(Please note that instructor will be using AI and plagiarism tools to check this work.)
Here is my request:
Using the article below, write an original APA formatted 12 to 15 page case study (with at least 5 credible references cited) that includes these elements:
1. The history, development, and growth of the company over time, what the company does, how it developed historically, what problems it is experiencing, and how you are going to approach the issues in the case write-up.
2. The nature of the external environment surrounding the company
3. The identification of the company’s internal strengths and weaknesses, and whether it has sources of sustainable competitive advantage
4. A SWOT analysis
5. The kind of corporate-level strategy that the company is pursuing
6. The nature of the company’s business-level strategy
7. The company’s structure and control systems and how they match its strategy
8. A general idea of a company’s financial position should be determined through the use of ratio analysis. These ratios should include information from subgroups: profit ratios, liquidity ratios, activity ratios, leverage ratios, and shareholder-return ratios. Use the financial data from credible sites like https://finance.yahoo.com/quote/WMT/key-statistics/, https://finance.yahoo.com/quote/TGT/key-statistics/, and https://finance.yahoo.com/quote/AMZN/key-statistics/ to do the analysis. Use this information to strengthen your case, by comparing the financial data to show where Walmart can make improvements in its corporate and business level strategies to be more successful in the industry.
9. Your recommendations for the company’s future success.
Here is the article:
Introduction
In July 1962, Sam Walton opened his first Walmart discount store in Rogers, a small Arkansas town with a population of just 6,000. That same year, both Kmart Corporation (Kmart) and Target Corporation (Target) also opened their first stores, although unlike Sam Walton, they focused on large metropolitan areas. By 2022, Walmart had eclipsed its rivals to become the largest retailer in the world with annual revenues of around $575 billion. The company had 2.3 million employees and more than 10,500 stores in 24 countries including 4,735 in the United States that were served by more than 210 distribution centers. The company accounted for over 13.2% of all U.S. retail sales. More than 90% of the U.S. population now lived within 10 miles of a Walmart store. Despite its success, in 2022, Walmart was facing significant challenges. In the warehouse store category, its Sam’s Club offering was struggling against Costco Wholesale Corporation (Costco), the world’s third-largest retailer. More troubling still, the online retailer Amazon.com Inc. (Amazon) was continuing to grow its share of U.S. retail sales. By 2021, Amazon’s share of U.S. retail sales had increased to 10.8%, making it second only to Walmart both nationally and globally. Amazon’s retail sales hit $468 billion in 2021, when it captured over 56% of all U.S. online retail sales. Amazon’s 2017 acquisition of the Whole Foods Market IP, Inc. (Whole Foods) brick-and-mor tar supermarket chain signaled that it was going after the grocery business, a category that Walmart had dominated since first expanding into the area back in 1988. In the wake of its August 2017 takeover of Whole Foods, Amazon cut grocery prices by as much as 40% on some products. In the months that followed, store traffic surged by 25%. Forecasts made in 2022 suggest that based on current growth trends, Amazon’s share of the U.S. retail market could grow to 14.9% by 2026, while Walmart’s share will slip to 12.7%, making Amazon the largest U.S. retailer.
Early History
Questions
- Variety stores offered a selection of inexpensive items for household and personal use. This was a concept that had been pioneered by F.W. Woolworth in the late 19th century. By 1962, Walton was a well-established Ben Franklin franchisee running 15 variety stores in small towns across Arkansas and Kansas. It was a business where Walton had honed his skills, competing against other small town variety stores. From the outset, Walton focused relentlessly on reducing prices, cutting costs, and making a living on slim margins. His overarching philosophy was to sell stuff that people need every day just a little cheaper than everyone else, and to sell it at that low price all the time. He believed that if you offered everyday low prices, customers would flock to you. His experience in the variety store business had taught him the value of this approach. To make this strategy work, you had to control costs better than the next guy. By all accounts, Walton made a religion out of frugality by tightly controlling expenses. Moreover, while still a Ben Franklin franchisee, he had pushed the boundaries of what was possible in the retailing business. Walton was one of the first retailers in the country and the first in the South to adopt a self-service format. Walton was fascinated by what other retailers were doing. He was known for visiting them and checking out their stores. He would walk into their headquarters, often unannounced, and ask to meet with senior managers. He would pepper them with questions, writing everything he saw and heard down on a yellow legal pad. When the discounting concept started to emerge in the mid-1950s in the Northeast, he made a point of visiting those stores, befriending their management, and gathering as much information as he could. These visits convinced Walton that large-footprint general merchandising discount stores would be the wave of the future. He believed that the wider range of products and better