Does Wal-Mart Finally Have an Edge over Amazon?

The down economy has seen Wal-Mart (NYS: WMT) trumping Target (NYS: TGT) in same-store sales, but lagging behind Amazon (NAS: AMZN) in the online retail category. It's a sore point for Wal-Mart, which has set Amazon in its sights for the past several years, even engaging in a price war over the holidays. Will a new, aggressive push for social media and app development be the thing that pushes the House that Walton Built over the Amazon edge?

In a move that counters its sprawling superstore image, Wal-Mart is opening a series of smaller-footprint urban stores (six are coming to Washington D.C. this year alone). It's a smart move; smaller stores in high-density areas with greater capacity for ship-to-store items would marry the convenience of location and online shopping with Wal-Mart's traditional in-store experience as it expands its online presence.

Part of its strategy for that expansion is the acquisition of Small Society, a mobile agency that created the apps behind Starbucks, Zipcar and Whole Foods. It's the second such acquisition for Wal-Mart. It was only last April that Wal-Mart acquired Mountain View-based startup Kosmix. A key asset of the $300 million purchase was rumored to be Kosmix's founders, who joined Wal-Mart (along with their 70-person staff) and were the talent behind Amazon's third-party retailers' marketplace.

The team (now called Wal-MartLabs) launched two apps in November that allow customers to compile lists, check availability at their local store, and display in-store aisle location of the items. The apps are designed not to replace in-store shopping, but to make it more appealing for customers. Reviews of the apps are mixed in the iTunes store, comments ranging from "lacking features" to "completely useless."

The focus of Wal-MartLabs will be social media sourcing; determining what to sell in its stores, and what to sell to specific customers, based on their social media footprints. With more than 11 million Facebook fans and 131,000 Twitter followers, Wal-Mart has a wealth of data to utilize. Target is not far behind, with 8 million Facebook fans, and 283,000 Twitter followers. Amazon is just shy of 2 million Facebook fans.

Once Wal-Mart can integrate the information from its social media followers with its smartphone apps, customers will be able to search for an item, see friends' recommendations, and even order items shipped to their local stores -- for free -- where it can be picked up, along with the rest of one's shopping needs.

If Wal-Mart thinks apps will woo customers away from Amazon, it's in for a rude awakening. Wal-Mart customers and Amazon customers fall into vastly different demographics. A Quantcast study shows that Wal-Mart's customers are mostly young women, half of whom have children and less than half of whom earn more than $60,000 a year. Amazon's customers are older, with a quarter over the age of 50, more than half earn $60,000 a year or more, and significantly fewer have children. Amazon shoppers trump Wal-Mart customers in terms of advanced degrees and earnings with a larger percentage of shoppers making $100,000 a year or more.

As for Wal-Mart's seemingly smart move away from superstores into sleek, efficient stores complemented by online shopping, it doesn't look like we'll see it become a full-blown trend anytime soon. Since 2007, Wal-Mart has opened only 24 stores that didn't fit the "superstore" label, but has converted 524 from regular to "super." Moreover, urban residents tend to fight Wal-Mart's arrival in their cities, from Chicago to Seattle and, yes, even D.C. Many of these rebuffs have been successful.

There are also other players in this space that promise to keep the bricks-and-mortar battleground hot while Wal-Mart tries to push online. Target's addition of miniature Apple (NAS: AAPL) stores-within-their-own-store format aims to renew the "cheap chic" image they were built on. Apple has an incredibly powerful brand and has been a market darling lately. If Wal-Mart tries to marry their push to sleek, efficient stores with a bit of pizazz, they're likely to find the space already firmly occupied by Target.

And don't forget about cost-cutting maestro Costco (NAS: COST) , the company whose cut-it-to-the-bone margins are hard for competitors to match. While Wal-Mart is often considered the low-cost king, you can only cut costs so much before the economics don't work. To counter that, they may have to start offering some items in bulk. If they go down this road they'll find it hard to match Costco's veteran operations and razor-thin margins. We've already seen Wal-Mart willing to do it to keep an edge on Amazon; I'm sure they wouldn't blink if they had to do so to keep Costco at bay as well.

Without much room to grow (literally) and an online space that's already well served, Wal-Mart would have to truly innovate to come out ahead. Its customers aren't likely to flee to Amazon, but neither are Amazon customers likely to suddenly take up with Wal-Mart on the basis of a few apps. I'm pessimistic on Wal-Mart's future, and have given it a thumbs down in CAPS.

I'm not the only one. My fellow Fools have been keeping an eye on Wal-Mart for some time, and has prepared a special free report predicting the big box giant's impending demise. The good news is, we've identified two companies poised to replace Wal-Mart in this special free report. Download a free copy today.

At the time thisarticle was published Molly McCluskey doesn't own shares of any of the companies mentioned. Follow her on Twitter @MollyEMcCluskey.The Motley Fool owns shares of Apple, Wal-Mart Stores, Costco Wholesale, and Fool newsletter serviceshave recommended buying shares of Apple,, Costco Wholesale, and Wal-Mart Stores; creating a bull call spread position in Apple; and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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