying online too. 2 Yet online grocery sales were expected to grow at CAGR of 18%, until 2022 (refer to Exhibit 5 for the share of grocery market by channel type).13 For the consumers shopping online, freshness and quality of the food items as well as prices were paramount, followed by timely and frequent availability of delivery. The grocery basket, while large in terms of volume and weight, had a relatively low dollar value. The average order size for someone purchasing online groceries was US$82 in 2017. The low margins, average order size of the industry and the nature of grocery products in addition to consumer price sensitivity and delivery preferences led to significant economic and logistic challenges for retailers in their efforts to offer an attractive, but profitable, online proposition. Yet, given the size of the opportunity, retailers were continuing to experiment with alternative delivery models in their search for a sustainable model for online grocery retail. Although belated, the leading grocery retailers in the US had significantly ramped up their investments to provide customers two key online grocery fulfilment models: the click-and-collect model, whereby the shoppers picked up groceries from collection points(e.g., neighbourhood stores), and the home-delivery model that provided the last mile connectivity. For last mile connectivity, the two favoured models were ship from store and ship from warehouse. While retailers with extensive physical store network usually relied on ship from store and in-store picking by employing additional staff, Amazon invested in developing shipping from warehouse and automated dark store picking." Traditionally, the major operating costs for offline retailers were staff, rental, utilities, and advertising. These costs were relatively fixed in the near term. Shoppers who came to the store bore the costs of assembling their basket from the shelves and transporting it home. In contrast, for online orders with home delivery, the retailer needed to pick, assemble and deliver the order. Estimates varied, but picking and delivering to homes cost the retailer, on average, US$ 10-15 per order. The fulfilment costs varied with the mix of products comprising the order. For example, large bulky items or frozen items were more expensive to deliver for the retailer. Therefore, while both multipack carbonated drinks and fresh fish yielded similar high gross margins for the retailer, the fulfilment costs for the bulky carbonated drinks multipack were considerably larger. Similarly, while yoghurt and frozen vegetables generated relatively smaller gross margins for the retailer, the cost of handling and shipping the latter was higher. As someone had to be home to receive the order, customers preferred either faster delivery (e.g., same day or within 4 hours) or certainty of delivery (e.g., a predefined one-hour slot within a few days). The more retailers accommodated customer delivery preferences, the higher the order fulfilment costs were. Faster delivery and promised delivery slots made route planning less efficient for delivery trucks and also had a detrimental impact on the utilisation of picking staff. Hence, it was not surprising that retailers with a large physical network preferred their online shoppers to click and collect from the store. Some retailers experimented by offering pick up discounts to consumers who ordered online or increasing prices for some items purchased online. For example, at Walmart, a bag of tortilla chips sold for US$3.83 if delivered, but only US$1.74 if picked up at the store. 15 After consumers sold for US$3.83 if delivered, but only US$1.74 if picked up at the store. After consumers complained about the differential pricing. Walmart began displaying on its website both the lower in- store as well as the higher online prices if delivered at home. By 2018, to cover the cost of fulfilment, most online retailers charged a fixed fee per order and specified a minimum order size. Some online grocery retailers also limited the number of bulky items (e.g., maximum 12 one litre bottles of water) per order. Several grocery delivery options were being trailed, which variously combined, minimum order quantity, fixed fee per delivery, and subscription models (refer to Exhibit 6 for grocery delivery options). Even consumers who preferred the convenience of shopping for groceries online tended to dislike paying the shipping charges. Typically, higher delivery charges increased the average order size as consumers were able to justify the shipping fee for larger orders, but reduced the frequency of orders and the size of the target market. E-commerce for Apparel In 2017, the US apparel market at US$328 billion was the largest worldwide, and poised to grow annually by 2.3 % over the next three years. Online sales were expected to grow at a much higher rate, increasing their share in total retail sales of apparel from 18% in 2017 to 24% in 2021." Unlike groceries, the apparel market's high profit margins, non-perishable nature, and high value- low volume ratio made it more conducive for the online model. The erstwhile big apparel players in the US - Walmart, Target, TJX, Kohl's, Macy's and Gap - faced a