buying power of discount stores would ultimately put traditional small-town variety stores like his out of businesses. This led to the establishment of the first Walmart store. Initially, Walton had wanted Ben Franklin to back his idea of building large dis count stores in small towns. As Walton put it…. I was used to franchising, and I liked the mindset, I generally liked my experience with Ben Franklin, and I didn’t want to get involved in building a company with all that support apparatus. Ben Franklin turned him down. They didn’t see the value in small towns. Wal ton’s experience as a Ben Franklin franchisee, however, had taught him that there was money to be made in small towns. The Rodgers store took 2 years to hit its stride, but by 1964 it was generating $1 million in annual revenues, three to five times what traditional variety stores made. This gave Walton the confidence to open two additional Walmarts in nearby towns, one in Harrison and one in Springdale. The Harrison Walmart was a basic affair. It was just 12,000 square feet with an 8-foot ceiling, a concrete floor, and bare-boned wooden plank fixtures. Walton called it ugly. David Glass, who would become CEO after Walton, said that it was the worst looking retail store he had ever seen. But as Walton noted… We were trying to find out if customers in a town of 6,000 people would come to our kind of barn and buy the same merchandise strictly because of price.3 By keeping costs as low as possible, Walton found he could keep prices 20% below those of nearby variety and specialty stores. He quickly discovered that his promise of everyday low prices attracted a lot of customers. In Springdale, a town of close to 15,000, Walton was trying to learn something else, would a 35,000-square foot store work in a larger town? Here too, the answer was yes. The key was that these stores would draw in people from the surrounding small communities, who would drive an hour to the Walmart to gain price discounts. Although such discounts might be available at large suburban stores, those might be 3 hours’ drive or more away. These early Walmart stores were open longer hours than rival merchants, had plenty of parking space, and utilized the self-service concept. By the time Walton had three Walmarts up and running, he realized that the discounting formula was a success. The strategy that was emerging from these early experiences was to put a good-sized discount store into little one-horse towns that everyone else was ignoring. While rivals like Kmart wouldn’t go into a town smaller than 50,000, Walton believed that towns as small as 5,000 could support one of his stores when you considered the population of the surrounding area. As noted by Ferold Arend, Walmart’s first vice president…. The truth is, we were working with a great idea. It was really easy to develop discounting in those small communities before things got competitive. There wasn’t a lot of competition for us in the early days because nobody was discounting in the small communities. One of the problems of focusing on small towns, however, was that getting good deals from distributors and wholesalers was difficult. They would charge Walmart for the extra cost of delivering to a small-town store out in the sticks, something that irritated Sam Walton, whose obsession with controlling expenses knew no bounds. To make matters worse, large consumer product companies such as Procter & Gamble, Gillett, and Kodak would dictate how much they would sell to Walmart, and at what price. In the early days, the ordering of merchandise was also decentralized to individual store managers, so there was no opportunity to realize economies of scale from bulk purchasing. Walton realized that this situation was untenable. The solution was to open the first Walmart distribution center, close to the company’s headquarters in Bentonville, Arkansas. Buying was centralized in Bentonville to get discounts from bulk purchases. Suppliers would drop ship merchandise at the distribution centers. Then Walmart would truck them out to the stores in the area to replenish inventory. A cross-docking system was developed in the distribution center to facilitate this process. It was at this point that Walmart started to build its own trucking fleet to transport the inventory. For the distribution system to work efficiently, Walmart needed information to know what merchandise to order and when to replenish each store. This requirement drove Walmart to become an early adopter of computer-controlled inventory systems. Walton himself realized the need for better information systems early on and enrolled in an IBM school for retailers in
- Nevertheless, he was reluctant to spend the money on information technology and only relented in the 1970s after pressure from some of his managers. In retrospect, Walton acknowledged that Walmart was forced to be ahead of the times in distribution and information systems because the stores were situated in small towns. During this period, Walton was also building a strong management team. In what would become a hallmark of Walton’s approach, he would spot talented managers at other retailers and try to persuade them to come and work for him. Walton could be tenacious. He would keep pursuing talented managers until they agreed to join the company. For example, David Glass, who would eventually succeed Walton as CEO, was pursued by Walton for a decade before he agreed to join Walmart in
