Business Model of Walmart

Walmart, the US-based retail giant has enjoyed strong growth over the past several years. The company has also experienced impressive growth and rising demand across the e-commerce segment bolstered by the growing use of digital technology. Walmart’s investment in e-commerce and digital technology over the past several years is paying off. The company has strategically invested in technology and human resources to overcome the rising competitive pressure from the e-commerce giant Amazon. However, the retail industry in the US is marked by intense competition and other leading physical retail brands are also extending their reach and growing their market penetration through investment in digital commerce. Costco, Target, and other physical retailers are also enjoying the benefits of e-commerce. In the longer term, customer experience and technology will remain the main factors affecting growth momentum in the US retail industry. 

Walmart Business Model.
Net Revenues of Walmart in billions. 2017-2020.

The core pillar of Walmart’s success is its business model. Sam Walton had focussed on some key factors when he laid the foundation of Walmart and one of them was managing operations and prices in a manner to benefit the customers the most. Since then Walmart’s business model has evolved a lot and the company has acquired a strong competitive position in the United States. The company has also expanded overseas to 28 markets.

Walmart Reportable Business Segments:

Walmart’s retail empire is divided into three main segments apart from e-commerce. The largest business segment of Walmart based upon revenue is Walmart US followed by Walmart International and Sam’s Club. Walmart US, the largest business segment of Walmart accounts for the highest sales and revenue of the company. This segment includes only the domestic part of Walmart’s business. The largest of all the markets where Walmart operates is the United States. Walmart International includes the part of Walmart’s business that is located overseas. Sam’s Club is the premium segment of Walmart’s business. 

Walmart US:

Walmart is the largest physical retail brand located in the United States. Its largest individual market is the US where the company is present across all the 50 states as well as Washington D.C. and Puerto Rico. 

This segment operates under several brands including Walmart and Walmart neighborhood as well as several e-commerce brands including walmart.com, jet.com, and many more. Historically, Walmart US has remained the best performer among the three segments of the company. The gross profit rate (which Walmart defines as gross profit/net sales*100) of Walmart US has been the best of all the three segments. It is also the best performing segment in terms of net sales and operating income. 

This segment offers an integrated omnichannel experience to its customers that includes both online and offline channels. It combines online and offline channels to provide a superior shopping experience to its customers. Walmart US has combined pickup and delivery services including “Walmart Pickup,” “Pickup Today”, “Grocery Pickup”, “Grocery Delivery,” and “Endless Aisle” with retail to provide a seamless buying experience to its customers.  During fiscal 2020, Walmart launched Next Day Delivery to more than 75 percent of the US population. The company also launched delivery unlimited in the same fiscal year from 1,600 locations. it also expanded Same Day Pickup to around 3,200 locations.

Walmart US operates three large store formats in the US including supercenters, discount stores, and neighborhood markets. The Walmart Supercenters are the largest store formats that are an average of 178,000 sq feet in size. The Walmart Discount stores are 105,000 square feet in size. The neighborhood markets of Walmart US are 42,000 square feet in size. Walmart US sells merchandise in three strategic categories that include grocery, health and wellness, and general merchandise. The general merchandise category includes entertainment, hardlines, apparel, home furnishing products, and seasonal merchandise products. Walmart US sells a large range of branded merchandise. It sells a vast assortment of products created by its private label brands. Several of the large format retail stores run by Walmart US are operational round the clock. Generally, it is the largest quarter of the year that is the busiest season for Walmart US. (Walmart’s fiscal year ends on Jan 31.

Walmart US also faces a lot of competition. The categories of retailers that compete with Walmart include the ones operating discount, department, retail and wholesale grocers, drug, dollar, variety and specialty stores, supermarkets, hypermarkets, and supercenter type stores as well as e-commerce stores. 

Walmart’s US operations are supported by a large web of distribution facilities that are located throughout the United States at key locations. There are 156 distribution facilities established by Walmart in the US that support its domestic operations. The merchandise customers buy from Walmart US stores are shipped mainly through these distribution facilities. Walmart has also established 33 dedicated e-fulfillment centers that it uses to ship merchandise customers buy from its e-commerce platform centers. 

The chart below shows the net sales of Walmart US in billions.

