Do Amazon and Wal-Mart Have the Same Business Model?

[spartansaver]

Attempting to distill what defines a business model. Would you say that Amazon and Wal-Mart have differing business models? How do you define a business model, and if so could you delineate Amazon and Wal-Mart's business models (if they are different)?

 

Sidenote: Somewhere along the way Buffett or Munger mentioned ~82 business models. I was wondering if anyone can verify this or if it was in relation to mental models?

[Guest longinvestor]

This is very interesting question. Would love to make up a short description (<30 words) for Amazon and Wal-Mart,

 

I have some key words in mind,

 

Walmart: Neighborhood (local); Needs (versus wants); one roof; everyday low price

 

Amazon: Unlimited catalog, online, ease of ordering, no shopping trip, fast delivery, sell for less 

 

[rkbabang]

Amazon is trying to build its Prime membership program adding more and more benefits to it to get more and more people to join.  Right now I use the free shipping, but also the video, prime music, the storage space on Amazon Drive, ...

 

Maybe it is closer to Costco in this way than Walmart?

 

[vegaseller]

No, Amazon is all about orthogonal infrastructure play.

 

Build first party ecommerce -> build out modular infrastructure -> lease to third parties -> tackle only high IRR first party segments using data

 

same play for AWS

 

build own IT systems -> Build out modular IT infrastructure -> Sell to third parties -> tackle high IRR segments (PAAS)

 

Same play for Wholefoods

 

Buy wholefoods -> build out intermediate logistics/store backend -> Sell to mom and pops -> tackle high IRR segments (forcing UPS into peak load areas), etc.

[spartansaver]

Longinvestor, would you say that having a broader offering is a strategy within a business or part of a business model?

 

Rkbabang, did Amazon change its business model in 2005 with the introduction of prime?

 

Vegaseller, I have never heard of orthogonal infrastructure play. Is this a reference to a personal business model you created? How would you describe Walmart's?

 

It seems that when describing a business model, a fair amount is semantics. But I would argue a valuable description of a business model should not be so broad that when analyzing different businesses everything is included, but not too narrow that it covers nothing.

 

[rkbabang]

Longinvestor, would you say that having a broader offering is a strategy within a business or part of a business model?

 

Rkbabang, did Amazon change its business model in 2005 with the introduction of prime?

 

Vegaseller, I have never heard of orthogonal infrastructure play. Is this a reference to a personal business model you created? How would you describe Walmart's?

 

It seems that when describing a business model, a fair amount is semantics. But I would argue a valuable description of a business model should not be so broad that when analyzing different businesses everything is included, but not too narrow that it covers nothing.

 

 

I wouldn't say Prime subscription "is" Amazon's business model, but it certainly is a part of it.  Amazon has a multifaceted approach to what it is doing.  In its retail operations Prime is a large focus (not "the" focus, but "a" focus).  But there is also AWS which is a different beast entirely.

 

 

[netnet]

Attempting to distill what defines a business model. Would you say that Amazon and Wal-Mart have differing business models? How do you define a business model, and if so could you delineate Amazon and Wal-Mart's business models (if they are different)?

 

Sidenote: Somewhere along the way Buffett or Munger mentioned ~82 business models. I was wondering if anyone can verify this or if it was in relation to mental models?

 

This is a very good and interesting question.  You should always be asking the most basic and elemental question to get to first principles, BUT the question itself may mean that you should be careful investing, because frankly I can not think of two more dissimilar business models by large retailers.  In fact, somewhat aping Vegaseller words, I would say that they are really orthogonal to each other, i.e. not opposites but different, but let's start with the similarities. (I do disagree with the infrastructure play analysis though, Amazon started out without infrastructure and depended a great deal on third party sales, new and used. Analysts questioned the wisdom of them building warehouses, rather than a lighter capital model.)

 

Similarities

• Among the greatest wealth creators in retail in respective generation
  
• Both consciously started competing in 'Palookaville' until they could compete in other markets
  
• Started by intelligent fanatics
  
• Best in class logistics and IT infrastructure
  
• Emphasis on pricing and crushing everyone else's margin
   
  

 

Differences

• Although they are quintessential companies of their generation,  given the different generations, they are vastly different
  
• Third party sellers, Amazon
  
• Location based vs online, Walmart
  
• Prime, Amazon note this allows for lower margin on purchases, See Sam's Club and Costco, (I know Sam's Club is Walmart.)
  
• For awhile Walmart drove US industrial policy, in demanding it's manufactures source offshore
  
• Because of supplier structure, Amazon does not care where manufacturing occurs.
  
• Larger % of store brands, Walmart
  
• Amazon benefits from highend brand purchases
  
• Walmart is a 'every day low price' company
  
• Amazon is a 'everyday low margin' company, Bezos--"Your margin is my opportunity".
  
• Because Bezos is relatively young (and alive) he is still innovating on business models, hence Prime, Echo, private label, AWS
  

 

(By the way, Munger was talking about Mental not Business Models.)

[rkbabang]

 

Differences

• Because Bezos is relatively young (and alive) he is still innovating on business models, hence Prime, Echo, private label, AWS
  

 

I think this is probably the most important factor in the comparison between the two.  With a ship as large as Wal Mart, heading in the same direction for decades and its charismatic brilliant founder no longer of this world, it is very difficult for it to adjust its heading even slightly, nevermind change course entirely.

 

Although you alluded to it, you didn't come out and say it: branding is an issue here as well.  Walmart isn't just perceived as low priced, but also as cheap and low quality.  You don't even think to look at Walmart if you want a high-end anything.  Whereas Amazon is perceived as carrying high-end items for less money.  Walmart and Amazon have a very different brand.