Walmart to Amazon: You're going down!
Oooh -- it's on.
The comment is the latest salvo in this fall's highly publicized pricing war between the titans. In October, Walmart.com dropped the price of 10 bestselling books to $10. Amazon followed suit; Walmart countered with $9, and Amazon followed. Walmart downed the ante to $8.99, and Amazon backed off -- only to see Target.com match Walmart.com, which ducked down to $8.98. Vasquez sums up his company's pricing strategy: "If they react and match our prices, we're going to continue to lower our prices."
Can retailers make money on books discounted so sharply? Absolutely not. Publishers occasionally give major retailers special discounts, but the standard wholesale charge is roughly half of the retail price -- so every copy of Dean Koontz's Breathless that Walmart sells for $8.98 costs the retailer an estimated $5.02. Even Stephen King's Under the Dome, whose Walmart price has gone up to $14.50, costs Walmart roughly $3 per copy.
A War with No Winners?
Neither Vasquez nor Bezos is a moron. So why are they getting into a battle that neither can win? After all, as economics columnist James Surowiecki recently pointed out in The New Yorker, one need look no further than the early 1990s airline price war to see the devastating effect to all involved. But Surowiecki -- and Daily Finance's Sarah Weinman -- argue that the net purpose of this battle may be simply to draw business away from other chains and independent booksellers.
Jon Strymish is manager of the New England Mobile Book Fair, one of the independents that seems to be in Bezos and Vasquez's sights. While he agrees with Surowiecki's position, he also offers another angle on the Amazon/Walmart battle royale: "It's an advertising move," he says. "They take a loss on a few books to get people to talk about how they're selling things too cheap. If they lose $50,000 by selling 10,000 books at a loss, they're still only paying a quarter of the cost of a TV ad."
The outcome of this battle is as clear as yesterday's headlines. In fact, the recent skirmish between Coke and Costco highlights where Amazon and Walmart are headed: regardless of who wins, razor-thin profit margins and a fickle consumer base will ultimately put retailers and publishers on a collision course.
While executives at News Corp.'s (NWS) HarperCollins and Random House did not comment for this story, both companies should keep a wary eye on the supercheap online model. Because once Walmart and Amazon stop feasting on each other, it doesn't take much imagination to figure out who's up next on the cannibal buffet.