- Early recruits included Ferold Arend, the company’s first chief operating officer; Bob Thornton, who was brought on to open Walmart’s first distribution center; and Ron Mayer, who joined in 1968 as VP for finance and distribution. All three had experience at other retailers. It was Mayer who pushed Walton to invest in computer systems to improve distribution. Meyer hired the first data processing managers. By the late 1960s, Walton had established the foundations for future growth: (1) The Walmart discounting concept had proved attractive, (2) the strategy of focusing on small towns was already paying dividends, (3) he had surrounded himself with a talented team of managers, and (4) with the opening of its first distribution center and the adoption of formal inventory control systems, the company was well placed to replicate its formula across America. At the same time the company was still small—Walmart only had 18 stores in 1969 and sales of $9 million, whereas Kmart had 250 stores and sales of $800 million (Kmart was owned by the well-established department store retailer Dayton Hudson). To grow, Walton needed capital. Up to this point, Walton had financed Walmart’s growth from a mix of cash flow and debt. By 1969, the company was not generating enough cash to fund Walton’s growth ambitions and pay down the company’s debt. Walton believed that he needed to grow the company rapidly before rivals figured out his small-town strategy. Initially, he tried to raise more debt but was turned down by several institutions who didn’t buy into his strategy, and was “fleeced” by those who were prepared to lend him more. Walton was getting tired of owing other people money. He decided to take the company public. On October 1, 1970, Walmart had its initial public offering, selling 300,000 shares at $16.50 a share. After the IPO, the Walton family still held onto 61% of the stock. The IPO raised close to $5 million. This allowed Walton to pay down debt and fund the next stage of expansion.
Building the Colossus
Walmart’s growth strategy was very deliberate. While other discounters were leap frogging from large city to large city, for decades, Walmart remained focused on its small-town strategy. The company wanted stores to be within a day’s return drive of distribution centers (about 300 miles) so that they could be restocked regularly. Regular replenishment reduced the need to store inventory in a dedicated space at the back of the store, which meant that more of the square footage could be devoted to selling merchandise, increasing sales per square foot. While rivals typically devoted 25% of their square footage to storing inventory, Walmart kept this figure down to 10%. As Walmart expanded its own trucking fleet, it also started to pick up merchandise from suppliers in the area, rather than have them drop ship goods off at the distribution centers. Trucks would replenish a store, then pick up goods from a supplier on the way back to the distribution centers so they had loads on the backhaul. When Walmart took logistics costs off suppliers, it negotiated lower prices, and then passed on those cost savings on to its customers in the form of lower selling prices. Initially, Walton wanted stores to be situated close enough to each other so that they were within reach of management at Bentonville. Walton, a licensed pilot, would frequently fly his small plane from Bentonville to surrounding stores, often dropping in unannounced. As the company grew, he appointed regional vice presidents to over see stores clustered in certain territories. Walmart started to invest in a fleet of small aircraft. The regional vice presidents were based in Bentonville. They would fly out on Monday morning to visit stores in their territory, returning Thursday. Walton insisted that they returned with at least one good idea to pay for the trip. As always, expenses were tightly controlled. When traveling, managers were expected to stay in cheap hotels, share rooms, and eat at budget restaurants. On buying trips to suppliers, managers were instructed to keep expenses below 1% of total purchases. As it expanded, Walmart first saturated the area within a day’s drive of Benton ville. Once an area was saturated, Walmart would build another distribution center in an adjacent area, go as far as possible from that center and put in a store, and then fill in the territory around the distribution center. As Walton described it, We would fill in the map of that territory, state by state, county seat by county seat, until we had saturated that market area. We saturated northwest Arkansas. We saturated Oklahoma. We saturated Missouri…..and so on.5 Walmart never planned to enter cities. Instead, the company would build stores in a ring around cities, some way out, and wait for the growth to come to the stores. The strategy seemed to work. The saturation strategy had benefits beyond management control and distribution efficiencies. Walton never liked to spend much on advertising. The company found that when it went from small town to small town, filling in an area, word of mouth would get Walmart’s everyday low pricing message out to customers, allowing Walmart to reduce advertising expenses. The clustering of stores also made it difficult for rivals to get traction in an area. For example, in the Springfield Missouri area Walmart had 40 stores within 100 miles. When Kmart finally entered the area with three stores, they had a hard time getting business. Walton himself would spend a lot of time flying around an area scouting out possible store locations. From the air he could get a good idea of traffic flows, see which towns were growing, and evaluate the location of competitors, if there were any. He had a major hand in picking the first 150 store locations before being forced by the growing complexity of managing Walmart to delegate that task.