Walmart International:

Walmart International is the second largest segment of Walmart and operates in 26 countries.  The Walmart International segment operates through the company’s wholly-owned or majority-owned subsidiaries. It operates several store formats that are mainly divided into three categories including retail, wholesale, and others.

The store formats used by Walmart International include supercenters, super-markets, hypermarkets, warehouse clubs (including Sam’s clubs), and cash and carry as well as several e-commerce platforms. 

The e-commerce platforms of Walmart International include walmart.com.mx, asda.com, walmart.ca, flipkart.com, and several other sites. The omnichannel experience offered by Walmart integrates retail stores and e-commerce through services like click and collect in the United Kingdom or online marketplaces like Flipkart in India. In terms of merchandising, Walmart US and Walmart International follow a similar strategy. Apart from leveraging the US-based private label brands, the company has also developed market-specific brands. By forming strong relationships with the local and regional suppliers, Walmart International has ensured that it offers its customers national brands at lower prices. It utilizes a total of 221 distribution facilities that are located in Argentina, Canada, Central America, Chile, China, Japan, Mexico, South Africa, India, and the United Kingdom. It uses these distribution centers to process and distribute both domestic and international products to the Walmart International retail operating units. For the distribution and shipping of products bought from its e-commerce channels, Walmart International utilizes its 90 dedicated e-fulfillment centers as well as 1900 e-commerce sort centers in India.

Sam’s Club:

Sam’s club is a warehouse club and also operates samsclub.com. It is operational in 44 states in the US as well as Puerto Rico. Sam’s Club memberships include a spouse/household card that does not involve any extra cost. However, the plus members of Sam’s Club are eligible for cash rewards. Plus memberships include cash benefits of $10 for every qualifying purchase of $500 and the customers can earn as much as $500 each year in rewards that they can use for purchases, membership fees, or redeem for cash. Moreover, the plus members are eligible for free shipping on most of the merchandise that they buy from samsclub.com. There is no minimum order size for the plus members and they can also receive discounts on prescriptions, glasses, and contact lenses.

Just like Walmart US and Walmart International, Sam’s Club also offers an omni-channel experience to its customers that integrates physical retail and e-commerce.  Its members have access to a large assortment of products. Sam’s Club sells merchandise in five main categories including grocery and consumables, health and wellness, fuel and other, home and apparel, as well as technology, office, and entertainment. Member’s Mark by Sam’s Club offers a large assortment of carefully curated premier quality products. Sam’s Club continues to grow its assortment of products every year. In 2019, the sales of Member’s Mark were higher than $12 billion driven mainly by growth across the private brand portfolio.

Business Growth Strategy of Walmart:

To achieve faster growth, Walmart is following an omnichannel retail strategy that will help it penetrate the market deeper in the US as well as several international markets. As customers are moving towards digital channels for shopping, Walmart’s focus on technology has grown to provide its customers with a seamless buying experience. Price leadership has been and will continue to remain a cornerstone of Walmart’s successful business model. Each week the company serves nearly 265 million customers through its more than 11,500 retail stores and 56 banners in 27 countries. While focusing on disciplined growth and investment in digital technology, the company is also trying to make its business model stronger by investing more in its associates and strengthening the trust customers place in Walmart. The focus of the company is to help people around the world save money and live better lives.

Walmart’s E-commerce Business:

The first e-commerce initiative of Walmart (walmart.com) was launched in 2000. Since then it has taken several bold steps that have enabled it to strengthen its position in digital commerce. After launching walmart.com, the company also launched samsclub.com. In 2007, the company launched its site to store service. As a part of this service, Walmart customers could make purchases online and then pick merchandise from one of the nearest Walmart’s physical retail stores. With time, the company made some acquisitions and also formed strategic alliances that helped it build better growth momentum in terms of e-commerce. In 2016, Walmart acquired jet.com in the United States and also formed a strategic alliance with jd.com in China, taking its e-commerce initiative a step ahead. The company has been following the same track and made a number of acquisitions in the United States to grow its e-commerce capabilities there and improve its reach through digital commerce. After acquiring jet.com, the company also acquired shoes.com, Moosejaw, Bonobos, and many more digital consumer brands. Walmart further boosted its e-commerce initiatives by adding free shipping from walmart.com on more than 2 million items. During the same year, Walmart also created a technology incubator named Store No.8 whose main focus was to speed up e-commerce innovation at Walmart. 

