Walmart is not just a retailer; it is a phenomenon. If Walmart were a country, its GDP would be greater than Norway’s. The company is the world’s largest commercial employer; and it manages just slightly fewer people than does the Chinese military.
How did Walmart become the largest retailer in the world? There are two core principles responsible for the company’s success: low prices and broad selection.
Let’s start with price. Walmart’s pricing policy is famous in its own right. The company’s policy is called EDLP – Every Day Low Prices – and Walmart works hard to deliver on that promise.
But how do they manage to do so? In a word, efficiency.Walmart is ruthless in taking every possible measure to cut its costs and lower its prices.
Scale also plays an important role in Walmart’s commitment to low prices. Buying and selling higher volumes of goods allow the company to reduce prices. This may seem counterintuitive, in that we typically assume that selling a product at a lower price leads to lower profits. But that’s not necessarily true, as Walmart knows well.
It’s also worth noting that there’s another advantage to scale. In Walmart’s case, the larger it becomes, the more bargaining power it has with suppliers. Walmart has such market clout that suppliers simply can’t afford not to place their products on the retailer’s shelves.
Thus, suppliers sell to Walmart at lower prices, which allows the retailer to pass on the savings to customers.
Walmart proved that a giant corporate-owned retailer could not only survive but thrive in rural areas. Walmart realized that customers would be willing to drive 70 miles or more to buy a significantly discounted lawn mower, for instance. By carrying a broad assortment of goods catering to every possible need, Walmart could reach customers who lived both near and far.
Walmart also introduced its own private labels, such as Sam’s Choice, to sell alongside popular national brands. Private label products are essentially equivalent to well-known brands but are less expensive, as the costs of advertising and marketing are considerably reduced.
It’s worth noting that although having a broad assortment of products benefits Walmart, there’s a drawback to having too much choice. That is, customers might get overwhelmed and consequently buy nothing at all.
Another factor that makes Walmart successful is its approach in working with suppliers.
Unlike many other retailers, Walmart doesn’t work with middlemen. This policy came at the urging of Walmart founder Sam Walton, who disdained distributors.
Thus Walmart developed its own supply chain capabilities and cultivated direct relationships with vendors.
In the early days, however, this wasn’t easy. Walmart’s negotiations with suppliers were ruthless, with each party fighting tooth and nail to get the better deal.
To change the situation for the better, the two managers created a Walmart/P&G team to improve communication and collaboration between their companies.
These kinds of close supplier relationships eventually became the rule and not the exception for Walmart. Even though the retailer never fully abandoned its ruthless negotiation style, Walmart has expanded its relationships with suppliers,particiWalmart’s focus on technological innovation has put it ahead of the competition, as it has made the retailer much more efficient, therefore enabling better service and lowering prices.
The company’s technology tracks every single item in its stores. And when shelves run empty, a computer automatically alerts a warehouse that an order needs to be placed and shipped.
Ultimately these collaborative relationships have led to increased efficiency and lower prices.
Walmart’s eventual logistics mastery started with a simple problem. Since its first stores were located in rural, isolated areas in the southern United States, many distributors found it unprofitable to deliver goods to Walmart stores.
But Walmart made a virtue out of necessity: If no one wanted to deliver to its stores, the company would do it instead, setting up its own distribution centers, complete with a fleet of trucks.
Today, the scale of Walmart’s logistics empire is unprecedented. It has more than 40 regional distribution centers, each over one million square feet. And each distribution center works around the clock to deliver goods to between 75 and 100 stores within a radius of 250 miles.
You might wonder: how on earth can Walmart manage such an operation? Well, it all comes down to technology. Walmart from the start embraced state-of-the-art technology and supply chain innovations.
Walmart set up High Velocity Distribution Centers for fast-moving goods in any product category. When a store is aware that a product is running low, it sends data to the closest distribution center. Trucks are packed with the required goods and brought immediately to the Walmart shelf, with no time lost.
Importantly, this system generates unparalleled amounts of data, enabling astounding real-time inventory visibility, data which has an immediate impact on merchandise planning.
the retailer doesn’t simply keep its data to itself to benefit, but openly shares some information with its suppliers.
This way, suppliers not only know which products sell well but also can pull accurate information about which items sell well on which days and in which stores. This enables suppliers to plan their production more efficiently and better coordinate inventory levels with Walmart.
With this sort of streamlining, Walmart can reduce not only waste but also the labor costs associated with storing inventory, which all translates to cheaper prices for the end customer.
Tight relationships with loyal suppliers.An end-to-end logistics empire.State-of-the art technology. These are the reasons why Walmart is at the top of its game.
Walmart may be the biggest retailer in the world, but the company is still far from reaching its full potential.
There are still two large categories of potential customers to which Walmart hasn’t successfully reached out: residents in U.S. cities and international shoppers.
Walmart got its start in rural, lower-income areas. To grow, Walmart needs to expand to urban centers, especially as there are many underserved urban areas that lack access to fresh, affordable groceries,Since some 23 million consumers live in such areas, the strategy holds huge potential!
And while Walmart plans to open 300 stores in urban areas by 2016, success is not guaranteed. As of today there is not a single Walmart in New York City. And it’s easy to see why: Walmart Supercenters are gigantic, and the real estate costs alone would be astronomical!
There is a simple solution, however, which is to make the stores smaller. And that’s precisely why the company introduced Walmart Express in 2011. At just 15,000 square feet, these stores will still be able to offer three times the product selection of an ordinary grocer.
The company is also taking seriously its global expansion plans. Walmart International is already active in 26 markets, making it the third-largest retailer in the world, behind Walmart U.S. and Carrefour.
But there’s still more that the company could do to reach out to some 4 billion untapped global customers. The company’s long-term potential, especially in countries like China, India and Brazil, is huge.
For now, Walmart International has entered such markets but doesn’t yet dominate them. In the future, however, Walmart International might surpass its U.S. counterpart as the biggest retailer in the world.
How to reach out to new customers isn’t Walmart’s only challenge. A more serious challenge already looms: analysts expect Amazon to overtake Walmart as the world’s biggest retailer by 2024.
There are two reasons why this is a possibility. First, Walmart has criminally neglected e-commerce. And second, Amazon is beating Walmart at its own game when it comes to price and assortment.
Walmart’s online sales today hover near $6 billion, which is small when compared to Amazon’s $34 billion in annual sales. The question is, how could Walmart miss such an obvious source of revenue?
In part, Walmart has focused its attention on expanding its Supercenters, which in general perform quite well.
But there’s also another reason for Walmart ignoring the internet. A decade ago, when the retailer tried experimenting with online technologies, its core customers weren’t interested.
In 2004, Walmart launched an online music store to compete with iTunes. However, since the typical, low-income Walmart shopper didn’t yet have internet access, the project was a flop.
So Walmart has its reasons for coming late to the online game. But that’s not the only factor at play. The second reason Amazon may surpass Walmart is because it’s already surpassing the retailer at its core strengths, offering lower prices and a broader assortment of products.
Another comparison found that when it comes to assortment, Walmart “only” offered 96 different types of camcorders, whereas Amazon offered 2,016. And this trend holds true more generally, in that the online retailer offers approximately 14 times more products than Walmart!
In other words, Amazon is not only a fierce competitor but also a worthy foe.