CONVERGENCE: Weighing the Future of Retail, an Investment Proposal

JESSE BERGER

KRYSTEN CONNELY MUHAMMAD SAAD RAHMAN

November 2015 Table of Contents

Introduction 3 Objectives 3 Process 4 Macro Analysis 5 Wave Theory 5 The “New Normal” 6 Financial Markets 8 Model 1: Regression & Monte Carlo Analysis 8 Micro Analysis 10 Retail Industry Trends 10 Amazon vs. Walmart Comparison 13 Financial Analysis 13 Internal Analysis 14 Model 2: DCF & Trend Impact Analysis 17 Part I: Discounted Cash Flow Analysis 17 Part II: Trend Analysis - Weighted Comparative Impact Model 18 Part III: Final Results 20 Investment Decision, Structure & Projection 20 Combined Model Results 20 Recommended Investment Structure 21 Conclusion 22 References 23 Appendices 26 Appendix A – Raw Output for Linear Regression Model 26 Appendix B – DCF Analysis Cash Flow Inputs 27 Appendix C – Weighted Comparative Impact Model 28

AMZN VS. WMT 2

Introduction

As titans of mass retail, both Amazon.com Inc. (Amazon) and Wal-Mart Stores

Inc. (Walmart) have been positioning themselves to take advantage of future trends in the industry. Amazon, a pure-play online retailer with strong global brand recognition and a diversified portfolio of products and services, could be thought of as the audacious hare in this iteration of Aesop’s fabled race – a pace setter that is quick to innovate and push boundaries. Walmart, with its commitment to low prices and pervasive brick-and-mortar presence, plays the role of reliable tortoise, making small adjustments along proven pathways, ensuring soundness of footing and direction.

Objectives

This storied race mirrors a classic dilemma faced by all investors – choosing between growth and risk versus income and safety. The appropriate decision involves finding balance within these dichotomies based on a deliberate objective. Influencing factors typically include the identification of an investment time horizon and appetite for risk, as well as a long-term outlook on industry trends and overall market expectations.

This exercise aims to evaluate the future share price performance of Amazon and

Walmart over the next ten years in order to create an investment portfolio structure that minimizes risk while capturing growth potential. Drawing from the Vulpes Investment

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Management mandate, we created a compelling opportunity that exploits the long-term forecast for both companies.

Process

Regarding publicly traded companies, expert analysts are hard pressed to accurately forecast precise quantitative earnings and price targets for upcoming quarters.

Uncertainty around these figures only grows as the timeline extends. In this case, the challenge was to quantify a decade-long forecast that is mostly qualitative, or in other words, to predict the unpredictable.

To accomplish this, a qualitative analysis of industry and academic literature was performed to evaluate the inherent range of potential future outcomes for three segments: macroeconomic environment, retail sector trends, and each company’s business strategy in relation to those trends. Each of these segments was broken down and quantified, producing two different models (Model 1 and Model 2, explained below) upon which we based a price prediction for each company in 2025.

Model 1 used regression analysis to derive the coefficients of various economic indicators on share price performance, which provided a formula for calculating each share price. A Monte Carlo analysis was run using a broad range of inputs. The average outcome price represented the first ten-year price prediction. Model 2 combined a three- year Discounted Cash Flow (DCF) analysis (Part I) with a weighted impact probability score of future retail and industry trends and their impact on both companies (Part II), which accounted for the subsequent seven years worth of value. Model 2 provided the

4 second ten-year price projection. The two were then weighted and averaged to derive a final price projection.