Developing Information Systems and Logistics
Questions
- By 2014, the company reported that its trucks had delivered 830 million more cases while driving 300 million fewer miles than in 2005, an improvement of 84.2% over
- This had been achieved through more efficient loading and unloading of merchandise, better routing, GPS tracking, new tractor technologies, and so on. One important innovation that Glass was responsible for was Walmart’s Retail Link program. First introduced in 1985, this proprietary trend-forecasting software delivers important sales information to suppliers at no direct cost. Retail Link bene fitted suppliers, enabling them to adjust their own production schedules and product plans to meet consumer demand as reviled by Walmart’s sales data. At the same time, this software gave Walmart deep insight into a supplier’s sales and profit margins, information that Walmart uses to bargain for lower prices from suppliers. As is the practice at Walmart with all cost reductions, those cost savings are then passed onto consumers in the form of lower selling prices. One of the consequences of Walmart’s investments in information systems and logistics has been better stock replenishment and faster inventory turnover. By 2016, Walmart was turning over its inventory 8.39 times per year, compared with 5.88 times per year at Target and 7.70 times at online rival Amazon.6 Among other things, faster inventory turns can boost sales per square foot. On this measure, Walmart has long bested rivals such as Target. According to the National Retail Federation, Walmart registered sales per square foot of $535 in 2021, compared with $437 at Target. Despite Walmart’s prowess in information systems, not all its initiatives have succeeded. In 2003, for example, it announced that its top 100 suppliers would have to tag pallets and cases of goods with radio frequency identification (RFID) tags. The goal was to improve the efficiency of Walmart’s logistics operation by passively tracking goods as they passed through the supply chain. In practice, technological problems resulted in spotty implementation and the initiative stumbled. But Walmart learned something from this—the company realized that RFID might have uses inside a store to maintain the right inventory mix. For instance, a shelf may look full of shirts, but what if they are only in sizes small and extra-large? RFID can help scan a shelf with out the cost of tedious hand sorting of merchandise or bar code scanning to identify stocking shortages.
Supplier Relations
As Walmart grew, its relationship with suppliers shifted. In the early days, powerful suppliers of branded products such as Procter & Gamble had dictated terms to Walmart. However, Walmart consolidated its buying in Bentonville and, as the company grew, its buying power began to increase. Today, Walmart is the largest distributor for many consumer products companies. For example, in 2015, Clorox earned 26% of its revenue from Walmart sales, Kellogg 21%, Campbell Soup 20%, and Procter & Gamble 14%.7 Walmart refers to its 60,000 plus suppliers as “partners,” but there is little doubt who is the senior partner in this relationship. Walmart does work closely with its suppliers, providing them with detailed information through its Retail Link program that helps them to identify inefficiencies and improve their product planning and product offerings. Walmart also provides suppliers with the opportunity to attain tremendous sales volume, which can enable them to achieve economies of scale. Even if suppliers make very slim margins selling to Walmart, the information and economies of scale they get may enable them to make more money elsewhere. To take advantage of this relationship, many of Walmart’s larger suppliers have established offices next to Walmart’s headquarters in Bentonville. One of the first to do so was Procter & Gamble, which opened its Bentonville office in 1987 and now has a 250-person team dedicated to working with Walmart. In return for its provision of data and volume, Walmart is relentless in demanding lower prices and better payment terms. Any cost savings achieved are then passed on to Walmart’s customers in the form of lower prices (and to shareholders in the form of higher profits and dividend payouts). As David Glass once said… We want everybody to be selling the same stuff, and we want to compete on a price basis, and they will go broke 5% before we will.8 Walmart’s Bentonville buying center is legendary for its sparse fittings— conference rooms with no doors furnished with cheap tables and mismatched plastic chairs that Walmart was not able to sell—so it used them to furnish their offices instead. Some supplier representatives have reported having to sit on boxes because there were no chairs available. Suppliers were also required to give Walmart a toll-free number to call, or to take collect calls from Walmart buyers. The idea was to convey an impression of austerity. Walmart’s buyers constantly push suppliers to lower their prices, often by 5% per year. After squeezing out all the efficiencies they can at home, many suppliers have only been able to achieve further cost reductions by moving pro duction offshore to low-cost locations such as Mexico or China, leading to claims that Walmart has been a major reason for the hollowing out of U.S. manufacturing. Walmart has also used its power to extract better payment terms from its suppliers. Suppliers may be paid net 60 days after Walmart takes ownership of a product, as opposed to the normal net 30 days. They may have to pay additional fees to cover the cost of their goods being transported through Walmart’s logistics system. Since the early 2000s, Walmart has been pushing suppliers to agree to “pay on scan” contracts where Walmart does not take ownership of a good until it is scanned for sale at the checkout, effectively enabling Walmart to push off significant inventory costs onto suppliers. Beginning in the early 1990s, Walmart has also developed its own store brand offerings. These include goods sold under the Sam’s Choice and Great Value labels. Often priced 20–30% lower than national brands, the presence of private label offerings is another mechanism that can be used to pressure suppliers to reduce their prices. As a management consultant who worked with Walmart suppliers noted… Year after year, for any product that is the same as what you sold them last year, Wal-Mart is going to say, here’s the price you gave me last year. Here’s what I can get a competitor’s product for; here’s what I can get a private label version for. I want to see a better value that I can bring to my shopper this year. Or else I’m going to use that shelf space differently.
