In Walmart, authors Natalie Berg and Brian Roberts share key business principles that have made the eponymous company the world’s largest retailer. Having studied the unprecedented success of the distribution network, the authors also raise the issue of problems that may await it in the future.
Bryan Roberts is Director of Retail Research at Kantar Retail. He was an analyst at Walmart for 8 years.
Natalie Berg is Director of Global Studies at Planet Retail. She also advises companies that want to partner or compete with Walmart.
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Discover How Walmart Has Become a Market Leader and What Could Threaten Its Lead
Walmart is not just a retailer: it is a phenomenon. If Walmart were a country, its GDP would be greater than in Norway. The company is the world’s largest commercial employer, it manages the number of people slightly less than in the Chinese army.
However, how does Walmart, a company with hundreds of billions of dollars of profit every year, ensure its current market position and success?
After reading this book, you will understand how this company achieved its sky-high success. You will learn how an efficient and masterful combination of technology, management, and strategy has turned Walmart into what it is today. However, you will also see that the fall of this empire can be as swift as taking off, as serious problems may await Walmart in the future.
Next, you will learn:
- why during negotiations you should go canoeing with your opponent;
- how strawberry pop tarts helped Florida cope with a hurricane; and
- why Walmart may in the near future either become even more successful or fail miserably.
Walmart delivers on its low prices thanks to its sheer scale and focuses on efficiency
How did Walmart become the largest retailer in the world? There are two main principles that have ensured the success of the company: low prices and a wide selection.
Let’s start with the prices. Walmart’s pricing policy is unique in its own way. It’s called EDLP (Every Day Low Prices) – low prices every day, and Walmart fulfills this promise.
But how does the company succeed?
In short, thanks to efficiency. Walmart makes sure that all possible measures are taken to reduce costs and lower prices.
Here is one example: in the early 1990s, deodorants were packed in cardboard boxes. Walmart thought it was an unnecessary waste because cardboard boxes took up precious space on the shelves during transportation. Therefore, Walmart asked deodorant suppliers to sell them their products without boxes. And as a result, the retailer saves 5 cents on every deodorant sold!
The scale also plays an important role in shaping low Walmart prices. Buying and selling large volumes of goods allows the company to reduce prices.
This may seem counterintuitive because we are sure that selling the product at a lower price leads to lower profits. But this is not always true, and Walmart knows this well.
Suppose you buy an item for 60 cents and sell it for 1 dollar, and not 1 dollar 20 cents. By placing a lower price, you will sell three times as many items. Thus, although you earn less per unit, you earn more overall.
It is also worth noting that there is another scale advantage. In the case of Walmart, the more he grows, the greater his power over suppliers. Walmart has such a market influence that suppliers simply cannot afford not to place their products on the shelves of a retailer.
In this way, suppliers sell their Walmart products at low prices, which allows the retailer to set lower prices for customers.
Walmart took advantage of the fact that retailers ignored the countryside, and this ensured their luck.
Have you ever been to a Walmart store? If so, the first time you were definitely struck by the size of the store, its endless rows of goods. A typical Walmart hypermarket has about 100,000 products across five thousand square meters of space. In other words, Walmart has no equal in terms of assortment.
This is especially surprising when you consider that at first Walmart stores were primarily located in the rural United States. The company opened its first store in the small town of Rogers, Arkansas.
What is this weird business strategy?
Walmart management realized that rural areas, whose residents cannot boast of high incomes, are often simply ignored by other retailers. Traditional corporate wisdom dictates that a large store will not be profitable unless there are at least 50,000 potential buyers around it.
Thus, rural areas depended solely on small local retail stores with limited stocks and weekends on Sunday.
But Walmart has proven that a giant corporate store can not only survive but also flourish in the countryside. Walmart realized that customers would readily travel a hundred kilometers or more to buy, for example, a lawnmower at a very low price.
Providing a Wide Range of Products for Every Occasion, Walmart Attracts Customers Living Both Nearby and Far.
Walmart also created its own brands, such as Sam’s Choice, which are sold alongside popular national brands. The products of these brands are essentially equivalent to well-known brands, but they are much cheaper because advertising and marketing costs are minimal.
