Amazon Versus Walmart. Who will emerge victorious?

To understand why Walmart survives while at the same time Amazon thrives you must look at the basic business models of each shopping experience.

Walmart is a traditional mass merchandise retailer. Walmart offers products for sale and hopes to make a profit on everything they sell. They also rely on the shoppers choosing to pick up additional items while they are in the store so the net shopping cart value can be quite high in many cases.

They have marketed themselves as having a large selection and generally low everyday prices. Shoppers may visit a Walmart store because they want to see the merchandise, try it on, touch the fabric, read the instructions on the box, or ask the department merchandiser a question. There is a lot of psychology involved in a Walmart shopping experience including the store layout and product placement. Thru marketing, they have convinced their customer base that Walmart is low priced on all items. If you do any amount of comparison shopping you know that Walmart is low priced on what they considered the Market basket products that every mass merchant retailer should be selling. These are also the products that most consumers can identify as a good value if the price is right. Everything else in the store may not be a great value but the customers won’t take the time to comparison shop. After all, who cares if that 300 pack of paper plates is 10% more expensive. The customer the customer is already in the store so they just throw it in the cart along with all the other impulse items they see as they shop.

Amazon is both an e-commerce retailer and a third party selling platform.

Amazon’s business model emphasized growth over profits. Jeff Bezos was fortunate to attract enough investment capital to grow the business without the pressure of trying to be profitable. Even with massive year over year growth, it still took around 15 years for Amazon to turn a profit.

As an e-commerce retailer, Amazon offers many private label products they have developed. They have these goods manufactured for Amazon, they buy and sell in large quantities, and they normally make money on the sale.

As a third party seller, Amazon charges sellers a fee after a listed item is sold. This fee includes some level of Amazon customer service, marketing services, and order payment processing services. The fee varies by product category. Amazon probably makes a little profit on each sale but not much. Amazon business model calls for cash flow growth rather than actual profit in these areas.

Amazon as a subscription service. Amazon sells Amazon Prime subscription services offering free shipping, Amazon prime video, and several other services. These services, will not necessarily profitable, do build customer loyalty.

The major differences between Walmart and Amazon with regards to revenue.

Walmart sells, or at least hopes to sell multiple items to every shopper coming in thru the front door. This increases profitability since many of the items are larger profit impulse items.

Many Amazon orders are single item checkouts. Customers come to Amazon, shop for a specific item, put it in their cart and checkout. Even with Amazon’s affinity sales algorithms, it is a difficult web site to shop. You normally will only search for your specific items of interest and seldom add impulse items.

Both retailers have a bright future and both are taking steps to build market presence in each other market strengths. Amazon is opening and has plans to purchase brick and mortar stores, and Walmart has made many major purchases of online, e-commerce sellers.

Strap in, the next 5 years or so in the retail world may become very interesting.

Advertisements

What is Economy of scale?

In a production or manufacturing environment, Economy of scale is a simple concept that tells us that the larger the production run, the lower the per unit cost will be.

Think of it this way:

If I purchase component parts for 1000 units I pay my parts supplier x dollars per unit. If I purchase component parts for 10,000 units I might pay x- 10% dollars per unit.

The higher volume should mean lower handling costs per unit for your supplier, and also lower handling costs per unit for your receiving department and warehouse staff.

It costs me the same amount to issue a purchase order and pay my suppliers invoice if I order 1000 pieces or 10,000 pieces, so again, lower per unit cost.

Actual manufacturing production line set up costs are a major cost of production. It takes time to modify each production work station, set up tools and testing equipment, and assign workers to specific tasks. It may take several hours to set up a production line for a specific product. If I want to produce 1000 pieces I may keep my production line busy for 1 day to produce 1,000 pieces. Then I have to retool for the next new item on the production line. If I start a production run for 10,000 pieces I may not have to retool the production line for 10 days. That amounts to a significant cost savings.

When you add up all of the cost savings from a larger production run vs a smaller run, the savings might be significant. The manufacturer may elect to pass some of those cost savings along to their customer resulting in a lower product price.

How to try and avoid fraud when dealing with Chinese Suppliers.

When you buy from a Chinese supplier, you have to do what is called due diligence or research about the supplier you want to do business with. Check out reviews from previous customers, request and analyze samples, and do everything possible to verify the manufacturer is reputable before placing your order. A visit to the factory is essential if you are going to be buying large quantities. Once you decide on the factory and place your order, arrange to hire an inspection service to do a QC check before shipment is made. If possible pay using a secure payment method like credit card or PayPal so you at least have a small chance of recovering your money if the deal goes bad.

These are some things you should be doing before you make any purchases, whether it is merchandise from a local supplier or an expensive item for your personal use. Do your Research!

Remember, it is your money you are spending and your customers that you are shipping the merchandise to.

Is it worth risking your money and your business reputation on an unknown supplier, just to save some money?

Now if you are worried about finding a supplier to build your patented product or IP product, that is a whole other set of concerns. As a new buyer from China all I can tell you is buyer beware. No amount of Non disclosure agreements or iron clad contracts will protect you if the factory chooses to defraud you. The distance you are from the factory, communication or language problems, and the differences in the legal systems will give you only a very small chance of success in resolving any patent or IP issues. Get everything in writing. Do not rely on any verbal agreements.

The two most common scenarios are as follows. I like to call them front door fraud and back door fraud.

Front door fraud. You are based in the USA. The factory is visited by a buyer from some other country, say South Africa, and sees your product on the production line. He asks for a quote. Now the proper way to handle this would be for the factory to refer him to you for a quote, but little Mary sales girl sees an opportunity to make a commission for herself or to reach her sales quota so she can get a bonus, so she quotes the South African buyer direct. She thinks since you, the patent owner is based in the USA, and the buyer is located far away, you will never know. If you ever find out about the sale, the factory owner will simply say, oh sorry, the sales girl is new and didn’t know better.

The second scenario is as follows. Back door fraud. Engineers from the factory, or management employees that have access to your files, steal your info and either sell the info to a different factory, or establish a production line themselves and manufacture and sell your product. In this situation, nobody knows nothing. The production line can be shutdown or renamed easily. you will probably never be able to find them. Or, if you do find them and try and sue, the cost of legal expenses makes this extremely difficult. You can spend a lot and sue, you may even win a judgement, but will you every be able to collect anything from a small factory?

So as a new company looking for a factory to produce your patented or IP product, preventing fraud requires extreme measures.

  1. Have different sub assemblies manufactured at different factories, them do final assembly in a different facility.
  2. Build the sub assemblies in China and bring them back to the USA for final assembly.

You may be able to save some money, sometimes even a lot of money, having a product manufactured in China, but if you’re not big enough to spend the money on security, quality control, and patent protection, will it be even worth it?

How Soon Can You Expect To Make A Profit With A New Drop Shipping Business?

You could start to make a profit from drop shipping in your first month, or you could work forever and always lose money. It’s all up to you, the choices you make, and how hard you want to work.

  • You need to choose unique products that are not facing huge competition in the e-commerce world.
  • You need to choose products with a high enough selling price to maximize your chances to make a profit.
  • You need to negotiate the best prices possible from your suppliers.
  • You need to find suppliers that will give you rapid order processing and shipping service so customer satisfaction is outstanding.
  • You need to answer customer questions and handle customer service issues rapidly.
  • You need to target your marketing to the correct demographics to most efficiently use your marketing dollars.
  • You need to vigorously control your business expenses to try and maximize potential profits.

If you are successful in handling the issues above and choose the right products, you may have a chance of being profitable.