Managing the Business
Questions
- At the meetings, Walton and other managers would discuss the performance of the company, its stores, departments, and even individual items. There would also be entertainment —performances by well-known music stars and comedians, pep talks by NFL football players, competitions between top managers, light-hearted hazing of managers who had lost a bet with Walton. Walton himself once danced the Hula in a grass skirt on Wall Street after losing a bet with David Glass about sales. After losing a bet with Walton, another manager road a horse down the main street in Bentonville wearing a blond wig and pink tights. The stores have their own version of the Saturday morning meeting. Associates meet before every shift to talk about the store’s performance, describe their favorite in-store items, and perform the Walmart cheer. Walmart centralizes much of its operations in Bentonville, including buying, logistics, and decisions about information systems. It even controls the temperature of its U.S. stores from Bentonville. However, it does give store managers discretion on merchandizing and some on pricing. Regarding merchandizing, Walmart understands that different locations require a different merchandizing mix, which is why Walton always stressed that store managers should be good merchants with a close eye on what sells in their community. Walmart’s buyers are told to pay close attention to what the merchants in the store want. Through its information systems, Walmart also supplies store managers with detailed information on what is selling in their store, along with their monthly profit and loss statements, allowing them to fine-tune the merchandizing mix and compare their performance with other stores in Walmart’s system. On pricing, store managers have long had the authority to match prices being offered at competing stores in their neighborhood if those prices are lower than Walmart’s. More generally, store managers are responsible for hiring and supervising employ ees, meeting financial goals, enforcing workplace regulations, delegating work, tracking inventory, analyzing sales data, processing payroll, and coordinating merchandising shipments. Store managers are supervised by regional vice presidents. Walmart does not have regional headquarters, which saves money. Instead, the regional VPs are based in Bentonville, but typically travel 3–4 days a week, visiting stores in their territory. Store managers earn between $50,000 and $175,000 a year. In addition, they earn bonuses tied to store performance and participate in Walmart’s profit-sharing plans. Walmart refers to its hourly paid employees as “associates.” Sam Walton came up with the idea of calling employees “associates” after visiting retail stores in the United Kingdom where employees were called associates. It got him thinking about the importance of building a partnership with employees. Walton freely admits that in the early days, he was so cheap that he didn’t want to pay hourly employees much. Over time, he came to the realization that if the company treated employees well, they would treat customers well, and happy customers would come back and buy more. Walmart had a profit-sharing plan in place for managers after it went public in
- The following year, he expanded the plan to include any associate who had been with the company for at least a year and worked at least 1,000 hours. Using a formula based on profit growth, Walmart contributed a percentage of every employee’s eligible wage to a profit-sharing plan. Much of the money in that plan was invested in Walmart stock. When they left the company, employees could take the accumulated amount either in Walmart stock or cash. For many years, the annual contribution amounted to about 6% of an hourly employee’s earnings. For those who got in early, the accumulated amount upon retirement could be hundreds of thousands of dollars in Walmart stock. To boost this still further, Walmart introduced an employee stock purchase plan, where employees could purchase Walmart stock through a payroll deduction at a 15% discount to the market value. Walmart changed the associate plan in 2010, replacing it with a 401k plan under which Walmart would match 100% of an employee’s contribution up to 6% of their pay. Walton also instituted an open-book policy at Walmart, sharing important information on a regular basis with associates, including store purchases, profits, sales, and markdowns. In Walton’s view, it was important for associates to get to know the business, so that they could become better employees. The open book policy also fed into Walmart’s strategy of promoting from within. Around 75% of store managers at Walmart today started as hourly paid associates. The company claims it now promotes around 160,000 associates each year. Associates can get promoted to supervisors, department managers, assistant managers, and finally store managers. Store managers move frequently, often every 18–24 months, a practice which Walmart uses to deepen their experience. Talented store managers can continue to move up in the organization becoming, for example, regional vice presidents.
