How the Retail Titan Maintains Its Dominance Through Cost Leadership, Convenience and Innovation
Walmart is the 800-pound gorilla of retail. The Bentonville, Arkansas-based behemoth generated a mammoth $559 billion in revenue across its 10,500 stores and clubs worldwide in fiscal 2021, cementing its position as the world‘s largest company by sales. That‘s more than twice the revenue of second-place Amazon.
Remarkably, Walmart has posted sales growth in the U.S., its biggest market, every single year since it went public in 1970. Its same-store sales have risen for an incredible 21 straight quarters. During the Covid-19 pandemic, Walmart further solidified its essential status with consumers, notching 9% comparable sales growth in 2020 (ex. fuel) while many other retailers struggled to survive.
So how has Walmart built and maintained such a wide competitive moat over rivals ranging from traditional retailers like Target and Costco to ascendant online players like Amazon? As a long-time student of retail and a tough customer myself, I‘ve analyzed Walmart‘s business model and strategy extensively.
In my assessment, Walmart‘s enduring competitive advantages boil down to three buckets: 1) Unbeatable price leadership through cost efficiencies and scale 2) Unrivaled store footprint and omni-channel convenience 3) Continuous innovation leveraging technology, data and automation. Let‘s dive deeper into each of these pillars of Walmart‘s competitive stronghold.
Winning on Cost Through Efficiency and Scale
"Save Money. Live Better." Walmart‘s famous slogan perfectly captures its core value proposition of offering the lowest possible prices to help families stretch their budgets. Founder Sam Walton‘s obsession with eliminating waste and driving efficiency is deeply embedded in Walmart‘s DNA.
Walmart achieves "everyday low prices" (EDLP) through a combination of:
- Massive volume and purchasing power over suppliers
- Vertically integrated, hyper-efficient distribution and logistics
- Relentless focus on cutting costs in labor, energy, rent, marketing and every other area
- Willingness to operate on razor-thin margins of around 3% and prioritize market share over short-term profits
Let‘s unpack how Walmart‘s immense scale creates cost advantages that are very hard for rivals to replicate. Walmart‘s $559 billion revenue base is more than:
- 5 times larger than #2 U.S. retailer Amazon ($281B)
- 8.5 times larger than Costco ($163B)
- 11 times larger than Target ($93B)
- 14 times larger than Kroger ($132B)
This huge sales volume gives Walmart tremendous negotiating leverage with suppliers. Vendors have little choice but to accept Walmart‘s strict pricing demands or risk losing out on a huge chunk of business. By some estimates, Walmart captures 25-30% of many consumer goods companies‘ total sales. As the biggest retail account by far, Walmart gets the lowest cost of goods.
Walmart then uses its highly automated, vertically integrated distribution system to get products to shelves quickly at minimal cost. Walmart‘s supply chain is the largest private logistics operation in the world, encompassing:
- 210 distribution centers across the U.S.
- 8,000+ trucks and 80,000 trailers
- 100,000 supply chain associates
- Ability to replenish stores within 24-48 hours
According to supply chain consultancy MWPVL, Walmart spends under 1.7% of revenue on outbound shipping costs, well below the 4-5% outbound costs of most retailers. Walmart‘s sophisticated logistics technology and "cross-docking" minimize inventory storage and handling.
On the labor front, Walmart leverages self-checkout kiosks and "smart" scheduling software to reduce staffing expenses. Walmart also keeps store construction and maintenance costs down through a cookie-cutter, no-frills store model.
By aggressively cutting costs in all areas, Walmart can profitably sell products for 10-15% less than competitors on a consistent basis. This price leadership draws a huge number of value-conscious shoppers and fuels Walmart‘s industry-leading sales per square foot metrics.
Expanding Convenience Through Omni-Channel
Beyond just offering low prices, Walmart has built an unparalleled store footprint for easy, one-stop shopping across a wide variety of categories from groceries to apparel to home goods. 90% of the U.S. population lives within 10 miles of a Walmart store. Walmart‘s nearly 4,800 stores in the U.S. alone cover over 700 million square feet:
- 3,570 Supercenters (180,000 sq ft)
- 800 Neighborhood Markets (42,000 sq ft)
- 380 Discount Stores (106,000 sq ft)
This sprawling brick-and-mortar presence has given Walmart a huge head start in the booming online grocery market. With its stores doubling as fulfillment hubs, Walmart can profitably offer same-day pickup and delivery options that pure-play e-commerce rivals can‘t easily match.