It is worth noting that, despite the fact that a wide range of products is an undoubted advantage of Walmart, too many choices have their drawbacks. Due to too much doubt in the choice, customers may not buy anything at all.
Sometimes the less the better!
For example, when Walmart Canada removed two types of peanut butter from the shelves, sales of the remaining three brands rose.
Walmart eliminated the need for intermediaries and developed close partnerships with direct suppliers
Another success factor for Walmart lies in its approach to working with suppliers. Unlike many other retailers, Walmart does not work with intermediaries. This policy was approved by Walmart founder Sam Walton, who “disdained” the middlemen.
According to his logic, intermediaries did not create anything of value but simply received money for the sale of goods produced by someone else. Walton rightly suggested that the retailer could save money by making deals directly with manufacturers.
In this way, Walmart developed its supply chain and developed direct relationships with suppliers.
At first, it was not easy. Walmart’s negotiations with suppliers were ruthless: each side struggled for a better deal.
But once that changed. The day Walton rode a canoe with his friends. The vice president of Procter & Gamble, a consumer goods company, was invited to this meeting. In a friendly conversation, both of them realized that they had a common goal: to create the best impressions for the consumer, but so far their methods of achieving this goal were different.
They also discussed the fact that both Walmart and Procter & Gamble had zero confidence in each other and could not establish a proper connection.
To change this for the better, managers created the Walmart / P & G team to improve communication and collaboration between their companies.
This kind of close relationship with suppliers, in the end, became the rule, and not an exception for Walmart. Although the retailer did not completely abandon his ruthless style of negotiations, Walmart expanded its relations with suppliers, began to participate in product development, trial marketing, packaging design, and data exchange.
Ultimately, such collaborative relationships have led to increased efficiency and lower prices. For example, Walmart exchanges product sales data with General Electric, so the supplier knows exactly what quantity of goods to ship to Walmart every day.
State-of-the-art Technology Enables Walmart to Successfully Manage Its Logistics Empire
Walmart’s current logistics mastery began with a simple matter. Since its first stores were located in an isolated countryside in the southern United States, many distributors felt it was not profitable to ship goods to Walmart.
But Walmart benefited from this: since no one wants to deliver goods to his stores, the company organizes its own distribution centers and a truck fleet.
Today, the scale of the logistic empire of Walmart is unprecedented. The company has more than 40 regional distribution centers, each of which covers more than one hundred thousand square meters. And each distribution center operates around the clock to deliver goods to 75-100 stores within a radius of five hundred kilometers.
Moreover, around 85,000 employees are involved in the company’s logistics.
The question is: how can Walmart manage such a system of operations? It all comes down to technology. Walmart from the very beginning began to adopt the latest technology.
In 2006, Walmart introduced the Remix project, which was designed to improve the flow of goods and their availability. In the past, Walmart had two different distribution networks: one for dry products, such as cereals, and the other for household goods, such as paper towels. Both of these networks included those that sold fast and those that sold slowly.
However, Walmart quickly realized that slow-selling products delayed transportation because fast-selling products could not be delivered to store shelves as quickly as needed without unnecessary losses.
So Walmart created High-Velocity Distribution Centers for fast-selling products of any category. When the store finds out that some product is running out, it sends data to the nearest distribution center. Trucks with the necessary goods immediately deliver them to the shelves of Walmart without loss of time.
Real-time Data Analysis Helps Walmart Not Only Fill Shelves, but Also Take Into Account Future Supply Need
Walmart’s attention to technological innovation enabled him to overtake his competitors, because of this, the retailer became much more efficient and, accordingly, was able to provide better service and lower prices.
The company’s technologies track every product on the shelves of its stores. And when one of them ends, the computer automatically notifies the warehouses that delivery is necessary.
It is important that this system generates unprecedented amounts of data, which allows for an inventory in real-time. These data directly affect the planning of turnover.
Here is a fantastic example. Before Hurricane Ivan hit Florida, Walmart algorithms predicted high demand for pop-tart strawberry pastries. The retailer’s computers notified the distribution centers of this, and thanks to this, these cakes were delivered just in time, and Florida’s families stocked up on the desired cakes before the storm.
However, the seller does not just use the data only for his own benefit, he also openly shares some information with suppliers.