To expand its e-commerce business overseas, Walmart acquired a majority stake in Flipkart in August 2018. Flipkart is an Indian e-commerce marketplace that also includes Flipkart, Myntra, and Jabong. In the United States, the company has continued to extend its e-commerce presence by adding more grocery pickup and delivery locations. In many of its international markets also the company is able to provide its customers with an omnichannel experience by offering a mix of physical and digital retail. Over the coming years, Walmart plans to further boost its e-commerce capabilities through continued investment in technology and acquisitions.

Role of Supply Chain in the Business Model of Walmart:

The supply chain of Walmart is a central pillar on which the operational efficiency and business success of the retail brand rests. Walmart has always maintained a heavy focus on maintaining supply chain efficiency through technology and by building strong relationships with suppliers. The cost-efficiency of the retail brand arises mainly from its supply chain management strategy. The company sources directly from the producers and eliminates the need for middlemen. In this way, it substantially reduces the costs of merchandise. By buying in bulk from the producers, it has been able to maintain lower prices. 

An important aspect of Walmart’s supply chain strategy is its use of technology to reduce complications related to inventory management. The company uses cross-docking, an inventory management system that reduces the time required for the transportation of merchandise. Cross-docking reduces the time lost between inbound and outbound logistics. As a part of cross-docking, inbound trucks are unloaded directly into outbound trucks. It eliminates inefficiencies from the Walmart supply and distribution system and also saves the retailers billions in the form of saved storage costs. The EDLP pricing strategy of Walmart requires it to reduce expenses in all aspects of business and by managing supply chain efficiency, the retailer saves substantial costs related to transportation, storage and inventory management.

Competitive Advantage in the business model of Walmart:

Walmart is the largest physical retailer in the United States. The company has acquired several sources of sustainable competitive advantage and continues to strengthen its competitive position through investment in technology, human resources and continuous expansion of its merchandise range as well as an increased focus on customer experience. The main source of competitive advantage for the company is its lower pricing strategy that continues to drive higher footfall across Walmart stores compared to the rival businesses. Here we will discuss some leading sources of competitive advantage for Walmart that have continued to support its fast growth and international expansion.

EDLP:

EDLP or everyday lowest prices is the pricing strategy utilized by Walmart. It is also the main attraction of the company which brings customers flocking to Walmart stores regularly. The company has been following this strategy since its early days and offering its customers lower prices than its customers. The company manages its supply chain and operations in a manner to keep operating expenses low and passes on the benefits to the customers. 

Brand image:

The brand image of Walmart is also one of the leading strengths of the company. It is a customer-oriented brand that has always placed its main focus on the convenience and satisfaction of the customers. Apart from selling a large assortment of products, the company has always been aggressive in terms of lower prices and customer price. This has helped the company gain strong popularity in the United States. While the popularity of the company has kept growing stronger over time, the only grey area was HR management. However, in recent years, apart from raising hourly wages, Walmart has also grown its investment in the training and development of its associates. This has also helped the company strengthen its image in the market.  

Extensive presence:

The United States is the largest market of Walmart and accounts for the highest share of its revenue. Walmart has maintained an extensive presence throughout the US as well as several more international markets. The company operates 5,355 retail stores in the US as well as 6,146 internationally (as of Jan 31, 2019). In the United States, the retail format that the company uses the most is the supercenters. The company operated 3,571 supercenters in total as of Jan 2020 in the United States. Texas had the highest concentration of Walmart Supercenters at 392.  Outside the US, the company had the highest number of stores operational in Mexico (2,408) as of Jan 2020.

Sourcing and supply chain management:

Walmart’s supply chain management strategy is also one of the core pillars of its competitive business strategy. It has helped it achieve a competitive advantage that is very difficult for rivals to match. Right since the foundation of the company, its focus was on managing prices. A key step in this direction was managing the supply chain in a manner that helped reduce costs and grow profits. Sam Walton formed a strategy that focused on eliminating middlemen and sourcing directly from the producers. In this way, the company was able to significantly reduce costs. Walmart has kept making improvements in the area of supply chain management to achieve higher efficiency. The company-owned fleet of trucks plays a significant role in distribution. Walmart’s investment in technology for inventory management and in other areas including distribution and delivery has also helped it achieve higher efficiency and offer its customers higher convenience.

