Competition is intensifying between two models of retail for the future: Amazon and Walmart. Last week, Amazon announced Prime Day, a Prime members-only one-day sale hyped up to rival Black Friday. Walmart responded this week with the promise of a mega-sale open to everybody. Removing any doubt to whether this move was inspired by Amazon, Walmart CEO Fernando Mediera wrote on the company blog post that asking consumers to pay an annual membership fee to save is counterintuitive. “We’re standing up for our customers and everyone else who sees no rhyme or reason for paying a premium to save,” he said.

It’s difficult to know who will win this retail war. Amazon has the advantage of investors willing to forgo profits for advances in fulfillment. As a result, Amazon has unrivaled shipping speeds and costs that attract batches of Prime subscribers each year. (Amazon reported 53% year-on-year growth in Prime subscribers in Q4 2014.) And these new subscribers tend to spend more: Surveyed Amazon Prime members spend $538 a year on average vs. $320 for non-members.

The Achilles heel behind Amazon’s growth (or why Walmart and the likes could win): These subscribers – and what it takes to keep them buying – are expensive. In 2014, Amazon spent $6.6 billion on shipping in exchange for $3.1 billion in delivery fees. Savvy retailers are realizing that competing in fulfillment is an expensive game, and are encouraging users to choose click-and-collect. Walmart, for example, advertises free shipping if users pick up their items from the store. Experiments like Walmart To-Go reveal that consumers prefer to pick up their online orders at the store, eliminating the wait for packages and time wasted browsing aisles. Amazon is disadvantaged due to its lack of a retail footprint, which it has tried to overcome.

Retail stores can be advantageous for home deliveries as well, since shipping an item from a local store is faster and costs less than shipping from a warehouse. Best Buy, for example, was able to beat Amazon in delivery speeds during the 2013 holiday season.

Screen Shot 2015-07-13 at 3.41.37 PML2 Founder and Chairman Scott Galloway believes the future of retail looks more like digitally savvy brick-and-mortar retailers like Macy’s, Best Buy, Walmart than pure play e-tailers. See full video and download a copy of L2’s Big Box study for more on how e-tailers can compete with Amazon.

 

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