Analysis of Walmart’s Operations and Strategy

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Analysis of Walmart’s Operations and Strategy

The retail industry has emerged to become one of the most lucrative industries in the U.S. due to the industry’s rich product and service portfolio. Established retail giants, such as Walmart, Target, Costco and Home Depot, seem to enjoy economies of scale, monopoly rents and other first-mover advantages, thereby dominating the industry. However, the unprecedented rise of small-scale convenience grocery stores, coupled with the growth of e-commerce firms such as eBay and Amazon, has become a threat to the retailers’ market share and profitability. The current report examines Walmart’s operations and strategy, with particular emphasis on the retailer’s products and services, market share, direct competitors and other businesses that affect its profitability and growth. Further, attention is paid to the retailer’s sources of competitive advantage, the current events and challenges that are affecting its performance and how it is responding to the challenges. 

Overview of Walmart

Walmart is the largest retail company in the United States and was founded by Sam Walton in 1962 when he opened the first discount store in Arkansas. Formerly called Walton’s, the retailer was later incorporated under that name Walmart Inc., and its headquarters established in Bentonville Arkansas. The company grew rapidly during the 1970s through geographical diversification and by 1980s, it was operating approximately 276 stores in more than 11 states in the U.S. (Hayden, Lee, McMahon & Pereira, 2002). In the 1990s, Walmart started internationalizing by entering the Mexican, Canada and China markets in 1995, 1996 and 1999, respectively. In 2019, the Fortune Global 500 listed Walmart as the largest company worldwide by revenue, with $514.405 billion. As of 2020, Walmart has revenue earnings of $523.964, and employees approximately 2.2 million employees in its 11,484 stores located in more than 28 countries across the world (Walmart, 2020).

Products and Services

Walmart offers a wide range of merchandise goods and services, including consumer electronics, clothing and footwear, sports and fitness supplies, toys, furniture, jewelry, general groceries, movies and music, photo finishing, health and beauty, pet and graft supplies and home improvement products. The retailer also offers a variety of services such as Walmart-2-Walmart, Walmart Pay, Walmart MoneyCard, Pickup Today, financial services and e-commerce services through Walmart.com.

Annual Sales

Walmart has maintained a consistent increase in annual sales since 2012. For instance, the sales grew from $446.51 billion in the 2012 FY to $485.65 billion in 2015, before rising further to $514.41 billion at the end of the 2019 fiscal year as shown in figure 1 below. According to Ellickson (2016), this steady increase in the retailer’s annual sales is driven by two major factors or strategies; namely, diversified product and service portfolio and the pricing policy. Notably, Walmart focuses on reducing operational costs by purchasing merchandise goods from low-cost suppliers and lowering their employees’ wages. This way, the retailer is able successfully implement the low-cost leadership strategy by offering products and services at more affordable prices relative to competitors.

Figure 1: Walmart’s Annual Sales Revenue between 2012 and 2019 in Billions (Statista, 2020)

Market Share

This ability to control such a large market share is derived from the company’s low-cost pricing policies, wide range of products and services, and increased focus on stocking quality merchandise goods. Moreover, the cumulative market share owned by the retailer’s various business segments such as the Sam’s Club and the grocery segment, have place Walmart in a unique position to dominate the brick and mortar retail industry in the U.S. 

Market Structures

The market in which Walmart operates – the retail and grocery stores industry – can be thought of as an oligopoly market structure. Head and Spencer (2017) describe oligopoly as a market structure where a market or an industry is dominated by small groups of large and well-established firms. Walmart’s market shows these features of an oligopoly market structure. Particularly, in addition to Walmart, there are other few large retailers, such as Costco, Target and Amazon, which control and influence the U.S. retail industry. Due to their economies of scale and first-mover advantages, these retailers adopt aggressive competitive strategies, for example, massive price cuts and extensive marketing, thereby making it difficult for new players to enter or succeed in the market. Notably, Walmart seems to offer customers very low prices – prices below which new entrants and other competitors will make losses and eventually be pushed out of the market.     

Operations

Being a multinational corporation, Walmart currently operates 11,484 retail stores in 28 nations across the world. Some of the countries in which Walmart has significant presence include the United States, Canada, Japan (as Seiyu Group), South Africa, Chile, and Argentina. Moreover, the retailer operates in the United Kingdom as Asda, Walmart de Mexico in Mexico and as Best Price in India. Besides the traditional brick and mortar stores, the Walmart also offers e-commerce services in more than 11 countries, and performs over 250 million transactions every week. This strong international presence allows Walmart to compete globally, which consequently increases their market share and revenue earnings.

