Wal-Mart and Amazon are rumored to be considering an alliance. A strategic alliance would be a major boost for Amazon, giving it cheaper supplies as well as the cash it urgently needs. It would also benefit Wal-Mart by enhancing its online reach, particularly internationally. However, Wal-Mart will not want to lose online revenues to an external firm. If successful, it may well go on to buy the troubled eRetailer itself.

The UK’s Sunday Times newspaper has claimed that supermarket giant Wal-Mart and eRetailer Amazon are in negotiations over a strategic alliance. Amazon’s share price jumped 26% on the news, whilst Wal-Mart shares fell by just over 1%. The deal would be along the lines of Amazon’s existing alliance with Toys R Us, sharing online operations but with no equity stake.

The deal would benefit Amazon by providing a substantial cash injection – particularly important considering the company’s dwindling level of working capital, which was just $346.2 million in Q4 2000. Some analysts predict a period of negative working in 2001, which would seriously damage supplier confidence. Wal-Mart would give the company both cash and credibility.

A tie-up would also give Amazon access to Wal-Mart’s customer base in over 4,500 stores, as well as cost advantages. As the largest retailer in the world, Wal-Mart can negotiate price discounts with suppliers beyond Amazon’s dreams. Since one of the main reasons for business-to-consumer eCommerce failures is their inability to undercut established players, a link-up with the world’s largest retailer would give it greatly improved bargaining power over its suppliers.

There would also be advantages for Wal-Mart. Although its majority-owned walmart.com site was one of the most frequently visited retail sites during Q4 2000, it has failed to make the impact online that its parent has in the real world. Using Amazon’s sophisticated order management systems and learning from its success in online branding and communications could build Wal-Mart’s online presence.

However, given their relative sizes – Wal-Mart’s 2000 revenues were $191.3 billion, compared with Amazon’s $2.7 billion – it is not a marriage of equals. In exchange for some eCommerce skill, Wal-Mart would risk losing a share of potential online revenues to an external firm. However, given the rapid rate of bankruptcies of online retailers, it is a good time for Wal-Mart to negotiate a favorable agreement with Amazon and provides a vehicle for further international expansion.

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