Criticisms of Walmart
While much has been written about Walton’s ability to find, recruit and empower ordinary people to do extraordinary things, Walmart has also been the target of sustained political and legal criticism over its treatment of employees, particularly since the turn on the century. One class action lawsuit on behalf of 1.5 million women who have worked at Walmart alleged systematic sex discrimination in promotion and pay.10 Other lawsuits have alleged that store managers routinely force hourly employees to punch out at the time clock, then return to work, putting in hours of unpaid labor. Walmart has also been cited for knowingly hiring illegal immigrant labor to clean its stores, and shockingly, locking them in the stores at night.11 Others have criticized Walmart for paying its hourly employees so little that they must rely upon state assistant such as food stamps to make ends meet, leading to the allegation that Walmart is indirectly subsidized by the state. Consistent with this, one academic study found that U.S. counties with more Walmart stores in 1987, and counties with more additions of stores between 1987 and 1998, experienced greater increases (or smaller decreases) in family poverty rates during the 1990s-economic boom.12 Another body of academic research suggests that the arrival of a Walmart store frequently puts other local retailers out of business. A classic study by Kenneth Stone of Walmart stores in Iowa found that while general merchandise sales grew 44% in the 5 years after Walmart arrived, competing grocery stores lost 5% of their business, specialty stores 14% and clothing stores 18%.13 Stone also found that between 1983 and 1993, small Iowa towns with populations of between 500 and 1,000 lost 47% of retail sales as people simply drove to Walmart to shop. Data like this has resulted in some small towns blocking Walmart from locating in their area. For its part, Walmart has countered these criticisms by taking steps to improve its image. It has instituted a diversity program to try and equalize opportunity and pay across gender and ethnicity. In 2016, it increased its minimum wage for new hires to $10 an hour. The company also points out that it does offer a healthcare plan for employees who work more than 30 hours a week. Regarding the negative impact on local communities, Walmart cites academic research that shows that long run price declines of 7–13% occur when Walmart enters an area, which increases the disposable income of residents. Research also shows that while competitors lose jobs, after accounting for both job losses at competing retailers, and job gains at Walmart, the establishment of a Walmart store in a county does lead to a small net gain in jobs.
Supercenters and Groceries
Questions
- Despite Kroger’s attempts to match Walmart, in 2016, Kroger’s food prices were still 4% above those of Walmart according to price checks. On non-perishable and frozen items, Kroger was charging 5.6% more than Walmart.16 Due to the ongoing price war for grocery sales, year-to-year food prices fell by 1.3% in 2016.17 Keeping grocery prices low requires Walmart to do what it has always done, use its economies of scale in purchasing and its logistics knowhow to drive down the price it pays suppliers and maximize its supply chain efficiency. For example, Charles Fishman explained how Atlantic salmon that might have cost $20 a pound in 1990 was selling for just $4.84 a pound in
- The Atlantic salmon sold at Walmart was sourced from farms in Chile. Walmart’s salmon use to come from Norway or Canada, but the constant quest for low prices drove Walmart to look for lower-cost supplies elsewhere. In turn, that helped to jump-start the growth of fish farms in Chile, which is now the world’s second-largest salmon producer (the introduction of fish farms, and the “mechanization” of salmon production is one reason for the price drop). In Chile, fish is harvested early in the morning while it is still dark, taken to processing plants, processed, then put on a truck or plane to Santiago, and then on a plane to Miami. Fish harvested in Chile can be on a dining room table in Iowa within 48 hours. Multiply the salmon story across Walmart’s product lines, and it becomes clear why grocery prices are so low at Walmart.