Competitors

The fact that the retail industry is now matured means that Walmart faces stiff competition from other players in the industry – both incumbents and entrants. For instance, direct competition comes from such retailers as Target, Costco, Lowe’s, Home Depot and Amazon, who offer similar services and merchandise goods. Despite the aggressive competition, Walmart has managed to attain and maintain a strong competitive advantage due to its policy of “saving people money so they can live better” and striving for excellent customer service (Walmart, 2020). However, competition from firms with new business models, such as Amazon and eBay, continues to grow because the firms as focusing on meeting consumers’ evolving needs and preferences; for instance, convenience and efficiency through such services as online retailing and home delivery. For example, Amazon launched the Amazon Prime service that facilitates the delivery of purchased products to customers within a few hours or up to two days depending on the customer’s location. This growing shift to e-commerce and home delivery services is threatening Walmart’s market share because the firm still maintains a traditional brick and mortar business model, which implies that it relies heavily on in-store sales.

Additionally, the low switching costs in the retail industry has made competition even more intensive. Most firms in the retail industry stock and sell a wide selection of merchandise goods that have been sourced from similar manufacturers, although some retailers are increasingly producing fast-moving products, such as bakery, inhouse. As a result, consumers can easily switch between retailers, based on their preferences, without incurring any costs. Many are also focusing on attracting more customers using such promotion strategies as end-of-the-month or holiday discounts and offers, coupons and loyalty card programs.

Walmart is also facing indirect competition from other businesses, especially product manufacturers. For instance, IKEA, LG, Sony, Samsung, Nike and Gap among other manufacturers that supply Walmart with merchandise goods have dealerships, showrooms and outlets that some consumers might find more convenient and reliable.      

Economic Concepts

Walmart derives its competitiveness from three key economic concepts or strategies: economies of scale, advertising and low-cost strategy.

Economies of Scale

As aforementioned, Walmart operates more that 11,100 stores in 28 countries around the world. With this high number of stores in different geographical locations, the retailer is able to make bulk purchases of merchandise goods from the most cost-effective suppliers. Since “bigger is often cheaper”, bulk purchases enable the retailer to enjoy economies of scale due to the massive discounts it gets on such purchases. This way, Walmart manages to use economies of scale, as an economic concept, to its advantage.

Advertising

Walmart also derives its competitiveness from marketing and advertisement. Notably, the retailer uses both modern and traditional methods of advertising to increase consumer outreach and market share. Modern advertisement involves the company capitalizing on online marketing by posting commercial ads – promotional videos, images and memes – on various social media platforms including Facebook, Twitter and Instagram. Increased presence on these platforms, combined with the reliability of its company website, provide Walmart with opportunities to reach millions of potential customers without incurring hefty costs on advertising. The retailer seeks to boost sales volume even further by utilizing inhouse promotion methods such as offers and discounts. In addition to these approaches, Walmart also uses broadcast media advertising, TV in particular, in order to reach an audience of older consumers and those who are not social media enthusiasts. 

Low-Cost Strategy

Cost leadership strategy is yet another practice or concept that gives Walmart its competitive advantage. Citing Vance (1994), Heyden et al. (2002) report that “Wal-Mart's corporate management strategy involves selling high quality and brand name products at the lowest price” (p. 4). To keep prices low and still remain profitable, the retailer focuses on minimizing operational costs by leveraging advanced technologies, offering lower wages and adopting modern warehousing practices. More importantly, given that Walmart makes bulk purchases, it is able to eliminate middlemen from their supply chain and negotiate for better merchandize deals directly with the manufacturers.

Impact of a Significant Recent Events

The ongoing COVID-19 pandemic has significantly affected the level of demand for Walmart’s products and services. For example, uncertainties about the aftermaths of the pandemic, especially the effects it might have on the economy in the near future, has forced many consumers to buy only essential goods and services such as food and grocery. As a result, there has been a significant drop in the sales of other products, such as jewelry, furniture, clothes and beauty product. Additionally, the measures taken to limit the spread of the virus, including lockdowns and restriction of social gatherings, have reduced the traffic of customers to the few stores that are open. The negative impacts are even more by the fact that Walmart depends largely on in-store visits for most its daily sales.              

How Walmart can better respond to the Challenges it Faces

Walmart can better address the challenges associated with the current COVID-19 pandemic by investing more in online shopping and improving its NextDay delivery service. Indeed, online shopping is the new norm for most retailers and consumers in the wake of the ongoing pandemic. Thus, by joining the e-retailing and home delivery bandwagon, Walmart will be able to surmount the reach out to its customers and increase daily sales despite the measures taken by the government to restrict people’s movement and gatherings.