Walmart: Save Money. Live Better. Retail for Everyone.
Walmart’s unrelenting focus on minimizing costs and low-priced items continues to create value for consumers. But how has the world’s largest retailer achieved its success?
Walmart is the largest global retailer, with over 2.2 million employees, 260 weekly customers, and 11,500 individual store locations1. As a company, Walmart aims to “help people around the world save money and live better2.” The company’s mission translates into a business model through Walmart’s market penetration and pricing. Walmart aims to deliver value by 1) offering customers everyday low pricing (“EDLP”) across consumable goods; 2) maximizing reach via a large footprint of retail stores and e-commerce.
The first thing that comes to mind when you think of Walmart is cheap merchandise. Walmart champions its leadership in pricing, offering an array of quality, branded merchandise at lowest possible costs. As a result of its strategy, Walmart sacrifices gross margin to maximize its customer base. For example, Walmart’s current gross margins stand at ~25% vs. ~30% for Target, a key competitor3. However, Walmart is able to offset foregone gross margin with increased volume and higher absolute sales and profit levels. This creates a positive cycle, as higher sales and volumes provide further leverage to Walmart to lower prices and attract more customers.
Walmart effectively aligns its operating model with its business model to create value for customers and shareholders alike. Below are key aspects of its operating model, which have allowed Walmart to achieve its position as the largest global retailer, with a market capitalization of ~$200 billion, revenues of over $480 billion, and EBITDA of ~$35 billion.3
Operating Model and Its Alignment to the Business Model
At the core of Walmart’s operating initiatives is a focus on minimizing costs and maximizing volumes.
1) EDLP: As stated, Walmart offers permanently low prices rather than high-low pricing and frequent promotions. As a result, the company is able to build trust with customers. Consumers are subsequently loyal to the brand, driving frequent purchases and, thus, sales volume.
2) Suppliers relationships: Walmart is notorious for ruthless and aggressive negotiations with all suppliers. Given its enormous footprint and sales volumes, Walmart has the power and leverage to “make or break” any brand it offers. For example, Walmart accounts for more than 20% of revenues of several large packaged food companies, including General Mills, Kellogg, and Hanesbrands4. As a result of negotiating low prices with suppliers, Walmart can maintain a low cost structure and pass along ultimate savings to customers.
3) Retail channels: Walmart opened its first discount store in 1962. Walmart currently has ~500 such stores, which offer general merchandise in ~100,000 square foot spaces. The Supercenter, started in 1988, is larger (~180,000 square feet) and designed to be a one-stop shop for consumers, offering groceries, which now comprise ~56% of sales, and general merchandise. ~3,500 such stores exist. The Neighborhood Market stores, started in 1998, offer a smaller footprint for communities in need of pharmacy, groceries, and merchandise. Such stores are smaller at ~38,000 square feet1,2. Walmart also operates Sam’s Clubs, a key Costco competitor. Moreover, Walmart has invested in e-commerce and mobile commerce to complement its retail footprint. The company has a presence in every state in the U.S. and stores across 26 other countries5. Walmart’s significant retail footprint and digital offering allow it to maximize customer reach across geographies. Such a strategy to maximize market penetration is very much in line with its business model. Walmart is able to maximize its customer base by reach and by offering diverse products. This, in turn, allows Walmart to maximize sales volume globally.
Through hard-nosed negotiations with suppliers, Walmart is able to minimize product cost and pass through savings via everyday low pricing. Walmart is able to maximize customer reach by operating a variety of retail stores and complementing such stores with a strong digital offering. As a result, Walmart is able to execute on its business model and maximize sales volume and profitability.
Sources:
1. http://corporate.walmart.com/
2. Walmart 2014 Annual Report
3. Capital IQ
Walmart definitely does a great job marrying its business and operating models together! Everything they do is to reduce their costs, and you definitely touched on one of the key elements – the hardnosed negotiations with their suppliers. They are definitely ruthless with both their product and non-product suppliers – so much so that they require all suppliers to have an office in Bentonville, Arkansas!
Aside from just squeezing suppliers on the prices, they also force suppliers to play a larger role in managing their supply chain costs. For example, Walmart was one of the pioneers of Vendor Managed Inventory (VMI), where suppliers are responsible for monitoring the inventory levels at Walmart’s warehouses and making sure there was enough product at all times.
I also find it very interesting that Walmart maintains such a vast distribution network, including managing their own fleet. They’ve managed to master this model through a mix of technology and techniques (such as cross docking), and have one of the most efficient supply chains in the world!
I wonder if they’ll be able to keep it up though – as they seem to be having some recent trouble adjusting their supply chain to the changing retail landscape, in particular, the shift towards ecommerce and creating an omnichannel experience. We’ll see if this retail / supply chain giant can get through this rough patch!
Great post, Jeff. I echo both your’s and VA’s comments notion that Walmart has traditionally managed to align both its operating and business model effectively. While they have an immense focus on cost reduction, primarily through the ability to keep supplier costs down and enjoy economies of scale through it’s massive super centers, I am a bit skeptical of their future growth prospects and ability to continue enjoying the success they have done in the past.
There was actually a very interesting Business Insider article from October this year which essentially pointed out that Walmart’s “entire business model is crumbling.1” On October 14, 2015, Walmart’s shares endures the steepest one-day drop since 1988. All this was on the back of a profit warning from the company due increased wage costs, more competition from e-commerce companies like Amazon and supermarkets and dollar stores. This is in addition to its weaker international segment growth as a result of the stronger dollar. With this in mind, I would be keen to know whether you believe Walmart should re-focus it’s business by getting out of the many unprofitable stores, move from it’s traditional concept of super centers and possibly Sam’s club (which posted its worst sales figures for quite some time earlier this year)2. Particularly, with super centers, they are potentially getting out of fashion as people tend to shop more efficiently and hence it may make sense for Walrmart to open additional smaller super market type stores in the city. Do you think Walmart is at a crossroads with its business and operating model and how might poorer investor confidence, lack of growth in US and potential move to super market type stores affect it’s focus on gaining cost efficiencies?
1 http://www.businessinsider.com/challenges-to-walmarts-business-model-2015-10
2 http://www.newsmax.com/Finance/StreetTalk/Wal-Mart-Business-Model-Crumbling/2015/10/17/id/696702/