Macro Analysis Wave Theory

Long-term economic wave theory, such as Fischer’s Great Waves or

Kondratieff’s K-Waves, posit that price revolutions recur throughout history in a similar sequence, albeit differing in duration, magnitude, velocity, and momentum (Fischer,

1996). America has seen its power and influence wane in recent years, transitioning to

BRICS nations (especially China) as the frequency and intensity of social and economic turbulence increase. To borrow from Kondratieff’s seasonal parlance, these were the falling leaves of K-wave autumn, which culminated with the speculative boom-and-bust event known as the dot-com bubble in 2000. The final and current season, winter, is characterized by diminished expectations, a widening wealth gap, repudiation of excessive debts, and possible economic depression, among other criteria (Kondratieff,

1984). Although the 2008 global financial crisis evoked a number of these traits, the full fallout was avoided. The economy did not enter a depression, debts continue to be serviced, and expectations remain elevated.

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The “New Normal”

It was not El Nino that intercepted the full brunt of winter in 2008, but the extraordinary measures undertaken by monetary policymakers. Led by the Federal

Reserve, the global economy has been thrust into unchartered territory via extended zero percent interest rates and aggressive monetary base expansionary policies, effectively allowing the continuation, instead of repudiation, of excessive debts. The resulting environment is now known as the “new normal” due to its unprecedented nature and the apparent inability of policymakers to allow for reversion to the mean. Figures 1 to 3 succinctly illustrate this point.

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Financial Markets

As an unintended consequence, these policies fundamentally altered the relationship of economic conditions to financial markets, and by extension, the price discovery mechanism typically associated with them. The continuous meeting of buyers and sellers at the crossroad of highest bid and lowest offer still reflects the collective wisdom of market participants based on the uneven distribution of imperfect information.

However, the “new normal” has skewed future expectations thanks to low borrowing costs. Companies can now maintain credibility despite operating with thinner margins for error and pushing profit projections further into the future, affecting both companies in different contexts. Based on share price valuations, it could be said that profitability still matters, but is not necessarily as valuable today as it was yesterday.

Model 1: Regression & Monte Carlo Analysis

To quantify the effects of the “new normal” on Amazon and Walmart, a regression analysis was run using both share prices as controls. Shares were analyzed against the following indicators over the last ten years: (1) NYSE Composite, (2) US

GDP, (3) US inflation, (4) real median personal income, (5) labor force participation rate,

(6) consumer debt as percentage of disposable income, (7) ecommerce retail sales as percentage of total sales, (8) US Economic Uncertainty Index, (9) China CPI, and (10)

China Economic Uncertainty Index. The regression analysis yielded coefficients for these

8 indicators as they pertain to each company’s share price. Table 1 and Table 2 illustrate the formulas for projecting each company’s share price based on selected inputs for the various indicators (see Appendix A for raw output from linear regression model).

To model a ten-year forecast price, a range of possible outcomes was chosen for each indicator based on historical trends and the “new normal” projected out for the next decade. A Monte Carlo analysis consisting of 40 iterations was then run to randomly generate values from within those ranges, producing 40 price outcomes. The average of those outcomes were taken as the final price projection for this first model (Table 3).

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Micro Analysis

Retail Industry Trends

Future changes in mass retail are underway – a quiet race between the ‘new and the old world’ to adapt to forces shaping the global economy over the next decade. Amid lower production and declining demand in most advanced economies, increased urbanization, and growing pressure from technology innovation (McKinsey, 2015), retailers are recalibrating to continually renew growth. Today’s retailers understand that success depends on three simple factors: price, selection, and convenience. Yet, the retail game is changing fast. US retail ecommerce sales have grown consistently since 2006

(Census Bureau of the Department of Commerce, 2015). Rapidly changing consumer preferences, combined with powerful technology and digital innovation, are making way for the retailer 2.0, the omnichannel retailer that successfully weaves channels together to create a seamless, engaging, convenient, and personalized experience by converging digital technologies and brick-and-mortar. An analysis of forecasted retail trends points to a series of unstoppable shifts disrupting and redefining retail over the next decade (Frost

& Sullivan, 2014; Planet Retail, 2015; Walker Sands, 2014).

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Race to the middle: Retailers converge at the online/offline intersection.

