Why Is Walmart So Cheap? Uncovering the Secrets Behind "Everyday Low Prices"

For decades, Walmart has reigned as the undisputed king of discount retail. With over 10,500 stores worldwide and annual revenues north of $550 billion, Walmart is not only the largest retailer but the largest company, period. And the foundation of this empire is a relentless commitment to "everyday low prices" – the promise of unbeatable bargains on everything from groceries to electronics.

But have you ever stopped to wonder just how Walmart manages to sell goods so cheaply? What‘s the secret behind those "rollback" deals and dollar bins? As a seasoned retail analyst and a particularly choosy shopper, I‘ve spent years studying Walmart‘s playbook. And I can tell you, it‘s not magic – it‘s a meticulously honed strategy touching every corner of Walmart‘s operations. Let‘s dive in and explore the top reasons Walmart is able to be so cheap.

1. Unrivaled scale and buying power

The foundation of Walmart‘s low-cost advantage is its sheer size. As of 2021, Walmart‘s 10,500 stores span 24 countries and serve over 220 million customers per week. The company‘s annual revenues of $559 billion are more than the GDP of many countries. And that‘s not even counting the $64 billion in sales generated by Sam‘s Club, Walmart‘s members-only wholesale chain.

This colossal scale translates into immense buying power. When you‘re ordering products by the millions, you have a lot of leverage to negotiate the best possible prices from suppliers. Walmart is notorious for squeezing manufacturers to cut costs, sometimes to the point of forcing them to shift production to cheaper locations overseas. One famous example is the "Vlasic pickle" incident, where Walmart pressured the famous pickle brand to sell a gallon jar for under $3, which Vlasic claimed was below its cost of production.

While Walmart‘s hardball tactics with suppliers are controversial, they‘re a key factor in keeping prices on the shelf so low. When a company accounts for upwards of 30% of many consumer goods categories, it can largely dictate terms to the brands that stock its shelves. And Walmart doesn‘t hesitate to use that power to secure the lowest possible wholesale prices.

2. A relentlessly efficient supply chain

Another key to Walmart‘s "everyday low prices" is the ruthless efficiency of its operations, particularly its legendary supply chain. Walmart is widely considered a pioneer in retail logistics, with one of the most sophisticated and streamlined distribution networks in the world.

The company operates over 150 distribution centers in the US alone, strategically located to minimize the distance goods have to travel to reach stores. Walmart was an early adopter of radio frequency identification (RFID) technology to track inventory, as well as cross-docking, where inbound shipments from suppliers are immediately sorted and shipped out to stores without sitting in a warehouse.

By constantly honing its transportation and inventory management, Walmart is able to minimize the costs of getting goods from factory to shelf. According to a 2019 research paper from the Institute for Local Self-Reliance, Walmart spends an estimated 3% less than other retailers on shipping and storage as a percentage of sales. Those pennies saved add up when you‘re moving over half a trillion dollars worth of goods.

3. Keeping labor costs to a minimum

In addition to hyper-efficient logistics, Walmart also keeps costs down in its stores through a lean staffing model and low wages. The company is notorious for its opposition to unions and history of labor law violations. As of 2022, none of Walmart‘s 1.6 million US employees are unionized.

With no union contracts, Walmart has wide latitude to set wages and scheduling. The company‘s average pay for a full-time associate is around $14.76 per hour, slightly above the retail industry average but still low enough that many employees qualify for government assistance like food stamps and Medicaid.

The majority of Walmart‘s store workforce is also part-time, allowing the company to avoid paying benefits and adjust staffing levels to match customer traffic. According to internal documents reviewed by The Wall Street Journal, nearly half of Walmart‘s US workforce is now part-time, up from 20% in 2005.

Of course, this lean labor model has human costs. Erratic schedules, minimal benefits, and wages that often fall short of a living wage place a heavy burden on many Walmart workers. But from a pure cost perspective, minimizing labor expenses through low pay and part-time staffing is a significant factor in Walmart‘s ability to offer such low prices.

4. Squeezing the supply chain

Beyond its own operations, Walmart‘s cost-cutting mentality extends deep into its supply chain. The company is known for placing immense pressure on vendors to slash prices, sometimes to unsustainable levels.

A 2015 study by the Economic Policy Institute found that Walmart‘s entry into a new market is associated with a 2.3% reduction in average wages for retail workers as a whole, not just those employed by Walmart. The study argues this is because Walmart‘s low pay forces competitors to cut wages to stay profitable at the lower prices Walmart brings to the market.