significant threat from e-tailing, and especially from Amazon (refer to Exhibit 7 for apparel sales of top retailers)". A 2017 survey indicated that about 25-30% of Target, Macy's and JCPenney's shoppers had switched some of their apparel spending to Amazon, and that nearly 24% of customers preferred to buy apparel online either on the brands' own websites or on Amazon (refer to Exhibit 8 for details on customers preferences for different retail formats and Amazon, and Exhibit 9 for the details on the types of apparel customers prefer to buy on Amazon).K.19 E-commerce sales of apparel did however present some challenges for retailers, including the inability to provide the shoppers a tangible experience whereby they could see the colours, touch the fabric, or try the gamment for fit, style and comfort . A survey indicated that 49% of all Amazon apparel shoppers bought from the e-retailer largely due to its lower prices and discounts.20 Another challenge was the significantly high retum rate of 30% in online sales, as compared to only 9% for in-store sales." Returns of online purchases often entailed customers having to go through a tedious process of repackaging the unwanted item, printing up a label, waiting for it to be collected and finally getting the refund. The time and the hassle involved in the process represented a paradox for e-tailing that was centred on the promise of ease, convenience and flexibility. For the retailers, not only did the returns increase the logistic complexity of their online operations, but also added considerably to the costs incurred. Since 62% of the customers preferred in-store retums, retailers with omni-channel presence were at an advantage. However, third-party services such as 'Happy Returns', a company that operated physical 'retum bars' in shopping malls, enabled customers to return items bought from e-commerce players, and collect refunds. Additionally, the e-tailers too aimed to facilitate the retums process by providing shoppers innovative, faster and easier alternatives such as Amazon offering lockers that could be used by shoppers for both pick up and return of items, or collection of returns from home fronts under its Prime Wardrobe initiative. E-commerce in general, and especially in grocery and apparel was also buoyed with the industry's move towards private label brands. Private label brands allowed the retailers (though both online and brick & mortar) greater margins, higher flexibility and the ability to innovate, and most importantly more control over the value-chain. Walmart: The Low Cost Leader23 Help people save money so they could live better. think one of the greatest strengths of Walmart's ingrained culture is the ability to drop everything and turn on a dime. * Sam Walton, Founder and Former CEO Sam Walton opened his first Walmart Discount store in Arkansas in 1962. Based on a low-price/high- volume business model, with a vast selection of non-perishables, it expanded into smaller towns and rural areas of the US. In the 1980s, Walton experimented with new store formats such as Sam's Club that served small businesses and individuals on a membership basis, and the Walmart Supercenter that combined a supermarket with general merchandise. By 1992, when Walton passed away, Walmart was recording net sales of US$44 billion, employed 371,000 employees across 1,928 stores and clubs, was present in more than 45 states across the US, and had gone international with its first overseas store in Mexico. Over the next twenty five years (1992-2017), successive leadership in the company continued with Walton's core philosophy of offering the lowest prices possible, minimising operating costs, and developing economies of scale. It drove a corporate culture based on frugality in which its employees as well as vendors were ingrained with the need to create efficiencies in operations to minimise costs, and pursued an 'inside-out" radial expansion strategy in locating its stores and fulfilment centres. Walmart had, from the onset invested heavily in technology. For example, RetailLink, its proprietary intranet that linked it with its suppliers, enabled immediate and transparent information sharing (inventory and sales performance data) between the suppliers and the company. Combined with a supply chain initiative called Vendor Managed Inventory (VMI) whereby manufacturers were responsible for managing their merchandise in the retailer's warehouses, Walmart managed to achieve almost 100% order fulfilment with the lowest distribution costs in the industry. The retailer also established strategic partnerships with most of its vendors based on 'long-term, high volume orders for the lowest possible prices'. Furthermore, Walmart's adoption of cross docking - the direct transfer of products from inbound trucks to outbound trucks - eliminated the need for storage and thus helped keep the inventory and transportation costs down while also considerably reducing the delivery time. Such practices enabled the company to imbibe an 'everyday low cost' (EDLC) philosophy and offer everyday low prices' (EDLP) to all its customers on a wide assortment of merchandise and services - a pricing strategy that was the cornerstone of Walmart's