Customer Experience:

Customer experience is of paramount importance for managing a retail brand’s competitive position. It is one of the most significant factors that affect brand image and popularity directly.  By investing in customer experience, the company has maintained its leading market position in the physical retail industry. People love shopping at Walmart because of the distinctive experience the company offers. Walmart offers a large assortment of good quality merchandise. However, not just product quality, the company also maintains a heavy focus on customer service for retaining customers. Technology is an important pillar of its business strategy and by investing in digital technology (including e-commerce websites and apps), the company is offering its customers superior omni-channel shopping experience.

Distribution and logistics:

The integrated omnichannel retail experience that Walmart offers mixes e-commerce and physical retail with various delivery options in several markets. However, a strong distribution and logistics system has helped the company bring higher efficiency to its business model. The company owns a large part of its distribution and logistics system in its domestic market. It has a large fleet of company-owned trucks that the company utilizes for delivery and distribution. Apart from that, it has established a large web of warehouses and e-fulfillment centers that also support distribution and delivery throughout the US and internationally.

Financial Performance of Walmart in the last two years:

Walmart’s performance in the last three years has been nothing less than stellar. Its net revenue climbed past $500 billion in 2018 for the first time. In 2019, the net revenue of Walmart climbed to $514.4 billion. In fiscal 2020, the net revenue of the company climbed to around $524 billion.

Walmart Performance during fiscal 2019:

In 2019, net sales of Walmart US segment grew by $13.2 billion compared to last year. Net sales of Walmart US grew to $331.7 billion in 2019 from $318.4 billion in 2018. The increase in net sales happened mainly due to the growth in comparable store sales of 3.7% in 2019 compared to 2018 driven by growth in average ticket size and traffic. Growth in e-commerce sales contributed positively to comparable-store sales.

Walmart International segment experienced a growth of $2.8 billion or 2.3% in 2019.  Walmart acquired a majority stake in Flipkart in the third quarter of 2019. However, Flipkart sales still added substantially to the net sales of Walmart International and remained the primary driver of growth for this segment. Apart from that comparable sales saw positive growth across most of the international markets of Walmart. However, Walmart also sold a majority stake in Walmart Brazil that led to a net reduction of around $3.1 billion in net sales of Walmart International which offset this segment’s revenue growth to some extent. The impact of currency fluctuations was around $0.7 billion. 

The Sam’s Club segment of Walmart experienced a decrease of around $1.4 billion or 2.3% for fiscal 2019. The factors that affected the decline in revenue during 2019 included closure of 63 clubs as well as reduced tobacco sales since Walmart decided to not sell tobacco across certain locations. Ecommerce sales also contributed around 0.9% to the net sales of Sam’s Club. 

Walmart performance during fiscal 2020:

The net revenue of Walmart Inc grew to $524 billion in 2020 from $514.4 billion in 2019. Walmart’s net revenue includes net sales as well as membership and other income. In fiscal 2020, the net revenue of the company grew by $9.6 billion or 1.9% compared to the previous year. The increase in Walmart’s net revenue was driven mainly by the growth in net sales. Comparable sales grew positively across Walmart US and Sam’s Club. Apart from that, Flipkart also contributed to the growth of Walmart’s net sales. Walmart’s US segment experienced a growth of $9.3 billion or 2.8% in net sales during fiscal 2020 compared to the previous year. However, the gross profit rate of Walmart US decreased by 14 basis points in 2020.

Walmart International segment experienced a decrease in sales of $0.7 billion or 0.6% during 2020 compared to the previous fiscal. The gross profit rate of Walmart International decreased by 136 basis points in 2020 compared to the previous year.

Sam’s Club experienced an increase of 1.6% in net sales compared to the previous year. The net sales of Sam’s Club grew by $1 billion in 2020 compared to 2019 and reached $58.8 billion.

Data and financial performance analysis based on the annual report of Walmart (form 10K for 2020)

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.