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FROM CART TO CASH: AMAZON VS WALMART AR SHOWDOWN

While Walmart has an impressive DSO, Amazon stands out with its ability to keep
the cash conversion cycle negative. Here is a comparative analysis of the
receivables management techniques employed by these two retail giants.


5X

faster cash collection by Walmart


3X

longer CCC for Amazon vs Walmart


30%

higher DIO for Walmart vs Amazon


6X

more cash for Amazon vs Walmart



With a whopping $500+ billion in annual sales, Amazon and Walmart move mountains
of merchandise yearly. 

But that also means plenty of invoices to collect! 

Get ready for a financial face-off of epic proportions as Walmart and Amazon go
head-on in the battle of cash conversion. Will lightning-quick delivery give
Amazon the edge or can Walmart's brick-and-mortar prowess drive faster cash
flows?

Let’s unravel the O2C secrets of Walmart vs Amazon and find out who has a better
grip on accounts receivable (AR) and working capital.


WALMART COLLECTS 5X FASTER THAN AMAZON

Receivables turnover ratio (ART) is your go-to metric if you want to find out
which business is getting paid faster.

Receivables turnover ratio = Net credit sales/average receivables

Walmart’s average ART was 88 against Amazon’s 18. This essentially means that
Walmart collects almost 5X faster than Amazon.



While this is not an apple-to-apple comparison, it is a reflection of the
differences in the way both the giants do business. Amazon is predominantly an
online retail channel (more than 50% of its sales come from its e-platform)
while Walmart’s majority of sales come from physical stores (84%).

Within their respective industries, the ART ratios of both Amazon and Walmart
are significantly higher than the industry averages, 13 for the online shopping
industry and 22 for the retail industry, indicating their dominant positions.


WALMART’S DSO IS AMONG THE LOWEST IN THE RETAIL INDUSTRY

DSO is the magic number that reveals how fast a company can turn sales into hard
cash. It measures the number of days it takes for a company to collect payments
from customers.

Walmart’s average Days Sales Outstanding (DSO) for the last five years was 4
days compared to 21 days for Amazon. Interestingly, Walmart’s and Amazon’s DSOs
are lower than their industry average of 4.5 days for physical retail and 35
days for online retail, respectively.



Amazon does a significantly better job at collecting receivables compared to
peers in the online shopping industry, considering the larger difference between
its DSO value and the industry average,


WHY IS WALMART’S DSO LOWER?

Here’s a look at why Walmart has a lower DSO than Amazon. This also tells why
physical retail businesses tend to collect AR faster compared to their online
counterparts.

 * Payment Methods: Physical retail outlets collect payments at the point of
   sale. 59% of Americans pay in cash for at least some part of their weekly
   purchases. This enables retail stores to apply cash faster, while online
   shopping platforms have to wait till delivery or bank clearance to realize
   cash.
 * Prepaid Debit Program: Walmart's partnership with Green Dot and its MoneyCard
   prepaid debit program serves as an affordable checking account alternative
   for many of Walmart's underbanked customers. The program effectively speeds
   the realization of payments from a large customer segment, contributing to
   Walmart's lower DSO.


AMAZON’S NEGATIVE CASH CYCLE HELPS IT FINANCE ITS OPERATIONS AT A LOWER COST

Turning cash invested in inventory into more cash is a routine business affair,
referred to as the Cash Conversion Cycle (CCC). 

It is influenced by how long you keep inventory (DIO), take to pay suppliers
(DPO), and receive cash from customers (DSO).

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CCC = DSO + DIO - DPO

DIO: Days Inventory Outstanding is the average number of days a company holds
inventory before selling it.

DPO: Days Payable Outstanding is the average number of days it takes for a
company to pay its suppliers.

Despite having a higher DSO than Walmart, Amazon sports a negative CCC. Over the
last five years, it has averaged -13 days.

In comparison, Walmart’s average CCC was 4.5 days. 

Let’s dive into the constituent metrics to see how Amazon and Walmart compare.

 1. Walmart’s DIO is 30% higher than Amazon’s

    Days Inventory Outstanding (DIO) is an indicator of inventory management
    success. 
    
    For Amazon, DIO averaged 30 days in the last five financial years* while for
    Walmart it was about 41 days.
    
    Amazon does not hold large quantities of the inventory by itself. Instead,
    most products are shipped directly from third-party sellers, about 82% of
    its total sales.



Walmart, on the other hand, holds 1.6X times more inventory than Amazon. This
increases its DIO. Also, Amazon’s fulfilment centres at multiple locations help
it process orders faster while reducing the inventory holding time.

 2. Amazon has significant influence over its sellers and suppliers

    A behemoth is not always benevolent. And Amazon fits this image.

    Amazon’s dominance in online retail and its faster inventory turnover (in
    comparison to Walmart inventory turnover rate) enables it to pay suppliers
    much later after collecting from customers. Amazon’s average DPO in the last
    five years is 62 days against Walmart’s 42 days.



Amazon increased its DPO from 54 days in 2018 to 68 days in 2022, while for
Walmart the DPO reduced from 46 days to 42 days during the same period. 

This enables Amazon to hold cash in hand for longer, and hence essentially be
financed by suppliers! 


A CLOSER LOOK AT AMAZON’S ACCOUNTS PAYABLES

Here’s a look at how Amazon manages its accounts payables.

 * Delayed supplier payments: Suppliers and sellers have often, and for a long,
   complained about delayed payments from Amazon. Its accounts payables
   increased by 53% during the pandemic (2020). Amazon’s market dominance
   enables it to get away with delayed supplier/seller payments.


 * Lower accounts payable turnover ratio: Amazon’s accounts payable turnover
   ratio (an indicator of how quickly a company makes payments to its suppliers)
   averaged 4.8, almost 35% lower than the industry average of 6.5. Walmart on
   the other hand, pays suppliers almost twice as quickly as Amazon. Its payable
   turnover ratio was 8.4. 


WORKING CAPITAL AND CASH ASSETS: AMAZON VERSUS WALMART

Walmart has historically maintained a negative working capital (current assets
minus current liabilities), averaging $(14.08) billion in the last five years. 

Amazon, on the other hand, has maintained a current ratio (current
assets/current liabilities) of 1.1 between 2018 - 2021. In 2022, it reported a
negative working capital, $(8.6) billion, indicative of its lengthening cash
cycle driven by increasing accounts payable and accrued expenses. 

Amazon also boasts of almost 6X the cash and cash equivalents held by Walmart.
Its operating cash flow for the latest financial year was 2.3X that of Walmart.


AMAZON AND WALMART ARE HEAD-TO-HEAD IN THE BATTLE FOR RETAIL SUPREMACY

It’s difficult to predict who’ll win the battle between Amazon and Walmart.
Amazon has rapidly grown in the last 5 years, doubling its revenue. During the
same period, Walmart’s revenues grew only 20%.

But Walmart still leads Amazon in terms of overall revenue, $611 billion vs $514
billion (Amazon’s revenue excluding AWS is only $434 billion).

Amazon has expanded its physical presence with the acquisition of Whole Foods
Market and the opening of Amazon Books and Amazon Fresh stores. Walmart, on the
other hand, is actively foraying into the e-commerce space, powered by the
acquisition of Jet.com and Flipkart in India.

The two retail titans continue to fight it out, in the stores and on online
channels, to prove their dominance, both on the balance sheet and in terms of
market share and customer order value.

*Note: Amazon’s financial year ending is December 31. For Walmart, the financial
year ending is January 31 .

Patrick Petti

14th November, 2023

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