Discover how Walmart became a market leader and what could threaten its position.
Walmart is not simply a retailer; it’s an anomaly. If it were a country, their GDP would be bigger than that of Norway’s. In fact, they are the world’s biggest commercial employer and they manage almost as many people as the Chinese military does.
However, how was Walmart, a business with hundreds of billions of dollars in profits yearly, lock in the market position that they have as well as the success that they’ve garnered?
The following text will take you ringside to watch the business’s dizzying rise, outlining how by combining both efficiency and skill in technology, management, and strategy has helped turn Walmart into what it is today. However, you’ll also find out how whatever goes up is also able to go down. In fact, Walmart’s biggest challenges are up ahead.
You’ll find out:
- How come during negotiations, you may want to consider going canoeing with your rival;
- How strawberry Pop-Tarts were able to help Florida deal with the hurricane; as well as
- How Walmart will either become even more successful or fail completely in the long run.
Walmart delivers low prices by increasing scale and ruthlessly focusing on efficiency.
How was Walmart able to turn into the greatest retailer around the globe? There are two main principles that are in charge of the success of the business: low prices as well as a wide selection.
Let’s begin with the price. Walmart is infamous for their pricing policy, called EDLP, or Every Day Low Prices; they work hard to stay true to their promise.
However, how are they able to do so?
Efficiency is key. Walmart is merciless when it comes to taking advantage of whatever they can in order to reduce costs as well as lower their prices.
Here’s one instance: back in the beginning of the 1900s, deodorant was bundled in cardboard boxes. Walmart had seen this as an unnecessary cost since the extra packaging had taken up too valuable of shelf space as well as wasted the oil during transportation which would have made shipping much more expensive. Therefore, they had asked deodorant suppliers to sell their items without any boxes which resulted in the retailer saving 5 cents on each deodorant that has been sold.
Another big part that plays a part in Walmart’s strive towards low prices is scale. Purchasing as well as selling greater volumes of goods let the business decrease their prices.
Although they may look as if they are counterintuitive, since we often feel that selling an item at a lower price will result in lower profits, that doesn’t always have to be true, which is something that Walmart understands very well.
Say, for instance, you purchase an item for 60 cents and then sell it at $1 instead of $1.20. When you price something lower, you end up selling three times as many products. Therefore, even though you are making less for each product, you make more overall.
It’s also important to mention how there’s yet another benefit to scaling. In the instance of Walmart, the greater it becomes, the more bargaining power they get with suppliers. Walmart has such a big market power so suppliers just aren’t able to not put their items on retailer’s shelves.
Therefore, suppliers sell to Walmart at much smaller prices which lets retailers transfer the savings to customers.
Walmart’s coup was to recognize that rural communities were being underserved by retail outlets.
Have you ever gone to a Walmart store? It’s difficult not to be astonished by how big the store it is, including its never ending aisles of items. A usual Walmart Supercenter has around 100,000 items in a 54,000 square-foot space. In fact, it’s difficult not to gawk from their range of retail products.
This is especially astounding if you take into consideration the fact that Walmart began in mostly rural places in the states. They had opened their initial store in the small city of Rogers, Arkansas.
What kind of good business strategy begins by opening in a rural area?
Walmart management understood that rural, usually low-income places had been ignored by other retailers. There’s this conventional thought that companies won’t make much money unless there are at least 50,000 possible consumers in a certain area.
Therefore, rural places had to depend on smaller and more local retail stores that only offered a small number of items and they had also always been closed on Sundays.
However, Walmart had proven that a big corporate-owned retailers wouldn’t only be able to survive in a rural area, but they could also do really well there. Walmart had figured out that customers wouldn’t mind driving 70 miles or more in order to purchase a much less expensive lawn mower, for example. By having a wide assortment of products that are able to provide everyone with everything that they need Walmart was able to reach out to those who were near as well as far away.
They had also brought forth their own private labels like Sam’s Choice in order to sell parallel to popular national brands. Private label items are basically equal to that of the well-known brands, but not nearly as pricey since the costs of both advertising and marketing were much smaller.
It’s also important to mention that despite the benefits of having such a wide selection of items, there are also disadvantages to having too many to choose from as customers might get too overwhelmed with all that there is to choose from and therefore, they won’t end up buying anything in the long run.
At times, having less is more. For example, when Walmart Canada got rid of two peanut butter brands off their shelves, the sales of the three left increased significantly.
Walmart eliminated middlemen and developed close, collaborative relationships with suppliers.
Another thing that makes Walmart successful is how they work with their suppliers.
What makes them different from other retailers is how they don’t work with middlemen. This policy came about at the request from their founder Sam Walton, who had scorned distributors.
He stated that middlemen don’t create anything valuable but were just getting paid to sell items made by someone else. Walton correctly concluded that by bargaining straight with the manufacturers, retailers would be able to save money.
As a result, Walmart has come up with its own supply chain abilities and nurtured direct relationships with their vendors.
At the beginning, though, it wasn’t that simple. Their negotiations with suppliers were harsh as each side fought hard in order to get the best deal.
However, things had changed when Walton had been on a canoeing trip with some of his friends. During that time, Procter & Gamble’s vice president, which is a consumer goods manufacturer, had been invited to join as well. During a nice conversation that they were having, they had concluded that the both of them shared the objective of making the best customer experience possible. The only difference was that they had different ways of doing so.
