Walmart Stores Inc
Walmart Stores Inc. is an American retail chain corporation that was founded in 1969 by Sam Walton. It operates discount grocery stores, departmental stores, Sam’s Club retail warehouses and hypermarkets. Walton’s business strategy was to sell products at low prices in order to get higher-volume sales, regardless of a decrease in his profit margin. “From the no-frills corporate offices to its requirement that all employees, even executives, empty their own trash, Walmart makes a point of keeping its costs down so it can sell products for less” (Efron). Walmart stores are equipped with only what is required to display and sell products. This business strategy is unique to Walmart and has allowed the company to outperform its competitors, both in terms of profitability and expansion. Over the last 50 years, Walmart has grown into the largest retailer worldwide, with over 11,700 stores “under 65 banners in 28 countries and e-commerce websites,” which are visited by approximately 270 million people every week (Walmart). “With the fiscal year 2018 revenue of $500.3 billion, Walmart employs approximately 2.3 million associates worldwide” (Walmart). Walmart’s mission to ‘save money, live better’ has allowed millions of consumers continuous access to affordable goods and services. “In addition, these stores include several ancillary services such as pharmacies, dry cleaning, vision centers, automotive care centers, hair salons, and income tax preparation resources (in season), providing consumers with a true “one-stop” shopping environment” (Zhu).
In the 1960s, competition in the US discount retail store market increased with the entry of new firms such as K-Mart and Target. Despite the increase in competition, Walmart continued to grow and increase its profits. “By the end of 1985, Sam Walton was one of the richest people in the United States” (Pindyck). The conventional strategy among business owners was that discount retail stores can only be successful in cities with high population, however, Walton opposed this theory. He decided to operate stores in small towns and succeeded in opening 30 Walmart stores in Arkansas by 1970. “The stores succeeded because Walmart had created 30 ‘local monopolies'” (Pindyck). Since these small towns could only accommodate one large retail discount store, Walmart avoided competing with other retail discount stores prevalent in large cities. This helped in minimizing the cost and prices while driving up the profit margin.
Walmart’s continued success can be attributed to its investment strategy in small towns instead of larger cities. Walmart’s successful strategy compelled other competitors to follow the same business model to increase their profit margin. Since “there are a lot of small towns in the United States, the issue became who would get to each town first” (Pindyck). With increased competition to enjoy a local monopoly in small towns, Walmart entered a preemption game with its competitors. This preemptive investment strategy can be explained by a payoff matrix between Walmart and Target. If Walmart enters the market and Target does not, Walmart will earn 10 and Target will earn 0. Whereas, if Target enters the market and Walmart does not, Target will earn 10 and Walmart will earn 0. However, if both Walmart and Target decide to open stores in a small town, they both lose 5.
Discount retail chain stores rationally respond to the strategies adopted by its competitors. “The requirement that the profit-maximizing decisions of all firms must be simultaneously consistent implies conditions that reflect a Nash equilibrium of the game between the chains” (Zhu). In this case, there are two Nash equilibria (the best possible option for player two given player one’s strategy) – one where Walmart enters, while Target does not, and the other where Target enters, while Walmart does not. If Walmart opens a store in a small town, the rational response for Target will be to not enter the market, thus assuring Walmart a payoff of 10. “The trick, therefore, is to preempt—to set up stores in other small towns quickly,” before Target does (Pindyck).
Walmart adopted the preemptive investment strategy and became the largest retailer in the world in 1999, with “2454 stores in the United States and another 729 stores in the rest of the world, and had annual sales of $138 billion” (Pindyck). Although Target adopted the preemptive strategy, it did not implement it as rigorously as Walmart did. By 1999, Target was only able to open 912 stores in the United States, “with sales reaching $26 billion” (Target Corporation Annual Report). Moreover, Target did not expand internationally and forewent the untapped markets in countries, which have high populations, cheap labor, and lack discount retail store markets, thus making them profitable investments. While Target confined itself to the United States, Walmart entered the international market and took over the discount retail chain markets in countries such as Mexico, United Kingdom, Canada, Japan, and India. “The latest expansion strategy is for the company to gain entry into a nation by the corporate takeover of a national retailer” (Hayden). Walmart’s international existence has expanded faster than any other company in the world. “It operates as Walmart in the U.S. and Puerto Rico, Walmex in Mexico, Asda in the UK, Seiyu in Japan and Best Price in India” (Agarwala). “Walmart’s international sales make up about one-fifth of its overall revenues; their international sales division has enjoyed an enormous success and does not seem to be losing momentum” (Mujtaba). ‘Walmartization’ of the global economy has introduced countless manufacturing jobs in countries such as India and China. “International commerce through Walmart will create “over 800,000 jobs worldwide over the next several years, not to mention the labor needed to build the stores, parking lots and distribution centers” (Mujtaba).
