Wal-Mart Takes Fight to Amazon

NEW YORK ( TheStreet) -- While visiting Wal-Mart's ( WMT) Web site in search of an obscure book, I could not find it in stock nor could I order it. Instead, I was referred electronically to an unexpected source: Barnesandnoble.com.

Taking heed of the ancient proverb, "the enemy of my enemy is my friend," Wal-Mart has evidently struck up a curious yet most sensible pact with Barnes & Noble ( BKS), which runs an expansive chain of physical, rather than virtual, stores.

An alliance between the two brick-and-mortar titans certainly makes sense for a variety of reasons. First, Wal-Mart and Barnes & Noble.com share the fear of having Amazon.com ( AMZN) siphon off an ever-greater portion of their sales.

Nearly 45% of Amazon.com's sales come from electronics and general merchandise, rather than books and CDs. This percentage has been creeping up in the last two years and will continue to rise as a result of organic growth and Amazon.com's impending acquisition of Zappos.com, an online apparel retailer.

Second, Wal-Mart and Barnes & Noble are trying to jump-start their Web sales, even as they manage increasingly complex chains of physical stores. Both Barnes & Noble and Wal-Mart are experimenting with new techniques to drive Web-browsers into their stores, and vice versa.

For example, merchandise ordered online at Walmart.com can be picked up in or returned to one of its retail stores. This saves the consumer shipping costs and brings more traffic to the store. In an effort to reinvigorate its holiday traffic, Barnes & Noble recently entered the e-book reader fray with the Nook, an electronic book reader that came out this month. The Nook is replete with numerous features and gimmicks to lure book and CD buyers into Barnes & Noble stores.

Even as they build their online presence, Wal-Mart and Barnes & Noble face challenges that Amazon.com doesn't have to deal with. The former are forced to pay state sales tax for merchandise sold in locations in which they operate. Amazon.com, on the other hand, is exempt from sales tax in most states, on the basis that it does not operate physical stores in such states. This allows Amazon to retain an important price advantage over its rivals.

In my quest to find the obscure book that brought me to Walmart.com, I finally found it, brand new, in stock and ready to order, in a place available for all to see, facing out from its own virtual bookshelf -- on Amazon.com.

-- Written by Battle Road Research in Waltham, Mass.

Battle Road Research (www.battleroad.com) an equity research firm, serves fund managers, analysts and financial advisers with an independent voice on technology, health care, solar power and education stocks. Battle Road analysts place an equal weight on industry and securities analysis in an effort to seek out stocks to buy and stocks to avoid. As an integral part of our research process, we tap into a network of industry sources who provide insight into the companies we cover. We present our conclusions in a straightforward buy, hold, sell format. As a matter of principle, we refrain from investment banking, company-paid reports, and personal investment in the stocks we research. Visit us on the Web at www.battleroad.com and www.battleroadblog.com.

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