Wal-Mart (WMT) announced last week that it will stop selling Amazon‘s (AMZN) Kindle e-readers and tablets. The decision indicates that the world’s largest retailer is wary of increased competition from Amazon.The retailer will stop carrying Kindles beyond its existing inventory and purchase commitments in hopes that consumers will be more interested in Apple‘s (AAPL) iPad and other gadgets.
Wal-Mart follows in the footsteps of Target (TGT), which made a similar decision in May. We expect this decision will have only a minor impact on Amazon’s revenue from the Kindle, as the majority of the devices are sold directly through the company’s website.
Wal-Mart’s decision is a no-brainer
Wal-Mart’s decision did not come as a surprise, as it was increasingly being treated as a Kindle showroom by customers. The device is integrated with Amazon’s online store and makes it easy for Kindle users to shop at Amazon.com. It was evident that the increasing penetration of Kindle devices would encourage customers to spend more at Amazon.com, which offers products at competitive prices compared to Wal-Mart or Target.
Forrester Research analyst Sucharita Mulpuru, who calls the Kindle a Trojan horse in other stores outside of Amazon, believes Wal-Mart “should have made this decision a long time ago,” he told Reuters. The timing of the decision ahead of the holiday season means that Wal-Mart stands to lose the holiday season sales.
Revenue from Kindle may dip in Q4
Amazon’s Kindle hardware revenue and the number of devices sold may dip slightly (if at all) as a result of the move. The dip will influence the decision of prospective customers who may choose to stay loyal to Amazon and buy a Kindle device from the website or instead buy another tablet like the Apple iPad, Google Nexus or Barnes and Noble’s Nook that remain available at Wal-Mart.
The good news for Amazon is that two other marketing channels, Best Buy (BBY)and RadioShack (RSH), will continue to stock the Kindle range of products. Another positive from this move is better margins from the hardware sales, provided the company is able to retain prospective customers, now with the middlemen taken out of the equation.
However, if other retailers follow suit, it may curtail Amazon’s reach toward buyers who still prefer to shop at physical stores vs. online stores. With seamless connectivity to its e-store provided by the Kindle, Amazon had an opportunity to convert Kindle users into its own users. But with Wal-Mart pulling back it will be tougher for the company to do so.
We have a $222 estimate for Amazon shares, which is 15% below the current market price.
Source:
http://indigest.biz/2012/09/why-wal-mart-kicked-out-amazons-kindle/