success. Promotions were relatively infrequent, averaging thirteen events annually relative to more than fifty at competitors. In grocery, Walmart enhanced its customer reach by expanding into smaller format stores such as neighbourhood markets (introduced in 1998) that were one-fifth the size of Supercenters. These stores primarily stocked food, were conveniently located near urban centres, and offered significantly lower pricing than the local competition. Additionally, with e-commerce taking off, the retailer entered the digital space in 2000 through the launch of its website Walmart.com for the American customers to shop online, and followed it up with a number of site-to-store' services that incentivised shoppers to buy online and pick up in stores. By the endof 2017, Walmart comprised 11,700 stores globally (serving 270 million customers a week across 28 countries), and employed a 2.3 million strong workforce. It reached a milestone with its total sales climbing to US$500 billion (y-o-y growth of 3%), although its operating income at US$20.4 billion declined by 10.4% over 2016 (refer to Exhibit 10 for Walmart's financial performance from 1998-2018). The company increased its dividend to the shareholders for the 456 consecutive year (refer to Exhibit 11 for stock performance over 1998-2018). Walmart US In the US, Walmart was the undisputed market leader, with its closest competitor Kroger clocking a third of Walmart's revenues (US$123 billion in 2017). By end 2017, it had 4761 stores and 597 clubs in the country that were located within 10 miles of approximately 90 percent of the US population (refer to Exhibit 12 for a breakdown of the stores based on format over 2013-2018). Its distribution network in the country, one of the largest in the world, comprised 157 centres (other than 30 dedicated e-commerce centres), a fleet of 6,100 tractors, 61,000 trailers and more than 7,800 drivers. Among the large assortment of products peddled by Walmart, groceries (perishables, frozen foods, beverages, dry groceries and non-perishable household and personal care products) accounted for the largest share at 56%, followed by general merchandise (entertainment, apparel, home furnishing, stationary, hardware, horticulture, etc.) at 33%, and health and wellness range (pharmacy, optical services, clinical services, over-the-counter drugs and other medical products) at 11%. Reinventing Retailing: Picking up the Pace of Change With limited success in e-commerce over 2000-2014, Walmart recognised the need to develop the essential e-capabilities it lacked. And to that end, since 2015 it increasingly reduced its spend on opening new stores and clubs, and instead focused more on e-initiatives such as online grocery, pick up towers, expansion of grocery delivery locations, technology and supply chain to facilitate an omni- channel model, and remodelling of existing stores to make them more customer-oriented (refer to Exhibit 13 for details on capital expenditure allocation). In 2016, Walmart acquired Jet.com, an innovative e-commerce company in the US, for US$3.3 billion, and retained its highly experienced leader, Marc Lore, as the CEO of Walmart's e-commerce business. Jet.com's access to a growing base of urban and millennial customers (400,000 new shoppers added every month, 25,000 daily processed orders) and a selective and distinctive assortment of merchandise (2400 retailers and brand partners), along with its expertise in technology that enabled it to reward customers in real time on bulk buying, were some of the strengths that Walmart sought to give itself a jump start in the domain. According to Doug McMillon-president and chief executive officer, If Wal-Mart were starting today and we were building an e-commerce business, some of the things that Jet designed into their approach would have been things we would have thought of and we would have wanted to do, and they've just done it from scratch Private-label Brand Portfolio Walmart, known for selling national brands at low prices, increasingly looked at growing its private label brands portfolio (especially for apparel and grocery) in order to drive customer loyalty and better margins. According to McMillon, given the level of competition, Having a private brand from a margin mix point of view and product-driven loyalty have become even more important than in the past.27 Besides, acquisitions of private brands such as Hayneedle in 2016, and Moosejaw outdoor apparel), ShoeBuy (Zappos-style shoe retailer), Modcloth (indie and vintage clothing) and Bonobos (menswear) in 2017 had helped Walmart expand its range of online apparel and accessories merchandise in order to include fashion, a category in which the retailer had struggled to make its mark in the past. Walmart also tied up with the department store operator Lord & Taylor, to offer their products on the Walmart website. Walmart's other successful private-label brands included Equate (health & wellness products), Great Value (grocery), and Sam's Choice (food products). It also rolled out Uniquely J (coffee, olive oil, laundry detergent and paper towels) which offered quality ingredients at low prices, with bold packaging to attract young customers. Some of