This Week in SCDigest

And surprising to me, international growth has also plateaued, despite an awful lot of attention and investment there. International sales last year were $123 billion, down from $136 billion the year before that, though the rising dollar is a key factor in that decline. Still, international is clearly not the Walmart growth engine once imagined.

Walmart for the first time this year is detailing its ecommerce sales, saying on a global and constant currency basis that on-line sales increased approximately 12% to $13.7 billion last year. That means the rate was probably less than 10% on a absolute basis ignoring the impact of the rising dollar. Either measure would put it well behind Amazon's growth, which as we will see below saw merchandise sales up 24.1% worldwide in 2015.

Not all that many years ago, there were (I think legitimately at the time) concerns about Walmart gobbling a giant, monopolistic share of the US retail market, but with the recent very modest sales growth Walmart's share of retail has simply flatlined. SCDigest developed a methodology several years ago, where we compare Walmart's US sales versus relevant US retail figures - total retail minus autos and parts, gas station sales, and restaurants/bars. 

It's not quite perfect because Yes Walmart does sell some gasoline, but they don't break it out in a way we can use. Nevertheless, I think what we have is pretty good - and does reflect a higher share of US retail for Walmart than if you do not exclude those categories, which is how it is usually reported.

By our measure, Walmart had an 11.2% of US retail sales in 2015, basically flat over the past 5 years, and down from a peak of 12.2% in 2009. It simply does not appear any more that Walmart will take over the retail industry. That is an interesting and important development- and seems unlikely to change to me. Would the FTC let Walmart buy say Kroger?

Now let's turn to Amazon, a company that provides a lot of numbers to analysts but getting real insight from them takes some work. That is because of its several business units and how it computes certain ratios, as I will explain in a moment.

Overall Amazon 2015 revenues were up 20% to $107 billion, but that includes digital media sales and its rapidly growing web services unit. I think it is more interesting to look at Amazon's merchandise sales, as shown in the chart below.

That shows Amazon was able to grow merchandise sales an amazing 30.8% in North America last year, up 2 percentage points from the year before even as the baseline level continues to rise. International merchandise sales growth was a slower 12.6%, but again the rising US dollar cut growth about in half of what it would have been otherwise.

One thing that vexes me is that I do not understand how and where Amazon books revenue for its "marketplace" service, where a customer is buying not from Amazon but direct from the supplier. Do Amazon's fees for that go into merchandise sales, or its web services unit? I think the latter, but I am trying to confirm. All this is complicated by the fact that sometimes Amazon does the fulfillment for these marketplace sellers.

In the end, I am trying to adjust the numbers Amazon reports for things like shipping and fulfillment costs against the right denominator.

For example, Amazon reports its net shipping costs - what it spends versus how much it receives from Amazon customers. Net shipping costs in Q4, for example, were an incredible $1.8 billion, and about $5 billion for all of 2015. Let me say that again - that was $5 billion with a B in net shipping costs. No wonder Amazon struggles to turn a profit. And we remember when companies used to make money on shipping.

The Amazon figures do report shipping costs as a percent of worldwide sales - and over the last five quarters that was in the 4-5% range. That's high enough, but SCDigest then compared those shipping costs just against merchandise sales - eliminating revenues from web services and digital media that have no shipping. Logically, this makes the picture worse, as shown in the graphic below, with net cots hitting a whopping 7.3% in Q4. So much for building fulfillment centers closer to customers. I will note the Gilmore household is on the Amazon Prime bandwagon, and easily make up our annual $99 fee in free shipping.

I am out of room, even though I have more - such as doing the same sort of adjustment to Amazon's reported fulfillment costs. Will do a part 2 as I did last year in a couple of weeks.

Any reaction to these numbers from Amazon and Walmart? Any other data you would like to see? Let us know your thoughts at the Feedback button or section below.

Good clear direction for the coach (inventory manager).

Unfortunately, the owners and the fans DO look at the scoreboard and in many cases want short term results and push forcefully and loudly for short term reactions to item level events.

It takes a strong inventory manager with some degree of legitimacy and authority to be able to push back and affirm that we have the right game plan that will see us through to simultaneous improvements in inventory performance and service.

David Armstrong
Principal
Inventory Curve LLC

It was a very interesting analogy.

I would like to purpose a topic to be discussed in your posts. Demand Driven MRP is getting more attention for companies to manage their inventories. Demand Driven MRP forgets about forecasting and have a look to the real consumption. Demand Driven MRP supporters tell to forget about forecasting, it is most of the times wrong, guide your decision on real consumption.

What are your thoughts about it?

Juan Calle
TDM Transportes

https://www.scdigest.com/newsviews/16-03-14-2.php

I really enjoyed your interview with Michael Watson on SCTV and his inventory analogies with Nick Saban's football strategies.

One point made was "to focus on the individual item". This approach, which of course is right, has dramatic implications on the ubiquitous "ABC Class" approach used by so many to manage their inventories. In that approach thousands of items are grouped into a hand full of Classes. So you are left with hundreds of items, all different, yet all managed in the same way.

Moreover these Class systems are constructed arbitrarily. Many will say "the A’s are the top 70% of sales, the B's are the next 15%" and so on. The 70% and the 10% are long standing "folklore" with little rational basis. Managing items based on their actual individual characteristics (forecast, variability, cost and so on) is the only way an inventory system can be optimized.

Great point made by Michael and you.

Terry Harris
Managing Partner
Chicago Consulting