Walmart has been able to dominate the global retail store industry primarily because of its effective investment strategy, mergers and relentless pursuit of delivering the lowest possible prices for consumers. Once Walmart acquires a company in a foreign country, it transforms regional stores into Walmart stores. “This particular strategy, of corporate takeover, puts the company at an advantage when it enters into a new market, since in one stroke, a large competitor is eliminated, and at once, Walmart has real estate and employees, and a massive presence in its targeted location” (Hayden). By retaining stores that are familiar to the general public, Walmart creates a brand familiarity among them. As these stores increase their profits and create a loyal consumer pool, Walmart starts remodeling the local stores to look like Walmart’s. This strategy of acquiring regional companies in foreign countries and slowing creating a loyal consumer base has made Walmart the largest retail store chain in UK and Canada. In 2002, Walmart “bought 6.1% of Seiyu in an attempt to gain a foothold in the Japanese market” (Hayden). Since the Japanese market has been extremely hostile towards foreign brands, Walmart bought Seiyu shares to ease into the market and allow local consumers to accept its business strategies and involvement in the Japanese retail store market. “Seiyu, a 36-year-old retailer, will school Walmart on Japanese customs to better prepare the retail giant for possible acceptance by finicky consumers” (Hayden). Although Walmart is not the first American company to enter the Japanese market, it is the first company to merge with an existing brand to increase its knowledge about the consumer base in Japan. Not only did this strategy help Walmart expand its business and increase its profit margin, but also led to an increase of 21% in Seiyu’s stock price. Thus, by moving first into the Japanese market and understanding the needs of the local consumers, Walmart was able to adjust to the needs of the Japanese consumers like no other company.
Since Walmart’s Everyday Low Pricing (EDLP) strategy has made it the leader of discount retail stores in the United States, it is safe to assume that other discount retail stores would also follow the same strategy to attract consumers and foster growth. However, if competitors are not able to preempt Walmart’s strategies and set up a store in a town before Walmart does, it becomes increasingly difficult for them to follow the EDLP strategy. Consequently, they are forced to set up stores in cities with high population and face competition from other discount retail store brands. In this case, instead of following the EDLP strategy, discount retail store chains follow the High-Low Pricing (HLP) strategy, where companies initially charge high prices for products and later charge lower prices through discounts and promotional schemes. The HLP strategy involves media advertising, in-store advertising, and weekly promotional schemes. “In the nomenclature of game theory, this process is best described as a non-cooperative game that is played among competing chains” (Jones). Each competing brand adopts different advertising and pricing strategies to increase their profits at the expense of its competitors. This competition leads to massive expenditure on promotional advertising and reduces the profit margin of the discount retail store brands. Thus, Walmart’s preemptive investment in small towns combined with its EDLP strategy has increased its profit margin, “lowered its cost and positioned it as a formidable competitor in the supermarket industry” (Jones).
With the emergence of e-commerce and a shift to online shopping, Amazon has become Walmart’s biggest competitor. Over the last few years, Amazon has increased its international presence and has become the world’s leading online retailer. Although Amazon has made it easier for consumers to shop by delivering a vast array of products to their doorstep, Walmart’s “traditional brick-and-mortar stores will continue to be the preferred channel for many households for the next decade, in both the US and emerging markets” (Agarwala). At present, Walmart has a significant advantage over Amazon in terms of physical existence. Stores allow consumers to engage with sales associates and check for faulty goods before purchasing them, which are not possible with online shopping on Amazon. With more than 11,700 stores worldwide, Walmart has focused its business strategies to improve its online platform by investing “$2 billion” in e-commerce (Agarwala). “Aggressive investments in the e-commerce platform, coupled with large capital availability and a well-established brand name, allow Walmart to replicate Amazon’s model, with potentially lower costs, and consequently lower prices for customers” (Agarwala). Moreover, Walmart can also convert its existing stores into distribution centers to reduce the company’s operating cost. This would provide consumers a choice to pick up their online orders in-store and make it easier for them to return items. “Walmart’s vast trucking fleet and distribution channel provide it close proximity to customers, which eventually might facilitate one-day or even faster delivery of products and allow the firm to compete against Amazon Prime, Prime Now, Pantry and Fresh” (Agarwala). Despite the increased popularity of online shopping, Walmart still enjoys a significant advantage over Amazon, thus prompting the online retailer to align its business model with that of Walmart’s.
In conclusion, despite the retail sector showing an overall negative price performance, Walmart has continued to fulfill its purpose of providing consumers access to cheaper goods so that they can live better lives. Walmart’s growing success can primarily be attributed to its preemptive investment strategy. By utilizing the first mover advantage and creating ‘local monopolies’ in small towns, Walmart not only eliminates competition but also reduces operational costs of advertising and promotional schemes. Unlike Target and other discount retail store chains, Walmart successfully tapped the international market by merging with local retail stores and understanding the needs of the local consumers. Walmart’s EDLP strategy has further made the company more attractive to consumers than retail store chains that follow the HLP strategy because consumers have continued access to cheap goods and don’t have to wait for sales to buy products. Although the growing success of online retailers like Amazon poses a threat to Walmart’s growth and productivity, the physical existence of Walmart’s stores allows the company significant advantages that are not available to Amazon. Thus, Walmart’s business model has been increasingly successful in adapting the company to the changing global environment and understanding the individual needs of consumers. The strategies of preemptive investment and acquisition of regional retail store chains have allowed the company to withstand intense competition and emerge as the largest and most successful retailer in the world.