Brick-and-mortar-only or online-pure-play is ceding to the hybrid retailer that offers a seamless blend of online and offline experiences. While foot traffic in US retail stores decreased by 50% in the last five years, the last year saw occupancy rates in US malls reaching 94.2%, the highest since 1987 (ICSC & NCREIF, 2015). Meanwhile, the percentage of US consumers purchasing online and picking-up in store rose from 4% in

2013 to 64% in 2014 (Murphy, 2015) indicating that shoppers are increasingly attracted to a retailer's’ ability to offer a convenient solution to merging online and in-store services and experiences. Online retailers are seeing the death of pure-play and the rise of click-and collect (ordering online and picking-up in store), “webrooming”, and one-click to no-click (replenishing items at home), as dominant trends (Accenture, 2014). An average Walmart customer in the US will spend $2,500 per year shopping through multiple channels, versus $1,400 at the store alone (Sherzad & Shad, 2015). In this respect, traditional brick-and-mortar offers unmatched advantages for convenience and represent a big piece of the omnichannel experience puzzle, as consumers still prefer to have an in-store option where they can see, touch, or return items. Big box retailers are building fewer and smaller stores that do more with less, better target the urban consumer, and offer a truly personalized experience.

The consumer experience is digital, highly personalized, and convenient - anywhere, anytime. By 2025, a “connected living” world will be defined by the use of many different devices to experience the full suite of services, providing “access and ubiquitous connectivity anytime and anywhere” (Frost & Sullivan, 2014, p. 5).

Consumers have high expectations for a highly personalized experience and exceptional

11 service across the shopping journey, even opting to provide personal information in return for personalized deals (Accenture, 2015). The need for new solutions to consumer engagement will represent a global investment of over $8 billion over the next ten years

(Frost & Sullivan, 2014). The consumer expectation of mobile in every step of the shopping is already forcing retailers to invest in mobile technology, apps, and in-store mobile infrastructure, reinforcing the needs for seamless channel integration.

Shipping and delivery innovation and execution sets retailers apart. One of the top drivers responsible for spikes in online spending is free, fast, and reliable shipping, as retailers continue to play catch up with industry leader Amazon (Walker

Sands, 2014). Fast delivery remains key, but more important for consumers is delivery at a convenient time (Accenture, 2014). With a fast growing sharing economy, last-mile delivery is becoming increasingly competitive as retailers race to improve delivery speed and service through new solutions like drones and couriers, even offering one-hour delivery in select cities.

This retail trend analysis reveals hybrid business models as the new standard in the retailing space, with “connectivity” and “convergence” as the channels for merging the digital, virtual, and physical marketplace (Frost & Sullivan, 2014), leading to the ubiquitous integration of products, companies, and industries. Consumers are poised for new retail experiences (Walker Sands, 2014). The onus is on retailers to carefully navigate and execute this omnichannel voyage to achieve higher conversions and growth.

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Amazon vs. Walmart Comparison

For many retailers, adapting to changing consumer preferences is daunting.

Amazon and Walmart are both taking steps to position themselves accordingly, but based on current pricing, the market seems to have proclaimed a favorite. Despite Amazon’s potential, its rich valuation leaves something to be desired for value-oriented investors.

Financial Analysis

A side-by-side comparison of relevant financial ratios for both companies (Table

4) as of October 30, 2015 illustrates which stock currently offers better value.

Walmart has less leverage, greater profit margins, trades at much lower multiples, generates dividend income, and can be bought for 18% below book value. There is a clear value proposition for buying Walmart’s shares over Amazon’s if the decision was

13 limited to the present. The following investigation into each company’s approach and direction provides insight into how they are preparing for the next decade.