the other introductions in its private apparel brands portfolio were Time and Tru (women apparel), Terra & Sky (plus-sized women's clothing), Wonder Nation (kid's clothing) and George (men's clothing). Beefing up the Last Mile Through the years, Walmart introduced a variety of online grocery services such as Walmart Pickup that allowed customers to order online and pick up at one of its stores, or Pickup Today that allowed customers to pick up their online orders at a store within four hours for free. In the former case, the order was serviced from one of the distribution centres, and in the latter, from the store itself. In 2017, the retailer allowed online grocery pickup at more than 1,100 locations, with plans to double the number by next year. To implement in-store picking, 18,000 employees as personal shoppers" had to undergo a three-week training program in order to pick the best produce and meats. As specialists, they were paid more than the entry-level workers. Walmart also installed pick-up towers near the entrance of many of its stores that served as vending machines for non-grocery online orders. These 16 feet tall and 8 feet wide towers allowed the customers to scan the barcode on the online order receipt or enter the order number), and collect their parcel in less than 45 seconds. By the end of 2018, Walmart planned to make the towers available across 700 stores and to 40% of the US populations For those customers who preferred home delivery, Walmart rolled out free shipping in two days for orders larger than US$35, without any membership fees (unlike Amazon Prime). To address the last mile connectivity' issue (considered to be the most expensive part of the fulfilment process) in a cost effective manner, the retailer enlisted its store employees to deliver online orders on their way home from work, for extra pay. According to Lore, Those same trucks could be used to bring ship-to-home orders to a store close to their final destination, where a participating associate can sign up to deliver them to the customer's house. In September 2017, Walmart acquired New York-based Parcel, a technology-based, 24/7 operation that delivered packages the same-day, ovemight and in scheduled two-hour windows. Leveraging Parcel's expertise, Walmart planned to deliver both general merchandise as well as fresh and frozen groceries to customers in New York City. And, to address one of the key customer concems associated with online grocery shopping, Walmart provided a 100 percent money back guarantee if the quality and freshness of the fruits and vegetables were not found satisfactory. Building on the Technical Prowess In addition to physically remodelling many of its stores - wider aisles, shorter shelving, new signs and flooring, interactive displays - Walmart recognised technology as a critical enabler for enhancing the customer experience. Set up in 2011, its technological arm, Walmart Labs, comprising more than 2,500 engineers, programmers and data scientists, carried out big data analytics (about 30 petabytes of shopping information) to inform business decisions, develop innovative solutions for search, supply chain and last mile issues, deliver operational efficiency by optimising business processes irrespective of the platform used, provide customers a seamless experience across different channels (digital, physical and mobile), and empower its employees through access to secure digital solutions. Walmart's mobile shopping platform was instrumental in creating an omni-channel experience at its physical stores. Inside the store, the Walmart mobile app, once tumed on, slipped into the store assistant' mode, providing shoppers access to up-to-date information about the products, where they were stocked in the store, how much their shopping carts would cost when they check out, and an automated checkout process. The scan-and-go feature allowed shoppers to completely bypass the checkout lanes in-store. They could simply scan the barcodes of their selected items on the mobile app, bag it and pay directly through the app. Besides, customers buying pharmacy products or availing money services could just order prescription refills or fill out the necessary paperwork from their phone after having entered their personal information in the app. The app enabled the customers to track the order status, view pricing, and manage pick-up details. Moreover, the express lanes in the stores for the pickup made the process even faster. Walmart also launched a simplified retum process through its mobile express retums service, whereby customers initiated the process of return on the app by selecting the online transaction and finished it at the physical store where they returned the item using the express lanes. The refunds were credited to the customer's account soon afterwards. The retailer also introduced personalised voice shopping (in partnership with Google) to offer hundreds of thousands of items that could be purchased by the customers by simply speaking on the mobile app or on the Google Express website. The company was also engaged in performing experiments with 3D printing and envisaged a time when small household items or replacement parts could be printed at