Amazon is the world’s largest online retailer, about five times bigger in that space than Walmart and its Jet.com subsidiary. Yet despite Amazon’s deep online roots and dominance over Internet shopping, I believe it will buy Target in 2018.
After digging into the realities of both companies, it becomes clear that Amazon buying Target isn’t as bold of a prediction as one might think. Here are three reasons why a merger makes sense.
Offline sales will always be a big part of retail
It’s no secret that online retail is slowly killing offline. My firm, Loup Ventures, estimates that in the fourth quarter of 2017, about 10% of total U.S. retail sales, or about $125 billion, were online. The longer-term question is: How much of total retail will eventually happen online? Based on our analysis of U.S. retail sales by category (excluding gas and restaurant expenditures), 55% of total retail sales should eventually happen online.
Even if half of commerce shifts to online, that still leaves a massive market offline at 45%. People in the future will still want to pick up groceries at a local store. As retail changes dramatically going forward, the biggest winners will promote both online and offline opportunities.
Amazon clearly believes that offline retail is important. In 2017, it acquired 473 Whole Foods locations, opened 13 physical bookstores, and piloted one Amazon Go store, which is an automated convenience store that has no employees or checkout. Acquiring Target would be an extension of this pattern, adding 1,834 stores to bring Amazon’s total retail locations to 2,321. By comparison, Walmart has 5,412 U.S. locations.
An Amazon-Target combination would set up a U.S. retail duopoly. On one end, Walmart and Jet.com would focus on the middle- and low-income consumer, controlling about 25% of the market. On the other end, Amazon, Target, and Whole Foods would go after the high-income consumer, controlling about 15% market share.
They both pursue affluent consumers
Amazon’s acquisition of Whole Foods last year confirmed that the online giant’s focus is on the high-income consumer. Market research firm GfK MRI estimates the median household income for an Amazon shopper is $90,100, similar to Whole Foods at $95,200. Target reports its average shopper earns $87,000. These far exceed the U.S. median household income of $55,322.
By buying Target, Amazon would solidify its dominance of the high-income consumer. Conversely, if Amazon were to acquire a company targeting lower-income customers, such as Dollar Tree, Amazon would steer its focus away from its core consumers. In my years of observing tech companies, I’ve seen that owning a demographic usually yields the best results.
Brick and mortar will get more advanced
Over the following 10 years, I’d expect Amazon to convert Target and Whole Foods stores to an automated model with few employees. Stores would be monitored by computer vision systems; shelves would be stocked by robots; customers would be helped by service robots that understand natural language; and checkout would resemble Amazon Go locations, where customers simply walk out with their purchases. In this future, the lines between online shopping and automated brick and mortar stores would blur, as cost-focused stores become more like smart warehouses. The few employees working in stores would focus on delivering personalized service based on mutual understanding and empathy, which would enable retailers to differentiate themselves.
Any number of factors could derail such a combination, including government intervention. But sometimes mergers make too much sense to ignore. Amazon buying Target is one such situation.
Gene Munster is a managing partner at Loup Ventures. He is not an investor of Amazon, Target, or Walmart.