Internal Analysis

Convergence of online and offline experience. Amazon has strongly aligned their processes with their core competency: ecommerce, earning a majority of their revenue from digital and online sales ($71.8B), controlling 23% of market share, and having grown 20% since 2014 (Reuter, 2014). Traditionally having no physical retail presence,

Amazon relied on their fulfillment centers to cater distribution to surrounding areas. In

November 2015, Amazon opened a physical bookstore, reflecting their intention to foray into brick-and-mortar (Ruddick, 2015). Walmart has a colossal physical presence with over 4,000 stores in North America, and plans to invest $9.9 billion into additional stores in 2017, predominantly of the smaller format variety (Brohan, 2015). To enhance their online presence, they will invest $1.1 billion into digital initiatives by 2017, which should effectively boost the 2.9% of revenue currently generated from online sales (Gagliordi,

2015). Walmart is also developing a mobile application, “Pangea,” to streamline and personalize the shopping experience (Buvat, 2015).

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Execution ability. Both companies have extremely efficient and responsive supply chains that leverage well-established processes and technologies. Their size and scope afford them the luxury of negotiating discounts from suppliers. To keep costs low,

Amazon relies on its army of robots that maintain inventory levels and can pre-package orders based on predictive algorithms. Recently, Amazon started testing its own private delivery network to cut out third party shipping partners and enter the transportation- logistics market. Walmart is testing different in-store pick-up methods for goods ordered online and is working on an unlimited shipping pass service similar to Amazon Prime.

They have also contemplated outsourcing order delivery to their own shoppers through an incentive program (Heller, 2013).

Business evolution. The keyman risk inherent with relying on one individual for guidance is high for Amazon, especially as it pertains to stock performance and expectations. The company has evolved from an online bookstore to a technology hardware manufacturer, and of late has made inroads into the cloud computing market

(Figure 4) via Amazon Web Services (AWS), which grew by 81% in 2Q2015 to $1.8 billion in sales (King, 2015). Amazon is also planning major expansions into international markets such as India to benefit from changing economic conditions.

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Known coast to coast like butter and toast, Walmart is essentially synonymous with its core competency: retail. Diversification from Walmart’s perspective means continuing to expand in international markets like Mexico, the UK, and India, which account for 30% of net sales and are growing faster than domestic sales (Figure 5), growing 6.9% over the last five years versus 1.5% domestically (Soni, 2015).

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Competitive landscape. Amazon is performing an incredible high-wire balancing act by operating with narrow financial margin for error by simultaneously managing their online retail business, developing their own hardware technology products, and foraying into cloud computing. This leaves Amazon susceptible to additional competition from both markets. When it comes to brick-and-mortar retail, Walmart is second to none and maintains a strong identity built on rock-bottom prices that command customer loyalty.

The concern is not a matter of if, but how effectively, they can penetrate the online marketplace.

Model 2: DCF & Trend Impact Analysis

Part I: Discounted Cash Flow Analysis

The first step in our model was to perform a DCF analysis for each company using consensus analysts’ Free Cash Flow figures for the next three years. While the

Weighted Average Cost of Capital input is current, assumptions were required for each company’s terminal growth rate and were chosen to reflect their respective prospects based on their stated growth strategies, as well as on historical precedent. Table 5 illustrates the results of the DCF analysis (see Appendix B for full results).

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Part II: Trend Analysis - Weighted Comparative Impact Model

Based on the DCF analysis, an investment in Amazon or Walmart today would return 58% or 49%, respectively. However, this only accounts for potential performance over the next three years. As a means of factoring in the subsequent seven years, we developed a Weighted Comparative Impact Model, whereby each company was evaluated based on their current decisions, strategies, and investments in the context of expected future retail trends. Table 6 illustrates the methodological process undertaken.

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Table 7 lists the chosen Key Factors/Trends, their relevant sub-factors, and appropriate weightings that served to score Walmart and Amazon.

Table 8 illustrates results from the trend analysis. Amazon’s trend factor (1.44) exceeds

Walmart’s trend factor (1.32) (see Appendix C full results).

The internal analysis and trend analysis make it clear that both companies are well-positioned for growth in a 2025 retail landscape. Amazon continues to outperform

Walmart when evaluated against dominant retail trends, and is set for exponential growth in online retail and cloud computing. However, with much room for growth, Walmart is

19 uniquely positioned to leverage its extensive brick-and-mortar footprint to redefine mass retail and become a leading omnichannel retailer. It has acknowledged the investments and changes required to effectively compete in the Internet age, namely significant investment in ecommerce, a transition to smaller stores, and more convenient and personalized service.

