How Walmart Can Beat Amazon at Its Own Game
What Walmart gains by joining the subscription economy
Few firms counter-punch like Walmart. “Innovation” has a new, first-of-its-kind feel. But most stakeholder value is a function of firms benchmarking, copying, or stealing other firms’ great ideas: improving them, putting more wood/capital behind the arrow, or placing it on broader platforms.
Walmart is planning to launch Walmart+, their response to Amazon Prime. This makes all sorts of sense. Every CEO has to convince investors they should buy shares, as there is a good/great chance the equity will double in the short to medium term. So, logically, the CEO is saying they can double revenue. Even if Walmart recognized operating leverage, they may need to add $400 billion or more to their top line. So, Doug McMillon needs to add the equivalent of the U.S. oil industry to his revenue line. That’s unlikely. So, what to do?
Simply put, the most accretive action taken by any $10 billion or larger business is to move from a transactional model to recurring revenue. This exploits one of the fundamental flaws of our species: the inability to register time. Time flies — it goes faster than our estimated consumption of a product during a given time period. Only 18% of gym members go to the gym consistently.
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In addition, the markets are a reflection of ourselves, and humans hate uncertainty. Waking up next to a stranger is exciting in the short run but exhausting in the long run. Walmart interacts with American families transactionally, while Amazon lives in 82% of their homes. That could begin to shift with Walmart+.
If Walmart+ becomes a $5 billion division, growing (much) faster than the core business, Walmart could recast its business and register a greater multiple. This puts a doubling of the market capitalization within reach on 4–6% annual revenue growth (doable). In the last five years, Apple has grown its revenues by 15% but more than doubled its market cap. How? Several factors including a bull market, monopoly abuse, and renewed growth of the most profitable product in history, the iPhone.
The gangster factor in a trillion dollars in shareholder growth has been Apple increasing its recurring revenues from single digits to 23% of revenues. Walmart has the same opportunity to recast its multiple with a bundle they continuously enhance and refine.
Twitter and subscription
Other than Facebook and Google (Genghis & Khan), a decent proxy of a media firm’s prospects is the percentage of revenues from subscription. Twitter said in a job posting that it was building a subscription platform under the code name “Gryphon.” The stock surged on the news.
Twitter’s ad-dependent revenue model not only fuels outrage and abuse, but also is largely responsible for the firm’s anemic growth. Transitioning to a subscription model will free the platform from bots and dampen the toxicity that is… Twitter. In other words, the platform is on the precipice of sustainable innovation.
Our innovation economy has morphed to the monopoly economy and now the exploitation economy. Many/most of the firms that have grown shareholder value by billions in a short time have arbitraged the inability of our government, and our instincts, to keep pace with technology. On the other side of the billions of shareholder value captured by increasingly few from social media, trading, or ride-hailing apps are millions of depressed teens, election interference, and a decrease of the dignity of work (no health insurance, sub-minimum wage compensation).
We looked at the 25 most recent articles in the New York Times Tech section and found that 68% of them presented technology (articles on products, applications of those products, or their founders) in a positive or neutral light. Only 32% of those articles took a negative or critical approach. We found Taylor Lorenz’s 25 most recent articles to be mostly positive and to cast technology and its users as endlessly inventive. Only six, or 24% of these pieces, presented technology or tech founders in a negative light. A small sample size, but an indicator that despite the externalities and co-morbidities of technology, the only bias appears to favor tech and VCs.
Professor Scott Galloway is Professor of Marketing at NYU Stern · Founder of L2 Inc, Red Envelope, and Prophet · Bestselling Author of “The Four” and “Algebra of Happiness", Cohost Pivot Podcast.