Walmart: In Search of Renewed Growth*

In early 2020, Walmart Stores, Inc., the world's largest retailer, faced mixed messages from
analysts. The company had just been ranked number one on the Fortune 500 list, with same-store
sales in the United States improving after many years of slow growth. However, Market Realist
reported in 2019 that ‘Target, Costco, and Walmart stock have risen 23.1%, 20%, and 5.3%,
respectively for the year.’ Target and Costco were major competitors in the discount retail business.
With more than 5,000 stores across the United States, Walmart had achieved broad geographic
coverage. Walmart's laser-like focus on its famous ‘Everyday Low Prices’ (EDLP) policy seemed
to have wrung almost every conceivable expense from the firm's supply chain and operations. As
a result, the company found itself looking toward a more upscale shopping experience. Target had
already staked a claim to this positioning in discount retail, with its ‘Expect More, Pay Less’
message and exclusive deals with top designers. Could Walmart top Target? CEO Doug McMillon
carefully weighed the risks and benefits of such a move.

Humble Beginnings
In 1962, Sam Walton and his brother opened the first Wal-Mart Discount City store in Rogers,
Arkansas. Walton was already an experienced retail manager, and had become intrigued by a
growing trend in retailing – discount stores. These new establishments combined the low-
margin/low-price strategy of supermarkets with the broader selection of merchandise often
seen in department stores. In 1962, Kmart and Target were also launched as discount retailers.
Walton's opened his first stores in small towns, in contrast to his competitors who were reluctant to
do business in cities with populations below 50,000. By operating in locations that larger
competitors shunned, Walmart found itself competing primarily against small, locally owned shops
– just the type of businesses Walton could challenge with his EDLP policy. Through EDLP,
Walmart sold goods at a lower price at all times, and reaped profits by selling a larger volume of
goods. To be successful, Walton paid close attention to costs, competitor prices, and invested
heavily in operations and logistics.
SENIOR MANAGEMENT
To reduce expenses, Walton shunned bureaucracy and traditional marketing. Walmart housed its
lean senior team in a nondescript building in rural Bentonville, Arkansas. When managers visited
suppliers, they rented inexpensive cars, stayed in low-cost hotels – often sharing a room—and'
walked instead of taking taxis. The operational rule was to hold trip expenses to less than 1% of
purchases. As Walmart grew, the company asked buyers to come to Bentonville, where negotiations
were conducted in sparse rooms. Meetings with suppliers were set up via collect calls. In the early
1990s, in a move that was challenged and upheld in the courts, Walmart bypassed manufacturer
representation altogether to deal directly with suppliers, thus saving on the cost of goods.

Walton's own behavior exemplified this in many ways: when he traveled between stores (first in
his old pickup truck and then in the plane he flew himself, thus saving the cost of hiring a pilot);
when he designed his stores (which had cement floors and industrial shelving); when he eschewed
fancy corporate trappings (keeping a cramped, spartan office at headquarters); when he banned
gifts from suppliers (believing those costs might be passed on to Walmart); and when he was
reluctant to add overhead (Walmart did not have a PR department until the 1990s). As Walmart

* Abridged from Stephan Meier and Felix Oberholzer-Gee. 2020. “Walmart: In Search of Renewed
Growth.” Columbia CaseWorks, CU20, #080408 (August).
grew, Walton's mid-western values, emphasizing frugality, independence, and propriety, permeated
the company. Walton died in 1992, but the core company values he had created continued to live
on in numerous company policies and in the culture of the people.

Company Policies And Culture

Walmart called its suppliers ‘partners’ and its employees ‘associates’, implying that both had a
different, closer relationship to management than was common at other companies. To build a bond
between management and associates, everyone was asked to give a Walmart cheer at the start of
meetings. Senior executives were expected to avoid ostentatious displays of power or wealth.
Walton also wanted to instill a customer focus; in his words: “There is only one boss: the customer.
And he can fire everybody in the company from the chairman on down, simply by spending his
money somewhere else. Whenever I come within 10 feet of a customer, I look him in the eye, greet
him, and ask if I can help him.” The yellow smiley logo became the corporate symbol. At the
entrance of every store a greeter said, ‘Welcome to Walmart’ as shoppers arrived.

AGILITY
Walmart’s culture was fast-paced, allowing it to react to market opportunities swiftly. Walton
started his work day at 4:30 a.m., and his management team arrived by 6:30 a.m. At the mandatory
company-wide 7 a.m. Saturday meeting, executives shared (live via satellite to all store locations
the week's priorities, including up-to-the-minute sales trends, new products, and competitive
developments. Saturday meetings were “equal parts talk show, financial update; merchandising
workshop, town-hall forum, talent revue, gripe session and pep rally.” Actions called for on
Saturday morning were implemented by the end of that day.