Part III: Final Results

The combination of our DCF valuation and trends analysis provides the following price projections for Model 2.

Investment Decision, Structure & Projection

Combined Model Results

Our formula for combining the two models and determining a final share price projection is as follows. Model 2 was given a heavier weighting to reflect the importance of individual business performance over macroeconomic factors.

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The final projected share prices are as follows:

On a percentage basis, Amazon’s shares are projected to provide a 78% return on investment from today’s price, while Walmart offers a 93% return, ex-dividends. If you include cash dividends and assume they remain constant, the return increases to 127%.

Recommended Investment Structure

Given that our model predicted positive returns for both companies, an investment structure that minimizes risk and captures growth is one that includes both companies.

Even though Walmart offers better value today and returns tomorrow, diversification within a portfolio has been proven to minimize risk over time. As such, we recommend investing 80% of our portfolio in Walmart due to its exceptional value proposition, and the other 20% into Amazon for diversification. Assuming a $1,000,000 investment, the

10-year projected combined value would be $2,170,550, or a return on investment of

117% (Figure 6).

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Conclusion

While both Amazon and Walmart are making the necessary changes to seize the future of retail as their traditional business models converge, we view Walmart as the better investment opportunity for the coming decade. This unfolding environment curiously situates these corporate monoliths on opposite ends of the spectrum in which the company that winds up controlling the middle ground may very well dominate the industry for years to come.

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References

Accenture. (2014, February 3). More U.S. shoppers plan to buy from stores but want the in-store shopping experience to match convenience of online, Accenture study finds. Newsroom. Retrieved from https://newsroom.accenture.com/news/more-us- shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to- match-convenience-of-online-accenture-study-finds.htm

Accenture. (2015). Mastering omni-channel B2B customer engagement. A Forrester Consulting thought leadership paper commissioned by Accenture Interactive and SAP hybris. Retrieved from https://www.accenture.com/us-en/insight-mastering- omni-channel-b2b-customer-engagement.aspx

Amazon. (2015). Amazon Fresh. Retrived from https://fresh.amazon.com/help

Brohan, M. (2015, October 14). Wal-Mart will spend nearly $2 billion in web improvements over two years. Retrieved from Internet Retailer: https://www.internetretailer.com/2015/10/14/wal-mart-will-spend-nearly-2- billion-web-improvements

Census Bureau of the Department of Commerce. (2015). Quarterly retail e-commerce sales. Retrieved from https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf

Fischer, D. H. (1996). The great wave: Price revolutions and the rhythm of history. Oxford University Press.

Frost & Sullivan. (2014). World’s top global mega trends to 2025 and implications to business, society and cultures. Retrieved from http://www.investinbsr.com/ipaforum/wp-content/uploads/Iain-Jawad-IPA- Forum-2014-Presentation.pdf

Forrester Research. (2012). Global public cloud market size, 2011 to 2020. Retrieved from http://www.institut-sage.com/2012/02/le-saas/

Gagliordi, N. (2015, October 14). Walmart projects 2017 revenue decline after billions invested in e-commerce. Retrieved from ZD Net: http://www.zdnet.com/article/walmart-projects-2017-revenue-decline-after- billions-invested-in-e-commerce/

Heller, L. (2013, March 29). Walmart vs. Amazon: It's about to get interesting. Forbes.