home, in stores or at distribution centres. According to McMillon, We can begin to envision a whole new way of delivering customized products to customers when and how they need them." Walmart's concerted efforts towards building an omni-channel presence led it to achieve high growth rate in its e-commerce sales, recording US$11.5 billion in 2017. Its website offered close to 75 million SKUs (double of the previous year), and included Marketplace' that permitted online selling of merchandise by third parties. Amazon: The Everything Store 31 We continue to aspire to be Earth's most customer-centric company, and we recognise this to be no small or easy challenge. Jeff Bezos, Founder and CEO 2 Founded in 1997 by Jeff Bezos as a company that sold books online, Amazon expanded extensively over the years, and in 2017 retailed i7 product categories (143 sub-categories) that included electronics, music, toys, groceries, apparel, footwear, appliances, books and magazines, etc. (refer to Exhibit 14 for its bestselling product categories). In addition, it offered third-party retail seller services, retail subscription services, and Amazon web services, an on-demand cloud computing platform to individuals, companies and governments (refer to Exhibit 15 for the segment wise breakup of Amazon's total revenue). Over the two decades (1997-2017) e-commerce and Amazon shared a symbiotic relationship, with growth in one fuelling the other. As the number of people using the Internet in the US multiplied (from 40 million in 1997 to 287 million in 2017) and the online sales grew by almost 200 times (from US$2.4 billion to US$440 billion), Amazon's sales and stock prices too grew in equal measure (refer to Exhibit 16 for Amazon's performance over 1997-2017). In addition, the retailer enjoyed a robust free cash flow of US$8.3 billion to support further expansion and investment plans. From the very beginning, Amazon's key decisions and plans had been fimmly and consistently driven by a focus on developing long-term market leadership through customer orientation, rather than accruing short-term profitability - a promise that was reiterated every year to its shareholders. To this end, the retailer undertook many innovative steps to drive greater e-commerce adoption. In 1999, the company patented the one-click checkout system to help streamline online purchasing. In 2000, it launched Marketplace' and allowed third-party sellers on the platform. This helped the company expand the SKUs that sold on its platform to 5.5 million, and by 2017 to 562 million (the sellers included more than 300,000 US-based small and medium businesses). Of this, apparel, at 166 million items, comprised the largest product category available on Amazon. However, the real impediment to greater adoption of the online model was the cost of delivery and the delivery time. To overcome this bottleneck, in 2005, the company introduced Amazon Prime, a breakthrough service. Amazon Prime Amazon Prime was a fees-based annual subscription program that allowed the members unlimited free two-day delivery on a large number of items (more than 100 million different items in the US in 2017). Over time, Amazon added a host of other benefits to sweeten the pot, beginning with free access to a certain number of books, movies and music, and an unlimited cloud photo storage space, to positioning it as an all-inclusive package of streaming entertainment, e-lending and exclusive access to a growing stable of Amazon services and products. 9/28 In order to boost its share specifically in the grocery and apparel categories, Amazon introduced many prime services that significantly enhanced customer value. Its Prime Now' service provided members free two-hour delivery on a large selection of grocery items (25 categories at the time of launch in 2014, which were subsequently expanded). And, to facilitate trials during online clothes shopping, in 2017 it launched Prime Wardrobe that allowed shoppers to try clothes at home before paying. Members could order multiple items of clothing (up to eight items), keep whatever they wanted and send the rest back. They were charged only for the items that were kept. Shipping was free both ways, with the customers having the option to have the returns picked up from their home fronts. Prime redefined the industry's value-proposition by making faster shipping a core customer expectation. Furthermore, shoppers no longer had to place sufficiently large orders to minimise the delivery costs. According to Bezos, "Prime was an all-you-can-eat, physical-digital hybrid that members loved." By the end of 2017, the retail giant had more than 90 million Prime subscribers in the US, who spent on an average US$ 1,300 per year on the e-commerce site, almost double the USS 700 per year spent by non-members. Compared to 40% of the Prime members, only 8% of non- members spent more than US$1000 annually on Amazon (refer to Exhibit 17 for the amount of money spent by prime versus non- prime members). Moreover, these shoppers offered steady and predictable revenue streams. Private Label Brands In 2009, Amazon began its private label program by introducing batteries under its brand AmazonBasics. It quickly grabbed a