Thus, suppliers not only know which products sell well, but they also find out the exact information about which types of products sell well, on which days and in which stores. This allows suppliers to plan their production more efficiently and better coordinate shipments at Walmart.
Thanks to this rationalization, Walmart can reduce not only the number of products that must be disposed of but also the labor costs associated with stockpiling. And all this works to lower final prices for consumers.
- Close relationships with suppliers. Sophisticated logistics empire.
- Cutting edge technology. Here are the reasons for Walmart’s incredible success.
- But what awaits the retailer ahead? Read on to find out.
- To reach its full potential, Walmart must reach out to more buyers, both local and newcomers.
Although Walmart is the Largest Retailer in the World, Its Full Potential is Still Not Realized.
There are two large categories of potential customers who rarely use Walmart services. These are residents of major US cities and foreign buyers.
As mentioned earlier, Walmart began with shops in rural low-income areas. To grow, Walmart needs to expand to large cities, especially because in many poor urban areas, residents simply do not have access to quality, inexpensive products.
About 23 million consumers live in such areas, so this strategy has great potential!
Although Walmart plans to open 300 stores in cities by 2016, the success of such actions is not guaranteed. To date, there is not a single Walmart in New York. And it’s easy to see why: Walmart hypermarkets are gigantic, and the cost of real estate alone will be astronomical!
There is a simple solution to this problem: make shops smaller. And so in 2011, the company introduced Walmart Express, whose area is only about a thousand square meters. And in such a small area, the choice of goods is still at least three times more than in a regular store.
The company is also very serious about its plans to enter the global market. Walmart International already exists in 26 markets outside of America.
But the company wants to reach the remaining 4 billion potential customers worldwide. The potential of the company, especially in countries such as China, India, and Brazil, is huge.
Currently, Walmart International has entered such markets but has not yet become number one on them. However, in the future, Walmart International may even surpass its American counterpart.
Amazon, whose prices are even lower and more choices, may beat Walmart in its own game
Winning new customers is not Walmart’s sole mission. A more serious problem has already been outlined: analysts expect that in 2024 Amazon will significantly outperform Walmart and become the world’s largest new retailer.
This is possible for two reasons. First, Walmart inappropriately neglected online trading. Secondly, regarding low prices and assortment, Amazon defeats Walmart in its own game.
Walmart’s online sales today are around $ 6 billion, which is very small compared to Amazon’s 34 billion. The question is, how did it happen that Walmart missed such an obvious source of profit?
This is partly because Walmart has focused on expanding its hypermarket chain.
But there is another reason Walmart ignores the Internet. Ten years ago, when a retailer just started experimenting with online technology, most of its target audience was not interested.
In 2004, Walmart launched an online music store to compete with iTunes. However, since a typical low-income Walmart buyer did not yet have Internet access, the project failed.
Therefore, Walmart has its own reasons for undeveloped online trading. But this is not the only factor. The second reason Amazon can outperform Walmart is that it has outperformed Walmart in its strengths by offering lower prices and a wider range of products.
Consider this example: when Wells Fargo compared two baskets of goods in 2011 – one from Walmart and the other from Amazon – they found that the Amazon basket was nine percent cheaper, even considering shipping costs.
Another comparison showed that when it comes to assortment, Walmart offers, for example, “only” 96 different types of camcorders, and Amazon – as many as 2,016. And this trend applies to everything: the assortment at Amazon is about 14 times wider than at Walmart!
In other words, Amazon is not just a competitor to Walmart, but a very worthy adversary.
The Final Words
Assuming that there is only one secret to the success of Walmart, then it lies in the incredible effectiveness of the company in all respects: whether it is providing a wide selection of goods, managing logistics, negotiating with suppliers or creating advanced technologies.
Efficiency is a key principle of Walmart: all in order to offer customers the lowest prices.
Walmart executives must follow certain guidelines to minimize costs. For example, when a Walmart CEO travels to a meeting with a supplier to close another deal, the travel expenses should be significantly less than the profit.
Why You Should Read “Walmart”
- To learn more about business innovation.
- To create a successful retailer.
- To fully understand Walmart’s path to success.
This book is available as: