Walmart should buy these 3 startups to take on Amazon, according to Morgan Stanley (WMT, AMZN)

Allbirds

In a note to clients about the battle between Amazon and Walmart, Morgan Stanley said Walmart should consider acquiring additional brands to better position itself against Amazon.
Amazon's shoppers are younger and wealthier, on average, when compared to Walmart's shoppers.
Startups like Outdoor Voices, Allbirds, and Warby Parker, which are not multi-billion acquisitions, could help steal some of those customers.

Walmart needs to go on another spending spree to compete with Amazon, according to Morgan Stanley.

In the increasingly fierce battle between Amazon and Walmart, the band's analysts predict a convergence in target customers. While Walmart has more customers toward the lower end of the income spectrum, Amazon over-indexes higher. Each is looking for new growth, and it's getting to the point where the only place that growth can come from is the other retailer.

"The next leg of growth will likely come from the attack on the others' consumer base," the analysts write.

In a paper outlining the battle between Amazon and Walmart, the bank's research analysts assert that Walmart should scoop up some smaller, more niche brands like Outdoor Voices, Allbirds, or Warby Parker. These brands, the analysts said, are already favorites of the younger, wealthier demographic that make up Amazon's core. All three of these brands are e-commerce success stories with positive associations in customers' minds, and could jump-start Walmart's shift.

Walmart has already made inroads here, acquiring women's clothing online retailer ModCloth and men's clothing online retailer Bonobos. But Morgan Stanley thinks it needs to do more in order to compete with Amazon. Additionally, these brands could have an impact on how Walmart is perceived holistically.

"Additional brands that skew toward wealthier consumers could, over time, elevate the Walmart brand," the analysts said.

These brands wouldn't be affected by any negative associations this demographic may have with Walmart's brand. Walmart is still associated with its low-cost roots in many minds, but it has expanded its assortment in clothing, with these aforementioned acquisitions, and has greatly expanded its grocery offering, which now includes many natural and organic items.

"By acquiring upscale brands, Walmart could introduce its refreshed brand to higher end consumers," the analysts wrote. "Additional acquisitions could accelerate Walmart adoption by Amazon's core customer."

That means these brands can then act as a gateway for these sticky Amazon customers and convert them to the Walmart empire if they continue to have positive experiences, and potentially even expand their purchasing habits to the parent brand.

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