And it‘s not just retail wages that feel the pinch – the "Walmart effect" ripples all the way up the supply chain. Manufacturers often have to make cuts to their own workforce or move production overseas to meet Walmart‘s stringent cost demands. A famous example is Levi‘s jeans, which Walmart convinced to produce a lower-quality $25 version to fit its low price points, eating into Levi‘s profit margins.

Some economists argue this pressure sparks productivity gains and benefits consumers through lower prices. But there‘s no denying Walmart‘s growth has accelerated trends like the loss of US manufacturing jobs and income stagnation for many low and middle-skill workers. Cheap prices at the register often come with hidden costs.

5. Pushing private label and budget brands

Another key aspect of Walmart‘s low-price strategy is its heavy promotion of private label and value-oriented merchandise. In many product categories, Walmart gives prime shelf space to its own "Great Value" brand and other cheap off-brand alternatives, often displacing name brand competitors.

According to market research firm Numerator, roughly 20% of Walmart‘s sales now come from private label products. These in-house brands give Walmart more control over costs and the ability to undercut name brands on price. Walmart has over 100 private labels spanning everything from groceries to furniture to apparel.

This push towards private label isn‘t unique to Walmart – Amazon, Target, Costco and other major retailers have made similar moves. But Walmart‘s sheer scale and the floor space it dedicates to house brands makes it a powerful driver of the trend. By making its shelves a sea of "Great Value" and other budget offerings, Walmart constantly reinforces its bargain basement ethos.

6. Strategic loss leaders and rollbacks

Speaking of budget branding, perhaps no retailer is more associated with words like "rollback", "slashed prices", and "special buy" than Walmart. The company plasters these signs all over its stores and ads, constantly hammering home its discount identity.

In fact, Walmart leans so heavily into cheap prices that it‘s been known to sell some goods at a loss. These "loss leaders" – think a $5 DVD bin or $1 flip flops – may cost Walmart money on that particular item. But they serve a larger purpose of driving foot traffic, impulse purchases, and cementing Walmart‘s bargain image.

As one retail analyst put it, "Walmart is willing to take a hit on margins in some areas because they know in the long run it‘s going to increase their price perception and their overall sales." With profit margins around 3%, well below the 5-6% average for the retail industry, Walmart has made chasing volume through unbeatable prices the core of its strategy.

The Walmart effect: Cheap prices and their discontents

Walmart‘s relentless pursuit of low costs has undoubtedly saved many shoppers money over the years, especially low and middle-income households who spend a larger share of their budget on basic consumer goods. With over 80% of the US population living within 10 miles of a Walmart store, those everyday low prices are within reach of most American families.

But Walmart‘s influence on the economy and society is complex. Some researchers have found that Walmart‘s presence in a community reduces overall consumer prices by 8-13% and increases purchasing power for low-income shoppers. Other studies link Walmart store openings to lower wages, lost jobs, and higher usage of government assistance programs in the surrounding area.

This mixed picture reflects the trade-offs inherent in Walmart‘s business model. By squeezing every drop of cost savings from its operations and supply chain, Walmart is able to offer unbeatable prices that provide material relief to cash-strapped households. But that same ruthless efficiency puts downward pressure on wages, supplier margins, and investment across the economy.

As the US‘s largest private employer and a dominant player in global supply chains, Walmart exerts an outsized influence on social and economic conditions far beyond its store walls. The "Walmart effect" is a complex phenomenon that inspires both appreciation and criticism – often from the same consumers who rely on its low prices to make ends meet.

The future of everyday low prices

As Walmart enters its seventh decade, its low-price leadership is facing new challenges. The rise of Amazon and e-commerce has forced Walmart to invest heavily in its digital and delivery capabilities, putting pressure on margins. Inflation and supply chain snarls have driven up costs across the board. And younger consumers are increasingly seeking out brands that align with their values on issues like sustainability and worker welfare.

Still, Walmart remains a formidable force in discount retail. The company continues to leverage its unmatched scale and efficiency to keep prices down even as costs rise. It‘s making major investments in automation, from shelf-scanning robots to driverless trucks, to further streamline operations. And it‘s doubling down on e-commerce, highlighted by its $3.3 billion acquisition of Jet.com in 2016.

Through it all, offering the lowest possible prices remains the core of Walmart‘s DNA. As CEO Doug McMillon put it in a recent interview with Harvard Business Review, "We‘re proud of our heritage and how we keep our purpose and our values at the center of everything we do."

For better or worse, Walmart has shaped the modern retail landscape around the primacy of low costs and consumer affordability. And as the company evolves to meet the changing demands of the digital age, it‘s a safe bet that "save money, live better" will remain its north star. Billions of bargain-hunting shoppers are counting on it.