one-third share of the category, which led to the launch of in- house brands across a range of product categories to help boost thin retail margins. Access to data on customers' product and price preferences helped Amazon develop its brands accordingly, and in some cases by simply mimicking the bestselling products in the category and selling at a lower price. Visibility into what consumers were searching for helped it understand gaps in the market and in its own assortment. For example, since Ralph Lauren was unwilling to list its polo shirts on the Amazon site, customers searching for them were instead presented Amazon Essential polos in twelve different colours at US$12 each. Amazon also had the ability to mine customer reviews to understand the pain points of the customers, such as a shirt fading after five washes. Amazon's private label business, with a portfolio of more than 100 brands, was estimated to be between US$10-12 billion in 2017 and anticipated to double over the next four years. Its in-house brands covered different price points. AmazonBasics included a wide range of home necessities from electronics accessories to office accessories, fitness equipment, travel accessories, home furnishings, pet accessories, kitchen tools and dinnerware. Some of its other brands were Amazon Elements (baby care & vitamins), Wag (dogfood), and Pinzon (bedding & bath). of best sellers across all clothing categories on its platform." Lark & Ro, the retailer's fastest growing fashion brand (90% growth over 2016) offered reasonable prices for commonly searched for items. Having grown by 25% in its apparel sales in US in 2016, Amazon was expected to become the biggest apparel seller in US by 2021 at US$62 billion in sales, overtaking Macy's at US$23 billion and TJ Maxx at US$26 billion 99,40 In 2017, it acquired Body Labs to gain the technology that created 3D models for shoppers for trying clothes online. To establish itself as a fashion brand, the retail giant also hired talent with experience in the fashion industry, advertised on fashion-centric platforms such as Vogue magazine, sponsored fashion events, offered premium designer names such as Zac Posen and Stuart Weitzman, and introduced new collections from celebrities such as Drew Barrymore and Dwyane Wade on its website. In addition, it enabled thousands of designers and artists to present their exclusive work on Amazon. According to a spokesperson of the company, Amazon wants to become the number one online shopping destination for fashion customers." Focus on the Last Mile and Physical Expansion Evidently, Amazon's ability to grow and drive its share further in product categories like grocery and apparel was contingent upon the retailers' extent of control and presence during the last mile of connectivity with its customers. Consequently Amazon made considerable investments towards developing innovative solutions for pick up, delivery and return of items services, and establishing a physical footprint in the domain through strategic acquisitions and partnerships with other players. By 2017, it had 330 fulfilment centres in US that exceeded 145 million square feet of space. Out of Box Services In 2000, Amazon introduced a locker system, installing self-service kiosks in public places, such as retail stores and office buildings, in the big cities in the US, for pick up or return of packages at a time and place convenient to the shoppers. Later, in 2017, the retailer extended this service by launching the hub locker delivery system for apartment blocks and other housing complexes so that residents could receive and pick up packages at flexible times. This 24x7 service obliterated the need for the shopper to be at home at the time of delivery, or the presence of a doorman or a concierge, hence allowing the retailer a certain amount of control over the logistics of the last mile delivery. Amazon also introduced the concept of Prime Air-a delivery service using drones (unmanned aerial vehicles) in 2013. Over the years, it set up development and testing centres in the US, the UK, Austria, France and Israel, and in 2016 made its first commercial delivery using a drone in the UK. However, unfavourable FAA (Federal Aviation Administration) regulations in the US had limited this initiative in the country. To reduce its dependence on third parties such as UPS and FedEx for making deliveries in the future, Amazon invested in building a US$1.5 billion cargo hub in 2017, and was soon expected to roll-out its services that delivered items from third-party sellers directly to customers, bypassing the traditional cars camins 2 Amazon Key was yet another innovative service proposed by the retailer, which enabled Prime members to receive and view the delivery being made inside their front door, when the customers were not at home. However, to do so, they needed to buy a compatible smart lock and a security camera specially made for the program. According to Rohit Shrivastava General Manager- Amazon Key, the customer benefits of the service extended beyond it being a delivery mechanism, It's a great service for busy families, you no longer have to worry about giving keys to service providers like house cleaners, instead you