Sam’s Club
Sam’s Club is a deep discount warehouse type store selling a limited range of merchandise at wholesale prices to buyers who wish to make bulk purchases. To shop at Sam’s Club, you must pay an annual membership fee ($45 in 2016). Wholly owned by Walmart, the first Sam’s Club was established in 1983. Sam Walton got the idea from his friend and rival, Sol Price, who had pioneered the concept with his Price Club stores in California back in 1976. The original target market for Sam’s Club was small business owners, but it was expanded to include general consumers who wished to make bulk purchases of household items. As of 2016, there were 650 Sam’s Clubs in the United States and they generated $57 billion in annual revenues. Sam’s Club faces very tough competition from Costco, the world’s second-largest retailer. Costco had 815 warehouse stores around the world and generated $196 million in annual revenues in 2021. Costco benefits from a focus on higher-income households—Sam’s Club estimates that the medium household income of its customers is around $80,000, compared to $120,000 for Costco. Costco also has very loyal customers, with about 90% renewing their annual membership. In addition to competition from Costco, Sam’s Club has reported some cannibalization of sales from Walmart supercenters and growing direct competition from Amazon. To try and deal with competition from Costco, Sam’s Club started to shift its strategy in 2016.19 First, the company aimed to open 8–10 new clubs each year in more affluent areas. Second, it decided to shutter underperforming stores. Third, it attempted to adjust its merchandising categories to appeal to more upscale customers. Finally, it continued to expand its private label offerings. Despite this strategic shift, Costco has continued to dominate the warehouse store market. In 2021, estimates suggest that Costco had a 56% market share in the United States, versus 36% at Sam’s Club and 8.3% at BJ’s Wholesale.
International Expansion
In 1991, Walmart started to expand internationally with the opening of its first stores in Mexico. The Mexican operation was established as a joint venture with Cifera, the largest local retailer. Initially, Walmart made several missteps. Walmart had problems replicating its efficient distribution system in Mexico. Poor infrastructure, crowded roads, and a lack of leverage with local suppliers, many of which could not or would not deliver directly to Walmart’s stores or distribution centers, resulted in stocking problems and raised costs and prices. Initially, prices at Walmart in Mexico were some 20% above prices for comparable products in the company’s U.S. stores, which limited Walmart’s ability to gain market share. There were also problems with merchandise selection. Many of the stores in Mexico carried items that were popular in the United States. These included ice skates, riding lawn mowers, leaf blowers, and fishing tackle. Not surprisingly, these items did not sell well in Mexico, so managers would slash prices to move inventory, only to find that the company’s automated information systems would immediately order more inventory to replenish the depleted stock. By the mid-1990s, however, Walmart had learned from its early mistakes and adapted its operations in Mexico to match the local environment. A partnership with a Mexican trucking company dramatically improved the distribution system, and more careful stocking practices meant that the Mexican stores sold merchandise that appealed more to local tastes and preferences. As Walmart’s presence grew, many of Walmart’s suppliers-built factories close by its Mexican distribution centers so that they could better serve the company, which helped to further drive down inventory and logistics costs. In 1998, Walmart acquired a controlling interest in Cifera. Today, Mexico is a leading light in Walmart’s international operations, where the company is more than twice the size of its nearest rival. The Mexican experience proved to Walmart that it could compete outside of the United States. It now has operations in 24 other countries. In Canada, Britain, Germany, and Japan, Walmart entered by acquiring existing retailers and then transferring its information systems, logistics, and management expertise. In Puerto Rico, Brazil, Argentina, and China, Walmart established its own stores (although it added to its Chinese operations with a major acquisition in 2007). Due to these moves, in 2022, the company had some 5,100 stores outside the United States, 550,000 foreign employees on the payroll, and generated international revenues of $100 billion. In addition to greater growth, expanding internationally has brought Walmart two other major benefits. First, Walmart has also been able to reap significant economies of scale from its global buying power. Many of Walmart’s key suppliers have long been international companies; for example, GE (appliances), Unilever (food products), and P&G (personal care products) are all major Walmart suppliers that have long had their own global operations. By building international reach, Walmart has been able to use its enhanced size to demand deeper discounts from the local operations of its global suppliers, increasing the company’s ability to lower prices to consumers, gain market share, and ultimately earn greater profits. Second, Walmart has found that it is benefiting from the flow of ideas across the countries in which it now competes. For example, Walmart’s Argentina team worked with Walmart’s Mexi can management to replicate a Mexico’s Walmart store format and to adopt their best practices in human resources and real estate. Other ideas, such as wine departments in its stores in Argentina, have now been integrated into layouts worldwide. Moreover, Walmart realized that if it didn’t expand internationally, other global retailers would beat it to the punch. In fact, Walmart faces significant global competition from Carrefour of France, Ahold of Holland, and Tesco from the United Kingdom. Carrefour is perhaps the most global of the lot. The pioneer of the hyper market concept now operates in 26 countries and generates more than 50% of its sales outside France. Compared to this, Walmart is a laggard with just 18% of its sales in 2021 generated from international operations. For all its success, Walmart has hit significant problems in its drive for global expansion. The overall profit rate of its international business is lower than its U.S. business. In 2006, the company pulled out of two markets, South Korea—where it failed to decode the shopping habits of local customers—and Germany, where it could not beat incumbent discount stores on price. In 2016, Walmart closed 115 underperforming stores in Brazil and several other Latin American countries in response to depressed local economic conditions. It also struggled in Japan, where the company did not seem to be able to grasp the market’s cultural nuances. In one example, Walmart decided to sell lower-priced gift fruits at Japanese holidays, which failed because customers felt spending less would insult the recipient! In 2020, Walmart admitted defeat and sold its majority stake in Walmart Japan to its joint venture partner, Seiyu. Walmart also exited the United Kingdom in 2020, after 21 years, selling its ASDA grocery stores to a group of private equity investors for $8.8 billion. The British grocery market turned out to be fiercely competitive, and Walmart struggled against two well-run local retailers, Tesco and Sainsbury’s. When a proposed merger with Sainsbury was blocked by local competition authorities, Walmart decided to exit the market entirely. As a result of these various moves, Walmart’s international sales fell from a peak of $137 billion in 2013 to $101 billion by 2021. The markets where Walmart has struggled most were all developed markets that it entered through acquisitions, where it faced long-established and efficient local competitors, and where shopping habits were very different than in the United States (Germany, South Korea, and the United Kingdom, for example). In contrast, many of those markets where it has done better have been developing nations that lacked strong local competitors, and where Walmart has built operations from the ground up (e.g., Mexico, Brazil, and, increasingly, China).
