MORGAN STANLEY: Amazon and Walmart are duking it out in a $4 trillion market

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  • The retail sales market will grow to $US4.3 trillion by 2021, Morgan Stanley analysts estimate.
  • Walmart‘s opportunity for upscaling its customer base, which includes low income earners, is greater than Amazon’s opportunity for downscaling, they said.
  • But competition with Amazon may weigh on Walmart’s margins.
  • Watch Walmart trade in real-time here.

Walmart has an advantage over Amazon in their fight for the $US3-4 trillion retail market, according to a group of analysts from Morgan Stanley.

Retail sales excluding motor vehicle & parts dealers totaled $US3.9 trillion in 2017 and will likely reach $US4.3 trillion by 2021, they estimated.

As the retail battles between Walmart and Amazon continue to escalate, Walmart has more to gain because of its current customer demographics, according to the analysts.

“Walmart dominates the low-income customer, who represents around 30% of total addressable spend, whereas Amazon dominates at the high end, which represent 50% of the spend,” said the group led by Simeon Gutman in a note sent out to clients on Monday.

“Thus, Walmart’s opportunity for upscaling could be much greater than Amazon’s opportunity for downscaling.”

Facing an uphill battle in reshaping its customer base, Walmart would likely have to invest more heavily in fulfillment, push hard on grocery, and buy more brands, Gutman said. These steps would also help it get rid of its negative brand image of being a low-income-focused retailer.

But the investment cycle in fulfillment, software upgrades and Click & Collect expansion will be longer than Walmart initially believed. Also, grocery competition with Amazon and Whole Foods’ Prime Now offering will lead to a price and convenience war that may weigh on margins, he added.

“It [Walmart] needs to elevate its fulfillment capabilities to offer same- and next-day delivery in top markets to attract Amazon’s sticky customer base,” Gutman said. “This is essential to stall Amazon’s encroachment across retail, but will likely dilute margins. We see Walmart’s US EBIT margin contracting 15 bps in each of the next 3 years, to ~5% by fiscal year 2021.”

Earlier this month, Walmart reported earnings per share of $US1.29 on $US128 billion in revenue, topping analysts’ estimates for $US1.22 and $US126 billion respectively due to its rising same-store sales and digital orders.

Morgan Stanley has a price target of $US98, which is 3% above its current trading price, and maintains an “Equal-weight” rating for Walmart.

Shares of Walmart are down 3.7% since the start of this year.

WMTEthel Jiang/Business Insider

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