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Wal-Mart, Amazon considering partnership

Online retailer Amazon.com and offline retail giant Wal-Mart are in "philosophical" discussions to create a partnership, according to a source close to the companies.

Struggling e-tailer Amazon.com and offline retail giant Wal-Mart are in "philosophical" discussions to create a partnership, according to a source close to the companies.

Although details are "not a reality" at the moment, the source said, the two companies are pondering the effect a deal might have on the capital markets and the companies' cultures.

The source compared the potential deal to the recent partnership between Coca-Cola and Procter & Gamble. Those two companies last month created a $4 billion venture that seeks to use Coke's global distribution strength to sell P&G products, and it lets Coke tap into P&G's research expertise for developing new products.

However, the alliance has not boosted the shares of those companies: Coke shares are off about 11 percent since the announcement, and P&G stock is down 8 percent.

A deal between Wal-Mart and Amazon would combine the retailing and purchasing power of Wal-Mart with the digital distribution capabilities of Amazon, the source said.

"It doesn't take a rocket scientist to figure out why a deal would make sense. This would greatly expand the products that go through Amazon and give them the depth of Wal-Mart's purchasing power," said the source, who could not give a timeline to a potential deal.

"Both companies have great admiration for each other's strengths and capabilities. A partnership would certainly be viewed possible not only by the respective companies but by the market in general," the source said.

Speculation about the deal, which was first reported in Britain's Sunday Times, caused Amazon's stock to surge 24 percent Monday. Shares were up $2.38 to $12.38, still well below their 52-week high of $75.25. Wal-Mart shares slipped 55 cents to $48.37, down about 25 percent from their 52-week high.

Amazon has a market capitalization of $5 billion, compared with $216 billion for Wal-Mart.

Representatives of both companies declined to comment on a potential deal.

Some analysts said a partnership would make sense for both companies.

With reports indicating that Amazon may soon face a cash crunch, a deal with Wal-Mart could help reassure nervous suppliers, industry watchers say. And a deal could help Amazon exit gracefully from product categories that aren't performing well, such as lawn furniture. Instead of completely discontinuing such categories, Amazon might be able to direct shoppers for such items to Wal-Mart.

A deal with Wal-Mart would also mean increased exposure for Amazon in rural areas and among lower-income consumers, many of whom have yet to shop online, analysts say. A deal also would allow Amazon to maximize the distribution centers it built in the last two years.

"I think Amazon does need a deal to leverage its existing asset base," said Jeetil Patel, a financial analyst with Deutsche Banc Alex Brown.

For Wal-Mart, Amazon offers a proven, stable e-commerce platform. With all of the dot-com closures in the past year, Wal-Mart stands to gain customers by default. But some analysts question whether its Web site and e-commerce fulfillment systems can handle a huge upsurge.

"Wal-Mart has to appreciate that Amazon is a better online retailer than Wal-Mart is," said Ken Cassar, digital commerce analyst at Jupiter Media Metrix. "Now is the time for Wal-Mart to get it right. Many of Wal-Mart's customers are just starting to come online."

A deal could be structured like the Amazon-Toys "R" Us partnership, in which Amazon handles the online sales for the traditional toy seller. Like Toys "R" Us, Wal-Mart could be ready to scrap its own efforts to conquer the Web and throw in with an established Web presence--one with expertise in distribution and fulfillment, taking online orders, and handling heavy Web traffic, analysts say.

Wal-Mart, the world's largest offline retailing company, has had mixed results at best online. Until recently, Walmart.com's traffic numbers have been lackluster, consistently missing a spot among the top 50 e-tail sites, according to Jupiter Media Metrix.

The company has redesigned its site twice, with the last effort forcing the company to close its online store for over a month. Like many online stores, the company has suffered several outages to its Web site.

Last week, the company also announced it had trimmed its staff in a cost-cutting measure. Regardless, Walmart.com remains in good standing with parent company Wal-Mart, said Walmart.com Chief Executive Jeanne Jackson.

"Wal-Mart has been very supportive," Jackson said last Tuesday. "They are happy with the progress we've made."

News.com's Greg Sandoval and Troy Wolverton contributed to this report.