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Retrieved from http://www.forbes.com/sites/lauraheller/2013/03/29/walmart-vs- amazon-its-about-to-get-interesting/

International Council of Shopping Centres [ICSC] & National Council of Real Estate Investment Fiduciaries [NCREIF]. (2015). U.S. Shopping Center Occupancy Rates Hit 6-Year High in 2014, According to ICSC and NCREIF Data. Retrieved from http://www.icsc.org/press/u.s.-shopping-center-occupancy-rates-hit-6-year-high- in-2014-according-to-i

Jerome Buvat, S. K. (2015). Walmart: Where Digital Meets Physical. Consulting, Capgemini. Retrieved from https://www.capgemini-consulting.com/resource-file- access/resource/pdf/walmart_pov_15_7_2015.pdf

King, H. (2015, July 23). Surprise! Amazon posts a profit, shares jump 18%. CNN Money. Retrieved from http://money.cnn.com/2015/07/23/investing/amazon- earnings-profit/

Kondratieff, N. D. (1984). The long wave cycle. New York: Richardson & Snyder.

McKinsey. (2015, September). Shifting tides: Global economic scenarios for 2015-25. Retrieved from http://www.mckinsey.com/insights/strategy/shifting_tides_global_economic_scen arios_for_2015_25

Planet Retail. (2015, July 22). The future of retail: 10 trends of tomorrow. Planet Retail. Retrieved from http://www1.planetretail.net/news-and-events/press- release/future-retail-10-trends-tomorrow

Murphy, I. P. (2015, June 25). Delivering convenience: The keys to buy online, pickup in store. Retail Dive. Retrieved from http://www.retaildive.com/news/delivering- convenience-the-keys-to-buy-online-pickup-in-store/401058/

Rueter, T. (2014, October 23). Amazon Q3 revenue increases 20%. Retrieved from Internet Retailer: https://www.internetretailer.com/2014/10/23/amazon-q3- revenue-increases-20

Ruddick, G. (2015, November 3). Amazon begins a new chapter with opening of first physical bookstore. The Guardian. Retrieved from http://www.theguardian.com/technology/2015/nov/03/amazon-books-seattle- store-opened-university-village

Sherzad, M., & Shah, S. (2015, October 15). Wal-Mart's omni-channel plan may restore profit growth. Bloomberg Research.

Soni, P. (2015, May 18). Walmart looks at a bigger international presence. Market

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Realist. Retrieved from: http://marketrealist.com/2015/05/walmart-looks-bigger- international-presence/

Walker Sands Communication. (2014). Reinventing retail: What businesses need to know for 2014. Retrieved from http://www.walkersands.com/images/files/file/Future%20of%20Retail%20Whitep aper(1).pdf

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Appendices Appendix A – Raw Output for Linear Regression Model Amazon

Walmart

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Appendix B – DCF Analysis Cash Flow Inputs

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Appendix C – Weighted Comparative Impact Model

WMT WMT Impact AMZ AMZ FINAL FINAL Criteria - Weighted Comparative Impact Model WMT Score AMZ Score RATING RATING Factor Sub-factor # Key Ratings Factors (Trends) Sub-Factors Metrics Metrics Metrics Weighting Weighting

- 4,000 stores; projected investment of $9.9B in physical stores in 2017; projected unit growth in small format stores - Minimal brick-and-mortar presence, with plans to expand further if Snapshot of scale and type of bricks-and-mortar (Neighborhood Market & Walmart Express) in 2017 exceeds Bricks-and-mortar footprint 25% 1.5 0.375 successful; started to expand into online groceries with Amazon 1.1 0.275 footprint investment in supercenters; shrinking big box (cutting # of Fresh offering. products from product inventory); plans to display fewer products in different way.

- Majority of revenue from digital/online sales ($71.8B); current 23% Digital/online revenues - 2.9% revenue from digital/online sales ($13.1B) vs. in-store Convergence of online and market share of online retail sales

offline: Seamless digital - Projected investment of $1.1 billion in ecommerce and digital - Continuous investment in ecommerce and digital as online pure- 1 40% Investment in ecommerce & digital shopping in brick-and-mortar initiatives in 2017 play retailer stores Strong online presence and Year-over-year increase in ecommerce sales - 30% increase in online sales in 2014 - 20% increase in online sales in 2014 15% 1.3 0.195 1.5 0.225 digital integration - Leveraging its extensive physical store network; strategic - Amazon started off as a e-commerce company and all their Ecommerce strategy focus on grocery + strong role of Neighborhood Markets processes are aligned to cater to recent trends.

