Walmart, Target Are Gaining Ground, So How Will Amazon Respond?

The list of brick-and-mortar casualties of the retail apocalypse is extensive, but Amazon (NASDAQ:AMZN) hasn't killed off everyone yet. Once in the crosshairs of digital-first upstarts, big box-stores Walmart (NYSE:WMT) and Target (NYSE:TGT) have done more than update their selling models for the 21st century. And as far as omnichannel strategies go, the two retailing giants look like they are taking over, while Amazon plays second fiddle.

The winds of change shift again

Walmart and Target both reported yet another quarter of great comparable-store sales growth (a combination of foot traffic, digital traffic, and size of customer receipts) to kick off 2019. Walmart had comps of 3.4%, its best rate in nine years; and Target put up a whopping 4.8% year-over-year gain.

The impressive growth is owed in large part to each company's respective work in the digital realm. Once lagging far behind -- and by many counts still trailing Amazon -- Walmart and Target have each developed their own internet retail strategy. Granted, both do a relatively small online business totaling a few billion each quarter, compared to tens of billions in sales at Amazon every quarter -- but the gap is narrowing.

Walmart and Target are a long way off from becoming majority-online retailers, but their relentless double-digit expansion is continuing even as Amazon's momentum has slowed down in the last few years. The big-box stores' secret weapon has been their physical footprint, allowing them to use real estate as an extension of the digital experience -- also known as "omni-channel" retail. In fact, Target CEO Brian Cornell said on the first-quarter earnings call that 80% of the company's digital sales were fulfilled in-store, either via same-day pickup or ship-from-store options. Walmart has utilized a similar strategy, introducing an option to order groceries online and pick them up in-store. The retail king is even mulling over going after Amazon's one-day shipping pledge.

In the meantime, Amazon's physical presence remains mostly limited to some 500 Whole Foods stores, which haven't grown much at all since Amazon acquired them a couple years ago. During the first quarter, physical store sales at Amazon were up only 1% after a 3% decline during the busy fourth quarter of 2018.

Will Amazon strike back?

With Walmart and Target enjoying resurgent success, it's not a matter of if, but how Amazon will decide to respond. Digital commerce is by no means its most profitable segment (that honor goes to the Amazon Web Services cloud segment), but retail is still by far the largest division and the heart of all of Amazon's important growth initiatives (like Prime membership, subscription and business services, and advertising).

So it would be hard to imagine the king of e-commerce just rolling over anytime soon. And it's not as if the company hasn't been trying. Its physical store presence is (almost) entirely made up of its Whole Foods subsidiary -- growing the base of Whole Foods locations could be part of a response, and in fact Amazon could resurrect the grocery chain's ambitions to expand to over 1,200 stores.

A strategic partnership with department store Kohl's (NYSE:KSS) to handle returns is showing early positive signs as well -- at least for Amazon. Kohl's has been plagued with problems that seem endemic to the whole department store industry; the average U.S.-based department store lost 4% in sales through the first four months of 2019 according to the U.S. Census Bureau. But that hasn't halted speculation that Amazon could just buy the chain out. Similar hypothesizing has been made regarding a tie-up between Amazon and Target.

Neither scenario seems particularly far-fetched, though either match would be an imperfect pairing. But uniting two different families never has been a cake-walk. Whole Foods was bought for $13.7 billion, so a company the size of Target (current market cap of $40.9 billion) or Kohl's ($8.2 billion) could work.

Of course, there are Amazon-branded physical locations that the company has been experimenting with too. But experimenting looks too slow and too uncertain with Walmart and Target on the march. It would be best if Amazon kept funneling money into its high-profit technology business, but I wouldn't be surprised to see the company use those profits to make another big splash in the brick-and-mortar space in the near future.

This article originally appeared in the Motley Fool.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.