In fact, Walmart is now the top online grocer in the U.S., with 30% market share, edging out Amazon and Instacart. Its 3,000+ store pickup locations and 1,500+ delivery locations reach 70% of the U.S. population. Walmart is on track to enable same-day delivery from 3,500 stores by year-end.
Walmart‘s growing digital prowess has it well-positioned to ride the rapid shift to e-commerce post-Covid. In Q4 2020, Walmart‘s U.S. e-commerce sales surged 69% to $64 billion. That solidified its spot as the #2 online retailer behind Amazon. Importantly, Walmart generates positive operating margins in e-commerce, unlike many rivals.
To strengthen its online offering, Walmart has acquired digital brands like menswear retailer Bonobos, plus-size fashion site Eloquii, and home goods merchant Hayneedle in recent years. Adding more specialty assortments will help Walmart attract younger, affluent shoppers to boost e-commerce growth and margins.
Leading Through Innovation and Automation
A final key pillar of Walmart‘s evolutionary competitive strategy is leveraging cutting-edge technology to drive efficiency, personalization and convenience. Going toe-to-toe with Amazon‘s formidable tech capabilities is no easy feat, but Walmart is making the right investments to hold its own.
Some examples of how Walmart is deploying AI, automation and data science across its operations:
- Demand forecasting models that predict customer behavior at the SKU level to optimize inventory
- Robotic systems that scan shelves to identify missing items and check prices
- Drones to deliver products and stock items in warehouses
- Machine learning to tailor product recommendations and dynamic pricing
- Computer vision to speed up checkout and prevent theft
- Virtual reality headsets to train salespeople
- IoT sensors on trucks and in stores to monitor assets and maintenance needs
- Blockchain and RFID tags to trace food sourcing and expiration
Walmart has developed one of the world‘s largest private clouds, called OneOps, to efficiently process over 2.5 petabytes of real-time transaction data flowing through its system every hour. Mining these data troves for actionable insights gives Walmart a big edge in delighting customers and streamlining costs.
According to a recent Harvard Business Review analysis, "No traditional retailer has moved as fast as Walmart to put artificial intelligence and machine learning at the center of its business. The results are already visible in its ability to anticipate and meet customer demand."
With a $10+ billion annual technology budget, Walmart can outspend almost any retailer on digital innovation. Expect to see Walmart continue to leverage AI and automation to extend its competitive lead, especially as rivals‘ tech investments dry up post-pandemic.
The Staying Power of Walmart‘s Cost and Convenience Advantages
When it comes to the holy grail of retail — delivering the right product to the right customer at the right price, place and time — Walmart is hard to beat. By relentlessly driving costs out of its operations and continuously expanding customer access points, Walmart has cemented strong loyalty with budget-conscious families.
In a 2021 survey by consultant BrandSpark, Walmart ranked as the most trusted retailer for everyday low prices across all categories, edging out Amazon for the top spot. 69% of shoppers named Walmart as a price leader, far outpacing Target at 39%.
This stubborn shopper perception of Walmart as the value king creates immense challenges for rivals trying to steal share without destroying their margins. If other retailers slash prices too aggressively to undercut Walmart, the Bentonville giant has the financial firepower to engage in costly price wars that weaker competitors can‘t sustain.
With over $15 billion in net profits and $25 billion in free cash flow in 2020, Walmart has a huge war chest to invest in strengthening its competitive advantages while also returning cash to shareholders. It‘s a virtuous cycle that‘s very difficult for rivals to disrupt.
To be sure, Walmart faces intense competitive pressure from Amazon and other rivals aiming to chip away at its dominance. But through its cost leadership, convenience and culture of innovation, I believe Walmart is well-equipped to keep extending its half-century reign over retail in the decade ahead. Competitors who underestimate Walmart‘s agility and adaptability, do so at their own peril.
