Walmart (NYSE:WMT) has been the biggest company in the U.S. by revenue for close to two decades and the biggest company in the world by revenue for much of that time as well.

The retail giant has risen to supremacy by adopting an everyday, low-prices strategy; by carrying a wider range of products than almost any other brick-and-mortar retailer; and by blanketing the country with superstores. It's followed a similar strategy internationally but with mixed results. 

Walmart's revenue is set to clock in around $550 billion this year -- tops in the world by a wide margin. But Amazon (NASDAQ:AMZN) is nipping at its heels in one key category. The e-commerce leader is expected to surpass Walmart in U.S. gross merchandise volume (GMV) by next year, according to Evercore ISI, which forecasts Amazon to reach $415 billion GMV next year, ahead of Walmart at $370 billion, though that does not include sales from Sam's Club.

An Amazon Prime tractor-trailer.

Image source: Amazon.

Gross merchandise volume -- defined as the total sales on a platform from both direct sales and sales from third-party sellers -- isn't the same as revenue, but it's arguably more important since marketplace sales tend to generate much higher margins than direct sales. In the case of Amazon, it's able to make significant profits from providing services like warehousing, fulfillment, and advertising to third-party sellers, a key reason why its profit margin in North American e-commerce has expanded rapidly in recent years.

How Amazon did it

In 2019 in his letter to shareholders, Amazon CEO Jeff Bezos revealed the percentage of GMV that comes from its third-party marketplace, rising from just 3% when it launched in 1999 to 58% in 2018, and it's likely to continue to increase.

Amazon has long been the dominant force in U.S. e-commerce, but its e-commerce marketplace owns an even greater share of third-party sales. The company gets much more traffic than any other retailer, making it the most desirable marketplace for third-party sellers, and is able to provide services that competitors can't, like Fulfillment by Amazon: Sellers ship their merchandise to Amazon, and the company handles the rest, storing the merchandise, and packaging and shipping each order. Amazon can do this because it's invested in its logistics infrastructure for more than two decades, and has an unmatched network of warehouses and delivery infrastructure.

In addition, its Prime loyalty program, built on its promise of one-day shipping, keeps customers loyal to the service and the purchasing cycle between customer and third-party sellers running smoothly.

Amazon doesn't report its actual GMV, but over the last four quarters, the company generated $163 billion globally in direct online sales and another $16 billion from physical stores, nearly all of which comes from Whole Foods. If 58% of its GMV comes from its marketplace, that would give it $414 billion in GMV over the last four quarters, an estimated $271 billion of which comes from the U.S.

Walmart plays catch-up

Over the last few years, Walmart, under CEO Doug McMillon, has recognized the importance of e-commerce and made significant strides in its online retail business, regularly delivering 40% growth in the category before that figure accelerated from the pandemic. 

In recent months, Walmart has looked to expand its e-commerce business by borrowing directly from Amazon's playbook in two distinct ways. First, it launched its own Amazon Prime-like loyalty program, Walmart+, which offers free grocery delivery, discounts on gas, and other benefits for $99/year. Like Prime, Walmart is hoping the new program persuades customers to spend more at its stores and online. Additionally, Walmart has focused more on developing its third-party marketplace; partnering with Shopify to add 1,200 new and unique sellers; and providing fulfillment services for sellers in a program similar to what Amazon does.

With Amazon's 20-year head-start, Walmart will probably never catch its online rival. But it's smart to make these moves as consumer demand will continue to shift from physical stores to e-commerce, or in cases like groceries, a hybrid model, which Walmart is well-positioned to execute.

For Amazon, topping Walmart in U.S. GMV could be both a blessing and a curse. It's a clear sign of the company's dominance, but it also further undermines its case that it isn't a monopoly even as it's receiving antitrust scrutiny from Congress and other regulators.

In the same shareholder letter from April 2019 in which Bezos shared the data on marketplace sales, he also wrote, "Amazon today remains a small player in global retail. We represent a low single-digit percentage of the retail market, and there are much larger retailers in every country where we operate."

That argument was thin then, and today it's downright wrong. As Amazon becomes the biggest retail platform in its home country, its market power has never been stronger.