How Come Amazon Is Worth More Than Walmart?

Despite It's Gargantuan Size Walmart's Worth Less Than Amazon

Walmart. Scott Olson / Staff / Getty Images News

The news that Amazon was worth more than Walmart blew the minds of most analysts. Walmart has always been regarded as the unassailable leader of retail.

How Big Is Walmart?

Everyone knows that Walmart is big – really big. But here are some facts that will throw light on exactly how big:

  • The number of people who work at Walmart is, naturally, less than the number of people who shop at Walmart. But the number of Walmart's employees itself exceeds the population of some US states or some countries around the world. Walmart employs 0.5% of the US population!
  • The distance covered by Walmart's logistics vehicles in a year iss tens of thousands of times more than the circumference of the earth.
  • The land occupied by all the Walmart stores put together is more than the area of several cities.

And the list can go on and on. That's what makes the topic of this article so interesting. How can something so big fall in second place? How big would the first place winner have to be?

Some Numbers: Comparing Amazon and Walmart

  • In 2014 Amazon generated revenues of $89 billion, while that figure was $486 billion for Walmart.
  • Amazon has had large annual losses for half the number of years in the past two decades. Even when it has reported a profit, the profit margin has been a small single-digit number. Walmart has also had small single-digit profit margins in the same period, but it has demonstrated stable, almost predictable, profitability in every one of those 20 years. This makes Walmart's quality of earnings far superior to that of Amazon.
  • The total revenues that Amazon has earned in the past 20 years of its existence is lower than the revenues that Walmart earned in the past one year alone.
  • But, valuation of Amazon is more than the valuation of Walmart. (I am using market capitalization as a measure of company valuation.)

How Can Amazon Be Worth More Than Walmart?

If you were to believe one TV anchor, it's because Amazon sells sex toys and Walmart doesn't.

But that silly distraction apart, what's really at play here is the shift in consumer preferences as well as investor beliefs. On the one hand, ​Walmart needs to maintain a gross margin of 25% for it to arrive at a positive net margin. While Amazon may sell the same goods that Walmart does, its gross profits are higher, yet it's net profits trail Walmart. One of the reasons its gross profits are higher is that Amazon also acts as a marketplace where its cost of goods sold is zero as the cost is borne by the seller.

The Differences in Non-COGS Expenses Is the Key

A big part of any retailer's expense is tied into COGS (cost of goods sold). This is the amount that the retailer pays for acquiring the goods that it sells. But COGS is not the only expense. Other expenses such as rent, utilities, salaries, and the like add up to a bundle too. These "other costs" for Amazon are far more productive in spurring growth than in the case of Walmart where most of these costs are necessary evils.

What Does This Mean for the Ecommerce Industry?

Amazon's valuation is a big thumbs up for the ecommerce industry. Ecommerce professionals have cried themselves hoarse evangelizing the many great benefits of the online retail landscape.

It's clear that analysts, commentators, investors, and the public at large seems to agree.

Note: This article was written in July 2015 and some of the data quoted in it may be outdated by the time you read it. But the conclusions presented are expected to be evergreen.