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This Company Is Fighting a Losing Battle

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Since Wal-Mart (NYSE: WMT  ) opened its first store in 1962, the retail giant built an empire that is unmatched in size and revenue. In 2012, Wal-Mart hauled in a whopping $443.8 billion in sales. So naturally, in 2000 when Wal-Mart decided to jump into e-commerce, the retailer thought it would rule the market. There was just one problem: Amazon (NASDAQ: AMZN  )

Wal-Mart learned the hard way that brick and mortar sales don't equate to online sales and has continually played catch-up to Amazon. Now, Wal-Mart is again increasing efforts to compete with Amazon, this time by opening new warehouses specifically for online products along with a "vast new logistics system." In addition, Wal-Mart said it would use workers in its existing stores to package and ship products to online customers.

Bad idea. Here's why.

Catching #1

A wise marketing professor I once had said that when it comes to market penetration, "it is better to be first than it is to be better." These words highlight the fact that the first player in an industry has an immeasurable advantage over later competitors. Amazon was founded in 1994, six years before Wal-Mart sold a single product online. By the time Wal-Mart got in the game, Amazon had a choke hold on the market.

Not much has changed. Last year, Amazon's web sales were at $61 billion compared to Wal-Mart's $7.7 billion. On top of that, Amazon's sales have been growing annually by an average of 33% over the past five years. Wal-Mart is riding a moped trying to catch Dale Earnhardt Jr. in his stock car - something that's not going to happen.

Show me the money

I think Wal-Mart is fighting a losing battle. Yes, the retailer could gain a bit of ground in coming years, but can it gain enough to warrant the amount of capital being poured into the segment? A vast new logistics system? New warehouses? More employees? I don't think Wal-Mart is playing to its strengths.

Wal-Mart was built on a brick and mortar foundation, and that's where its focus should remain. I know. Online sales are growing! The Internet is the future of retail! I've heard it all. But even today, physical world sales account $9.50 of every $10.00 in the US.

My question for Wal-Mart is this: is a segment that generates 1.7% of revenue worth all of the attention? Capital allocation is essential is any business, and if a firm is spending its money efficiently, profits will be maximized. If year after year, a segment fails to produce, it may be time to accept that the segment is a side business that isn't worth an excessive amount of money or time.

Discount retailer Tuesday Morning (NASDAQ: TUES  ) is an extreme example of a retailer who embraced this reality. In July, Tuesday Morning shut down its website so that more focus could be placed on the firm's core of 850 stores. The website generated just 1% of Tuesday Morning's $812 million in revenue for the year ending in June, so management decided that focus needed to be placed on the 99%. The company's stock hasn't significantly responded to the news, so investors seem to be alright with the decision.

Wal-Mart shouldn't go as far as shutting down its website, but the firm should indeed focus on its core: retail stores that offer consumers the lowest prices in the US. This proven strategy works year after year, as evidenced by Wal-Mart's sales growth:

Now what?

So what should Wal-Mart do with I think the website can be an asset if used correctly. Wal-Mart should stop fighting a losing battle with Amazon and instead focus on an area of the web that Amazon doesn't dominate just yet: groceries.

According to Todd Hale of research firm Nielsen, online sales of food, groceries, and other everyday items are growing annually by almost 20%. I think Wal-Mart should set its sights on this market and open fire. Although Amazon has a bit of a head start, its grocery business AmazonFresh only exists in Seattle and LA. And as I outlined in a previous post, I don't think Amazon is in the grocery business to profit on groceries.

Conversely, Wal-Mart has the infrastructure and presence to take the budding industry by storm. With over 3,000 Supercenters, Wal-Mart is the number one grocer in the US. Consumers already buy Wal-Mart groceries in stores, so why not buy them online as well? Wal-Mart should start on the East Coast, using its infrastructure and supply chain already in place to deliver groceries and other consumer products directly to customers. Currently, Wal-Mart delivers non-perishables, but I think the company should expand into a full line of online groceries.

Final thoughts

Wal-Mart isn't going anywhere. The world's largest retailer will be a force for years to come. But Wal-Mart needs to concede that it can't beat Amazon, and shift focus to retail stores and online groceries.

If you can't beat 'em, don't waste your money. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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