The warning from Walmart for lumbering corporate giants

It was a significant moment in the war between virtual commerce and bricks and mortar'.

A few months ago, the market value of Amazon the world's largest online retailer overtook that of Walmart the world's biggest traditional retailer.

Before yesterday, Walmart shares had already underperformed the wider US market by 20% so far this year, over fears it was facing a huge challenge.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

And yesterday, we learned just how huge.

Why Walmart took a beating

For a company of its size and importance, that's a gobsmacking move. But it's not surprising, given the profit warning it put out.

Walmart had already trimmed its earnings expectations in August. Now it says that sales will be flat next year, while earnings per share might fall by as much as 12%.

It's the same as has been happening with supermarkets on this side of the Atlantic. On the digital front, there's huge competition from the likes of Amazon and every other online retailer. On the real world' side, meanwhile, smaller, more nimble rivals are taking market share from once-dominant behemoths.

The company says it plans to invest to make changes to attract customers back.

As well as boosting the money spent on staff, it's spending $1.1bn on building up its ecommerce side click and collect' (where customers order then pick up from the store) and the like. Trouble is, as Lex notes in the FT, this rather "misses the point badly. There has never been a successful large-scale digital/bricks strategy in retail because consumers are moving away from store shopping" altogether.

Meanwhile, Walmart's also pumping $20bn into a share buyback scheme over the next two years. Which, given that the problems it's facing are down to disruptive' technology, doesn't seem like a particularly good use of capital. In fact, it feels more like a desperate attempt to prop up the share price until it comes up with a better idea.

The dinosaur companies are in danger of extinction

Planned pay rises will be adding $1.2bn to Walmart's wage bill this year, and $1.5bn next year. That accounts for three quarters of its expected drop in profits. The idea is to invest in staff and premises, thus making the shop more appealing.

But regardless of how the company presents it, it's also a sign that it's getting harder to hire good people cheaply.

It's all part of the shifting back of power from capital to labour. That's going to put pressure on profit margins and make it particularly difficult for companies with large levels of low-paid employees and lots of infrastructure to keep increasing their earnings using their current business models.

At a time when corporate lifecycles are getting ever shorter, it's more important than ever to be able to react quickly to change.

The problem is that once upon a time, all that infrastructure and these brands represented a massive barrier to entry and a competitive advantage. Now they just represent baggage.

The banks are a classic example of the sort of industry that suffers from very similar problems. Lots of infrastructure (branches) that no one really wants to use, combined with institutionalised complacency as a result of being the biggest players for too long.

Andrew McNally wrote a lot more about the impact of innovation and the four key traits that companies will need to survive over the coming years and decades in a recent issue of MoneyWeek magazine. If you haven't already, you should check out his piece to learn which types of companies are most vulnerable to this sort of change.

If you're not already a subscriber, sign up now.