- Adopting mobile check-in service for in-store pickup (2015); Investments in IT infrastructure to better connect - Efficient deployment of capital on technology to promote fast, expanding drive-up service; replatforming their technology and online/offline (e.g. analytics, mobile solutions) user-friendly shopping experience their physical distribution

- Pioneer and master of ecommerce personalization and - Rebuilding its website to further personalize the shopping customization; launching Handmade at Amazon, creating a custom Investment in personalization capabilities experience of each customer; - investment in apps (ranked Personalization as the new shopping experience for customers looking for handmade goods, among top 3 of retail apps) 2 consumer shopping 5% Mass personalization 5% 1.2 0.06 but who still want the "Amazon experience" 1.5 0.075 experience - Investing in creating seamless multi-channel experience at - Continues to invest in executing on seamless customer Investments in customer experience scale experience.

- Amazon Prime; large investments in warehouses close to urban Same-day delivery capabilities centers - Already large footprint in urban centers and large cities - Launched Amazon Flex; testing its own private-delivery network to cut out third party shipping (UPS, FedEx, etc.), potentially entering - Testing drones for home delivery, curbside pickup and Last-mile delivery capabilities transportation and logistics market; launched "On My Way" Pilot Delivery and distribution 10% checking warehouse inventories 1.3 0.13 1.3 0.13 program to enlist Americans to help deliver Amazon packages 3 Execution Ability 15% while en route to another destination. - Spent $6.6B on shipping costs in 2014, while it collected only Shipping and delivery costs - Testing an unlimited shipping pass service (similar to Prime) $3.1B in shipping fees. $50 subscription service

Fulfillment and store replenishment - Walmart's powerful supply chain is very well established - Amazon's powerful supply chain is very well established Supply chain infrastructure 5% 1.3 0.065 - Amazon's dominance enables competitive pricing during 1.3 0.065 and performance Negotiation with suppliers - Walmart's retail dominance enables competitive pricing during negotiations negotiations

- Cloud computing as strong business segment (AWS grew 81% to $1.8 billion in 2Q15). AMZ's first reporting of profits largely due to - Walmart does not have a product diversification or service Vertical services 12.5% Expansion into non-competing verticals 0.9 0.1125 AWS (from this year onwards, AWS revenue reporting has been 3 0.375 diversification. All of its services are consumed internally. separated); these others services help diversify their business and mitigate the dependence on purely retail.

4 Business Volatility 30% - Amazon remains dependent upon Jeff Bezos, who has been at the Dependency on one individual to drive future - Walmart has seen 5 CEOs in its history and hence does not Keyman risk 2.5% 1.2 0.03 helm of the company since inception; can be seen as a single point 0.9 0.0225 growth seem to have a problem with keyman issue. of failure.

Global/international - India is fastest growing market (Amazon India is fastest growing Presence, revenue, and investment in different - 80% of revenues currently in US; focused on expanding in presence and geographic 15% 1.4 0.21 in sales); $2 billion expansion in India; Fulfillment Centers 1.2 0.18 markets China diversification expansion in international settings.

Cloud Computing 5% Cloud computing market and competitors - Not applicable to WalMart 1.5 0.075 - Google, Microsoft, Oracle, etc. 0.9 0.045

5 Competitive Landscape 10% Online retail 2.50% Online retail market and competitors - Biggest competitors will be Amazon and Ali Baba 1.2 0.03 - Ali Baba & upcoming Walmart 1 0.025

Brick-and-mortar retail 2.50% Brick-and-mortar retail market and competitors - Target, Discount Stores, etc. 1.5 0.0375 - They do not have a physical presence 0.9 0.0225

Total 100% 100% 1.32 1.44