Looking Forward: The E-Commerce Revolution
Walmart’s biggest challenge going forward may be holding off competition from e-commerce retailers, and particularly Amazon.com. Walmart first established an online presence back in 2000 when it created Walmart.com. This subsidiary is headquartered not in Bentonville, but near San Francisco where the company has access to the world’s deepest pool of Internet executive and technical talent. For years, Walmart.com lagged the sales growth achieved by Amazon. In 2021, Walmart generated nearly $55 billion in e-commerce sales, representing about 13% of its total sales. Amazon, in contrast, registered $468 billion in e-commerce sales in 2021. In 2016, Walmart shifted its e-commerce strategy, buying the fast-growing e-commerce retailer, Jet.com, for $3.3 billion. Jet.com went online in mid-2015, and by 2016, was already on track for $500 million in revenue. With the acquisition, Walmart gained access to Marc Lore, the founder of Jet.com, considered by many to be one of the sharpest minds in e-commerce. Lore stated that under his direction, Walmart would move “at the speed of a startup.” In January 2017 Lore announced that Walmart.com would offer free 2-day delivery on orders over $35, putting Walmart on a par with Amazon. Walmart’s online inventory also grew rapidly from just 10 million items in 2016 to at least 67 million in late 2017. The expansion was helped by several other acquisitions of fashion and apparel e-commerce retailers, including Bonobos and ModCloth in apparel and Moosejaw in outdoor goods. These brands give Walmart the opportunity to sell upscale brands to online consumers who wouldn’t normally shop at Walmart.21 In May of 2020, however, Walmart decided to shut down the Jet.com banner in favor of a continued focus on Walmart.com, which management decided was the more powerful brand. Marc Lore would run Walmart.com. Since 2016, Walmart has made concerted efforts to better leverage its brick-and mortar stores and distribution systems. By the fall of 2017, it had expanded its grocery pickup service to more than 1,000 stores and launched a service offering discounts on items ordered online that are picked up at the stores. The company also installed pick-up towers in some stores to make in-store pickups easier. The company also added products to its website and expanded its third-party marketplace, increasing the number of products offered through Walmart.com from 10 million in 2017 to 240 million by 2022. The early results of this strategic shift were dramatic, with online revenues surging by more than 60% in the first year after the Jet.com acquisition. However, Amazon. com did not stand still. In June 2017, Amazon acquired Whole Foods for $13.7 billion, a deal that catapulted Amazon into hundreds of physical stores and fulfilled a long held goal of selling more groceries. With the Whole Foods acquisition, Amazon got a network of physical stores where it can implement decades worth of experience in how people pick, pay for, and get groceries delivered. Amazon was quick to signal its own commitment to price discounting, cutting prices of select items at Whole Foods by 40% immediately after the acquisition closed in August of 2017. As of 2022, however, Walmart was outperforming Amazon in the online grocery market by a wide margin. By mid-2022 Walmart’s U.S. online grocery market share, which included pickup and delivery services, rose to 55%. Amazon’s share stood at 7%, while the online grocery delivery platform Instacart had a 27% share. Walmart has been gaining share in this segment from its rivals. The company also noted that three quarters of its gains in online grocery market share were coming from higher-income shoppers with incomes over $100,000.