They had also talked about how Walmart and Procter & Gamble had been working with essentially zero mutual trust and hardly any communication.
In order to turn the situation around, together those two managers had made a Walmart/P&G team that enhanced both the communication and collaboration between both of their businesses.
With time, those types of close supplier relationships turned into the rule instead of the exception for Walmart. Despite them never completely ridding themselves of their harsh negotiation methods, Walmart had widened the relationships that they had with suppliers as they had worked together with item development, tried out marketing, worked on the package design, as well as shared data.
In the end, those collaborative relationships had caused efficiency to increase and prices to decrease. For instance, Walmart shares data on product-level sales together with General Electric, therefore, their suppliers know just the amount of items they need to deliver and ship to Walmart on a daily basis.
State-of-the-art technology has enabled Walmart to manage a logistics empire as well.
Their future logistics mastery had begun with a basic issue. Due to the fact that their initial stores had been in rural, isolated places in the south of the states, a lot of distributors had decided that it wasn’t profitable to deliver products to Walmart stores.
However, Walmart created a benefit out of simply needing to; if no one would deliver to their shops then they would have to on their own by setting up their own distribution centers that had their own swarm of trucks.
Nowadays, the size of Walmart’s logistics sector is remarkable. They’ve got over 40 regional distribution centers and each one of them is more than a million square feet. Every distribution center works day and night in order to deliver items amongst 75 to 100 stores that are within a radius of 250 miles.
In addition, they require around 85,000 staff in order for the logistics train to continue moving forward.
Now, you may question, “How is Walmart able to handle operations of that type of scale?” In the end, it all revolves around the technology. From the beginning, Walmart had taken advantage of a couple of different distribution networks: they had one for dry groceries such as cereal and then they had another for household merchandise such as paper towels. However, those two networks had products that sold fast as well as slowly.
That being said, Walmart understood that the items that moved slowly had been slowing down the work altogether, causing those that sold faster from getting to the shelves as fast as possible, causing potential losses in sales.
As a result, Walmart had created High Velocity Distribution Centers for those items that moved quickly, regardless of the item category. Whenever a store knew that an item was running low, they had to send that information into the nearest distribution center. Trucks were then packed with the items necessary and brought in right away to Walmart’s shelf, without any time lost.
Real-time data mining keeps Walmart’s shelves stocked and even anticipates future needs.
Their attention to technological innovation has caused them to be ahead of their competitors since they have become much more efficient. As a result, their service is better and their prices are lower.
In fact, Walmart’s technology monitors each product in their stores. Therefore, whenever the shelves are empty, the computer notifies a warehouse immediately that an order has to be made and then shipped.
It’s important to note that this system creates huge amounts of information, allowing incredible real-team inventory visibility; data that makes an impact right away on merchandise planning.
Take this example, for instance. When Hurricane Ivan was close to hitting Florida, Walmart’s algorithms had made the prediction that many would demand Kellogg's Strawberry Pop-Tart toaster pastries. Their computers had let the distribution centers know and then the items had come in just in time to let those Florida families to buy just enough Pop-Tarts before that storm.
However, the retailer doesn’t only hold onto the data for themselves, but the share some data to suppliers, too.
As a result, suppliers understand which items are doing well and then can also receive proper data in regards to which product do well on which days as well as in which stores. This allows their suppliers to plan out their production much more efficiently as well as coording the inventory levels much better with Walmart.
With that type of streamlining, Walmart can get rid of both waste as well as the labor costs that they receive when they store inventory, which is why customers end up paying a whole lot less as well.
Walmart is at the top of their competition because they’ve got tight relationships with their loyal suppliers, they’ve got a huge logistics team from start to finish, and they boast the most recent technology.
However, what does their future look like? Keep on reading to learn more.
To reach its full potential, Walmart needs to reach more city dwellers and international shoppers.
Although Walmart may be the largest retailer worldwide, their business still isn’t close to reaching their true and complete potential.
They’ve still got two big types of big customers that Walmart still hasn’t had much success with: those in American cities as well as international shoppers.
As we had talked about before, Walmart began in rural, and lower-income places. In order to expand, Walmart has to brand out to urban centers, especially considering the fact that are a lot of urban places that don’t have that don’t have easy access to fresh and more affordable goods, for instance.
Due to the fact that around 23 million consumers live in those types of places, the strategy has a lot of potential.
Since by 2016, Walmart is planning on opening up 300 stores in urban places, they aren’t ensured to be successful. To this day, there still isn’t one Walmart in New York City and it makes sense; Walmart Supercenters are huge so the price for real estate would be out of this world.
This is a very simple answer to this problem, though; just make the stores smaller. That is exactly why the business had brought forward Walmart Express in 2011. Its 15,000 square foot stores will be able to provide three time the amount of items that any normal grocery store offers.
In addition, the business is seriously looking into plans that will globally expand their business. Today, Walmart International already has 26 marketings that are working, making it the third biggest retailer worldwide, just under Walmart U.S. as well as Carrefour.
However, they could still do more in order to reach out to around 4 billion untapped global customers. Their long-term potential, especially in places such as China, India, as well as Brazil, is really big.
Currently, Walmart International has gone into those markets, but it isn’t yet dominating them. In the long run, though, Walmart International may go over their U.S. counterpart as the largest retailer worldwide.