can give them their own code right from your Amazon Key App. Brick & Mortar Presence Amazon invested heavily towards creating an offline presence through a variety of access points in order to provide shoppers a physical browsing experience. For example, since 2015, it had opened 13 bookstores in addition to more than 40 pop-up stores across the US. According to Jennifer Cast, then vice-president of Amazon Books, We've applied 20 years of online bookselling experience to build a store that integrates the benefits of offline and online book shopping. However, the bookstores did not find resonance with the larger audience, generating negligible revenues for the retailer. The pop up stores housed an assortment of Amazon hardware products, and served a dual purpose. One, they aided the company in its marketing efforts to create and boost product awareness and drive sales of the devices which were no longer being stocked by retailers such as Walmart and Target. Two, the customer-product trials and interactions at the stores drove more traffic to Amazon's online store. In 2016, Amazon launched its treasure truck fleet and within two years it comprised 35 trucks across 25 US cities and 12 UK cities. The trucks carried select must-have' items and sold them at discounted prices. Customers could opt for the item through the mobile app, pay for it and fix a time for pick up in person from the truck at the address sent by the retailer. In 2017, Amazon acquired Whole Foods, a premium grocery chain with 470 stores, for US$13.7 billion. The acquisition allowed it to broaden the physical footprint, own a reputed high quality private label brand (365), and acquire a better understanding of shoppers' grocery buying behaviour through access to rich customer data. As its first steps, Amazon slashed the prices at Whole Foods by 25-50% on select products to lure customers from the competition, made Whole Foods products available on its website, and included them in its Prime Now service. It was now able to offer customers high quality groceries, which included thousands of natural and organic products as well as locally sourced favourites, at low prices, delivered fresh. According to Jeff Wilke, CEO Amazon Worldwide Consumer, We're determined to make healthy and organic food affordable for everyone. Everybody should be able to eat Whole Foods Market quality - we will lower prices without compromising Whole Foods Market's long-held commitment to the highest standards...and continuously lower prices as we invent together." Amazon also planned to use the Whole Food stores' parking lots to drive offline cross-selling by parking its treasure trucks there and by offering merchandise that Whole Food shoppers might be interested in. In January 2018, after five years of research and testing, Amazon came up with another retail invention that appeared to be the future of brick & mortar stores. It opened Amazon Go, a fully automated convenience store with no checkout required, in Seattle, US. The just walk out' shopping experience allowed shoppers to pick up items from the shelves and simply walk out. A custom-built combination of computer vision, sensor fusion, and deep learning tracked the shoppers, tallied up their bill, and charged it to the customers' Amazon account. While the customers benefitted by controlling the amount of time they spent at a store irrespective of how crowded it was, there were concerns about whether they would be interested in such a solution where there was no human interaction at all. The retailer believed that while it might take a little while for people to get used to simply walking out, over time it could become practically indispensable. As Bezos said, Even when they don't yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf . No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it"? Battle for Omni-channel Supremacy The writing on the wall was loud and clear. Omni-channel was increasingly the preferred choice of the customers in US and world-wide. Failure to respond effectively to the changing shopping behaviour could adversely affect the strong customer relationships enjoyed by the retailers, be it Walmart or Amazon While it was evident that both retailers were focused on developing the requisite capabilities to provide a seamless omni-channel shopping experience through technology investments, marketing innovations and strategic acquisitions, this strategic shift had raised challenges on many fronts. Foremost, the high investments by Walmart and Amazon could lead to adverse financial implications for both retailers, especially in the short term, and possibly in the long term too. Second, a successful online expansion for Walmart, and an offline expansion by Amazon, could result in cannibalising their sales in the channels each was more proficient and profitable in. Most importantly, this was the first time the two giants faced each other as fierce competitors. So far it was the rest of the retail industry that had bome the blunt of their aggressive market warfare. But for now, the two had their biggest fight on hand. While the market seemed to currently favour Amazon, the advantage could change hands any day. The question was, how would it end