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Look out Amazon, Wal-Mart's coming

Online retailers may worry now about Amazon expanding its business, but analysts say the land-based retailing giant could trump them all as it awakes from Internet slumber.

Online retailers may worry now about Amazon expanding its business, but analysts say the land-based giant Wal-Mart may just trump them all as it awakes from Internet slumber.

To date, Wal-Mart has had little more than a faceplate on the Net. Although the company has been on the Web since 1996, its site has generated neither the press nor the traffic of Amazon's.

But that could soon change.

Yesterday, the company announced a deal with Book-A-Million, the third largest book retailing chain in the United States. Under the terms, Books-A-Million will become the exclusive book provider for Wal-Mart's online customers.

Earlier this month, Wal-Mart signed a deal with Fingerhut, through which the catalog retailer will perform Internet order fulfillment for Wal-Mart. A Wal-Mart spokesperson said both deals will take effect later this year, along with some "significant changes" to the company's Web site.

Wal-Mart's delay in Net strategy has given the company a chance to get "its ducks in a row," according to Forrester Research analyst David Cooperstein. Although earlier bricks-and-mortar entrants have struggled to compete against pure-play e-commerce companies, Cooperstein said Wal-Mart could prove a daunting challenge to virtual stores.

"A year ago, it was Amazon vs. Barnes and Noble," Cooperstein said. "Earlier this year, it was Amazon vs. eBay. Now it's Amazon vs. Wal-Mart."

Lacking an offline presence, Amazon and other pure-plays will have a hard time reaching the majority of American shoppers who are not online. Meanwhile, Wal-Mart has the opportunity to cross market its nearly ubiquitous stores with its Web site.

Similarly, Zona Research analyst Clay Ryder said that Wal-Mart doesn't have much to fear from Amazon because of its limited product selection and reach. However, because what Amazon offers is not particularly unique, it has much to fear from Wal-Mart.

Amazon has tried to position itself as the premier online retailer, but Ryder scoffed at that notion.

"That's like Starbucks being the premier retail grocer," he said. "If Wal-Mart starts selling everything it has in the stores online, it could become the premier online retailer, not [a company] that [just] sells books and CDs online."

But analyst Mike May of Jupiter Communications said he doesn't expect Wal-Mart to go toe-to-toe with Amazon. Instead of offering as wide a selection as Amazon within each product category, May said he expects Wal-Mart to take a page from its past. Wal-Mart became the leading toy retailer in the United States not by offering as wide a selection of toys as Toys R Us, but by focusing on the most popular toys during the holiday season.

"It's conceivable that it will do with books online what it did with toys offline," May said.

But Wal-Mart's success online is by no means assured. And the company faces several challenges along the way.

Adam Sarner, leadership strategy analyst at the Gartner Group, said Wal-Mart will have to improve its Web site significantly to bring it up to par with Amazon's site. Wal-Mart will need to streamline the buying process and address privacy concerns, he said.

Amazon has an advantage over Wal-Mart in that its business was designed for the Internet, Sarner added.

"I think it's positive for Amazon to have a different business model than a bricks-and-mortar shop," Sarner said. "I don't see a disadvantage with Amazon at this point."

Cooperstein said that Wal-Mart faces another challenge with its land-based stores: its customer base. Unlike Amazon, which has been collecting valuable information on its online customers, Wal-Mart knows little about its customers because transactions are often made in cash.

Additionally, Wal-Mart's customer has a different socioeconomic makeup than the traditionally affluent Internet customer.

"They need to figure out a bridge between their traditional audience and the Internet audience," Cooperstein said.

Finally, Wal-Mart can ill afford a misstep online, said Ryder. Unlike many small Web companies who can afford to make mistakes because of their newness and relative obscurity, a misstep by Wal-Mart could have huge negative repercussions on Wal-Mart's offline stores.

"If you're a large player, the impact can be significantly different and should not be underestimated," Ryder said.

Still, Wal-Mart's moves should be a cause of concern for e-commerce pure-plays such as Amazon, said the Yankee Group's Melissa Bane.

"They're a general merchandiser and Amazon is still becoming that," Bane said.