In February 1991, the very month that Walmart overtook the most iconic American retailer in sales, Sears spokesman Jerry Buldak told the Philadelphia Inquirer that the companies couldn’t really be compared:

“We feel the mission of Sears is to be an integrated, powerful specialty merchant, with brand names and our own lines of exclusive merchandise,” company spokesman Jerry Buldak said. “We feel that distinguishes us from other retail specialty stores or discount chains.”

No other retailer, he said, offers customers as much under one roof: insurance and other financial services, Sears’ own credit-card operation, with more than 28 million customers, and a nationwide repair network to service merchandise.

Twenty-five years later the solipsism of Buldak’s statement remains remarkable, especially since Sears’ demise had been set in motion 29 years earlier.

1962 was perhaps the most consequential year in retailing history: in Ohio the five-and-dime retailer F.W. Woolworth Company created a new discount retailer called Woolco; S.S. Kresge Corporation created Kmart in Michigan; the Dayton Company opened the first Target in Minnesota; and Sam Walton founded the first Walmart. All four were based on the same premise: branded goods didn’t need the expensive overhead of mass merchandisers, which meant prices could be lower. Lower prices served in turn as a powerful draw for customers, driving higher volumes, which meant more inventory turns, which increased profitability.

Sears, which had introduced a huge number of those brands to America’s middle class,¹ first through their catalog and then through a massive post-World War II expansion into physical retail, was stuck in the middle: higher prices than the discounters, but much less differentiation than high-end department stores. By the time Buldak gave his statement the company’s fate as an also-ran was sealed, even though no one at Sears had a clue: Buldak’s stated mission of being “an integrated, powerful specialty merchant, with brand names and our own lines of exclusive merchandise” failed to consider whether customers gave a damn.

Walmart in the Middle

There is certainly an echo of history in Amazon’s rise; over time the one-time bookseller has developed a dominant strategy that resembles Sears in its heyday: lower prices and better selection, and over the past few years especially, incredible convenience. Walmart has felt the pain for a while, at least in its stock price: Amazon overtook the largest retailer in market cap last summer, just in time for Walmart’s sales to flatten or even drop; in May the company reported a 1.1% decline in year-over-year same store sales in the U.S., the fourth poor quarter in a row.

Walmart is stuck in a new middle, surrounded not just by old competitors like Target, but new ones like Kroger (groceries have provided much of Walmart’s recent sales growth), deep discounters like Aldi, club-based retailers like Costco, and convenience-focused drugstores. Looming above all of them, though, is Amazon.

Walmart, which launched its first online site back in 1999, has consistently told investors it can handle the threat. In the clearest articulation of a strategy that has been repeated on earnings calls ad nauseum, then-CEO of Walmart.com in the U.S. Joel Anderson told investors on a 2011 analyst call:

One of our key pillars of digital success and differentiation will be about building a continuous channel approach. Specifically, I’d like to share with you the progress we have made in 3 areas to leverage our multichannel for the U.S. business.

The first of those areas is around the idea of assortment. It is our role online to extend that shelf in the stores. The offline merchants here in Bentonville set the strategy, and then it’s our job to broaden that assortment…

Secondly, I want to focus on access. Several pilots are currently in place to leverage our ship-from-store capabilities. We will offer next-day delivery at a very economical price. We will use these capabilities to reach customers in urban areas that we have not yet penetrated.

The third area is fulfillment. We already have unlimited assets in place, nearly 4,000 stores, over 150 DCs. This will give us the flexibility to offer our customers best-in-class delivery options.

For example, last week, we transitioned several disparaged shipping offers into one comprehensive fulfillment program. We are now offering 3 compelling free shipping programs. This is an excellent example of multichannel strategy beginning to come to life.

The fulfillment program Anderson went on to describe was ridiculously complex: “fast” shipped anything online to your local store, “faster” shipped a smaller selection to your house, while “fastest” made an even smaller selection available for pickup the same day. Anderson concluded:

“Fast, faster, fastest. What a great example of a continuous channel experience that cannot easily be replicated.”

What a positively Buldakian statement! Of course such an experience “cannot easily be replicated”, because who would want to? It was, like Sears’ “socks-to-stocks” strategy, driven by solipsism: instead of starting with customer needs and working backwards to a solution, Walmart started with their own reality and created a convoluted mess. Predictably it failed.

The Multichannel Trap

The problems with Walmart’s original approach were threefold:

• It was confusing: “Fast faster fastest” and its various iterations put all of the onus on customers to figure out what worked best for them, and for which items. Why, though, should customers bother? If they want to buy something in person, go to Walmart. If they want it delivered, go to Amazon. You know exactly what you will get from both experiences (which, by extension, favors Amazon in the long run).

• It was complicated: Much of Walmart’s economic might derived from a logistics system that included distribution centers serving clusters of stores, connected by Walmart’s own trucking fleet (and before the Internet, the world’s largest private satellite communication network). That seems on the surface like a useful tool for e-commerce, until you get into the reality that shipping individual items at all hours is a very different problem than shipping pallets to stores once a day (I would analogize it to Microsoft trying to port the Start menu from the desktop to a mobile phone), and solving for one business increases costs and complexity for the other.

• It was confined: This is where the Sears story comes full circle: Walmart spent decades building stores in smaller cities, not only killing off less efficient local retailers but also removing the need to visit mass merchandisers in the big city. The company still has not fully penetrated some urban areas, but more than enough urbanites drive out to Walmart and its competitors to have all but killed Sears, JC Penney, etc.

  Now Amazon is doing the same to Walmart, but in this case the encirclement has been multidimensional: delivery of just about anything everywhere at prices that are usually hard to beat (and again, Prime customers aren’t even checking), and, over the last few years, within two days at worst, two hours at best.

Walmart is finally responding in a meaningful way, buying Jet.com for $3.3 billion, and I laid out on Thursday why the deal makes sense for Walmart, Jet.com, and especially the latter’s investors. Said investors were made whole, Jet.com has access to Walmart’s deep pockets and a much more cost-effective way than advertising to get customers’ attention, while Walmart finally has the executives, technology, and infrastructure to do e-commerce properly — with laser focus.

Amazon’s Inevitability

Still, chances of success are low, because both Walmart and Jet have a business model problem, not unlike the one Walmart imposed on Sears. In that case Walmart cut margins and made up for it with inventory turns; still, at the end of the day their profitability came from their markup margin on 3rd-party goods.

Amazon, meanwhile, is transitioning to a new model completely. As I laid out in March the vast majority of Amazon’s products are increasingly sold with little to no margin at all: profitability comes from fees paid by third-party merchants and Prime subscriptions. It is a model that is completely dependent on scale, and the lower the margin and thus prices, the higher Amazon’s volume, which means ever more leverage from Amazon’s massive fixed costs in infrastructure and logistics.

Unfortunately for Walmart, Jet.com, and any other would be competitors, it’s starting to pay off in a major way: while AWS has been demonstrating the power of scale for a while, it is just this year that Amazon Retail is showing the same sort of returns. Amazon Retail’s operating margin in the second quarter was 2.09%, which sounds minuscule until you realize that is a 181% increase over the year-ago quarter; the first quarter operating margin was 1.73%, a 499% increase.

True, that’s not nearly as good as Walmart’s 4.6% first quarter operating margin, but for Jeff Bezos said margin was plenty of opportunity; for Walmart, led astray by the all-too-natural instinct to start with the model you have instead of with the customer, it represented too much of a liability.

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1. In addition to building their own ↩