IN THEORY THIS should be a good time to be Walmart, the doyen of American retailers that came of age in the stagflationary era of the 1970s. Inflation is back, yet no one knows better than the Beast of Bentonville how to use the power of the growl to convince suppliers to lower prices. Supply chains are buckling, yet such is Walmart’s heft that it has chartered ships and bypassed rail services to deliver Halloween and Christmas goods early this year. Workers are in short supply, but it managed to add 200,000 jobs to its 2.3m global payroll in the three months to September. “There’s a level of excitement in the air, you can feel it,” enthused Doug McMillon, its chief executive, as Walmart raised its year-end sales and profit targets after solid third-quarter earnings on November 16th.

There’s a puzzle, though. Investors are not buying it. In the past year Walmart’s share price has lagged behind not just Amazon, the e-commerce giant, but other big-box American retailers, such as Target and Home Depot. On November 16th its shares fell a further 3%, as investors fretted over what Simeon Gutman of Morgan Stanley described as slightly “squishy” profit margins. Is the stockmarket, so enamoured of all things new, missing the turnaround story of the decade? Or is there something else to worry about, namely the hot breath of Amazon on Walmart’s neck?

There are few more engaging advocates of the turnaround story than Felix Oberholzer-Gee of Harvard Business School, who co-hosts a weekly podcast with two of his fellow professors called “After Hours”—a “Seinfeld”-like dose of bonhomie for business enthusiasts. The trio, who interchange high-brow discussions on companies with topics ranging from Scandinavian crime drama to cocktail-making, might not be regulars in the aisles of Walmart. But they are cheerleaders. “Walmart is on fire,” Mr Oberholzer-Gee exclaimed in a recent episode. He acknowledges that investors have not yet caught on. But that might just be because their mindsets are hardened against legacy retailers, he argues.

The turnaround story has two parts. First is the customer. Since lockdowns ended, shoppers have returned to Walmart’s stores, though not yet in sufficient numbers to prove that its almost-800m square feet of American retail space—more than the size of Manhattan—is worth cherishing. The company claims it is. It says having stores within ten miles of 90% of Americans is vital for an “omnichannel” strategy that encourages shoppers to buy in-store, online or a combination of the two.

But with footfall still subpar, its challenge is to attract online shoppers without cannibalising the ones who visit the stores. It is having some success. Surveys suggest its new Walmart+ subscription service—a lower-cost rival to Amazon Prime—is attracting young, urban and affluent online shoppers who might not be seen dead in a Walmart store (a partnership with American Express’s platinum card reinforces the impression of upward mobility). According to Mr Oberholzer-Gee, Walmart.com has also started to display “edgy” brands such as Ray-Ban that typically shunned Walmart’s physical stores, which further appeals to this cohort. Moreover, Walmart is rolling out Uber Eats-style home delivery to 900 cities through its Spark network of gig-economy drivers. It makes for an intriguing gambit. Walmart, the emblem of suburbia, is moving tentatively into Amazon’s metropolitan heartland.

The second part of the story is profit. Unlike Amazon, whose e-commerce business is not a big contributor to earnings, Walmart needs to justify returns on everything it does. That encourages it to think laterally, since online profit margins are meagre. As a result, it is seeking to defray the cost of its e-commerce distribution network by attracting third-party merchants, rather than just selling Walmart stuff. It is building a fast-growing advertising business, called Connect, which Mr Gutman reckons could generate $2bn of operating profit—8% of last year’s total—by 2025. And it is delving into fintech, specifically placing bets on customer-supporting financial services ranging from bill-paying to cryptocurrencies. All of these could bolster the bottom line without detracting from physical-store sales.

The twist in the tale, though, says Marc Wulfraat of MWPVL, a logistics consultancy, is Amazon. While Walmart may be encroaching on its urban territory, Amazon is on the counterattack across the suburban hinterland. Its weapons are distribution centres, the vast warehouses from which retailers ship goods around the country. In 2018, Mr Wulfraat says, the size of Amazon’s distribution network in America overtook Walmart’s. Since then, Amazon has sought to double it again, building what Mr Wulfraat reckons will be another 140m square feet of distribution centres—as much as Walmart has built in America in its entire 59-year history.

It is a daunting operation. Mr Wulfraat says that each week Amazon builds what some retailers construct in a decade. “It’s almost like a war effort,” says Ken Murphy, of abrdn, an asset manager that invests in Amazon. He reckons the logistics blitzkrieg is part of Amazon’s effort to shrink delivery times so sharply that people will have little incentive to go to stores. That makes Walmart, with its vast store network in America, vulnerable.

Banana armies

Defeat is not inevitable. More than half of Walmart’s domestic sales are groceries, which people are still hesitant to buy online. That gives it some protection from the Amazonslaught. So far Amazon’s ownership of Whole Foods, an upmarket grocery chain it bought in 2017, and its Fresh supermarket formats, have been half-hearted attempts to take on its Bentonville rival.

But if Amazon masters the art of cashierless shopping, as it is trying to do, it could change the buying of groceries as it has everything else, from bookselling to cloud-computing. So far Walmart can pride itself on keeping Amazon at bay while reinventing itself for an omnichannel world. And yet the grocery wars have barely begun. And the size of Amazon’s arsenal is growing. ■

This article appeared in the Business section of the print edition under the headline “Walmart gets its bite back”