PRICING PRACTICES
While Walmart’s competitors set prices at. headquarters, Walton delegated pricing and
merchandising decisions to store managers, who often visited neighboring stores to observe their
rivals’ prices. Decentralization allowed the company to react quickly to local market conditions.
For example, Walmart prices were approximately 1% lower when Walmart and Kmart were located
next to each other. However, if a store had no immediate local competition, prices were about 6%
higher than the company's average.

INFORMATION TECHNOLOGY
Starting in the early 1980s, the company made large investments in technology. Walmart was an
early adopter of electronic scanning, automated distribution systems, and satellite-supported
electronic data interchange (EDI) with its suppliers. By the 1990s, EDI supported inventory
management throughout the company. At the same time, Walmart launched Retail Link, a private
exchange that gave thousands of suppliers access to point-of-sale data and offered inventory
information for the previous two years on a store-by-Store basis. This wealth of data allowed store
managers and suppliers to determine the specific traits of a Walmart location by indexing local
demand against more than 1,000 other stores and market characteristics.

DISTRIBUTION
Walmart's distribution strategy reflected the isolated locations of many of its stores. Walton said,
“We were in the boondocks, so we didn't have distributors falling over themselves to serve us. Our
only alternative was to build oar own warehouse so we could buy in volume at attractive prices and
store the merchandise.” Walmart expanded its retail network by adding stores that were within one
day's drive of each associated distribution center. Thomas Holmes, an economics professor at the
University of Minnesota, explained:

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 “Walmart started in a relatively central spot in the country and store openings radiated from
the inside out … Walmart always placed new stores close to where it already had store
density … When stores are packed close together, it is easier. to set up a distribution
network that keeps stores close to a distribution network ... save on trucking costs.”

Walmart’s trucks were usually able to reach a store in time for shelves to be restocked within one
day, a critical advantage over the weeklong delivery time historically experienced by Walmart's
competitors. Over 80% of sales went through the company’s own distribution centers. Walmart
introduced cross docking: moving merchandise items from one truck to another without ever
storing them in a warehouse. Because the company owned its own fleet of trucks, it controlled all
parts of the delivery and schedule process. Walmart had even taken over the transportation of some
of its suppliers’ merchandise, which it could do more efficiently than the suppliers themselves, due
to the size of Walmart’s trucking fleet. As a result, the company was able to drastically reduce the
number of items that experienced stock-outs or overstocks. Thus, a typical store allocated just 10%
of its footprint to inventory storage, versus the 25% industry average. The continued expansion of
Walmart network made it more likely that people would shop at its stores, since many customers
lived within a short walking distance of several Walmart locations.

COMPETITION
Walmart’s culture was characterized by a fierce sense of competition and a keen focus on business
improvement. After managers visited the stores of local rivals, they had to come up with ways to
undercut their prices. Every associate was asked to make suggestions about ways to improve sales
for his or her area. Buyers aggressively negotiated the best prices from their suppliers and then
went back each year to demand another 5% savings. The company was not shy about asking
suppliers to modify their products or packaging. Despite such pressures, many manufacturers
continued to view Walmart as the best retailer to do business with. Walmart had taken the top spot
in Kantar Retail's annual ranking of about 350 retailers every year since the first survey was
published in 1997. Out of nine categories in the 2019 survey, Walmart scored first in seven, with
key competitor Kroger topping the remaining two.

Growth Directions
Walmart experimented with a variety of new store formats and other growth opportunities.
SAM'S CLUBS
Walmart's warehouse club offered a limited selection of merchandise (3,500 SKUS, compared to
7,000 at a regular store) at near-wholesale prices and quantities, exclusively for Sam's Club
members. The company delineated the differences between these ventures and Walmart stores
clearly: Sam’s Clubs’ inventory was purchased separately from Walmart's, seasonal merchandise
played a much bigger role, and inventory turnover was much faster. Although the division's gross
margin was 13% (significantly lower than Walmart stores average of 21%), Sam's Club had sales-
per-square-foot averaging $401, versus $150 at Walmart.
SUPERCENTERS
In the late 1980s, Walmart adapted the European hypermarket store format, pioneered by the French
retailer Carrefour, to create supercenters. Supercenters added a grocery market to an existing
Walmart store. Despite the thin margins in the grocery business (3%-4% was considered typical
compared to 20% in the general merchandise segment), supercenters came to fuel Walmart's growth
and profitability. By 1999 it had opened 683. By the mid-2000s, this figure had grown to 1,980: In
2020, groceries accounted for 56% of the company's annual revenues.

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NEIGHBORHOOD MARKETS
As Walmart’s grocery business grew, the company entered the small-scale grocery business, called
Neighborhood Markets, targeting urban customers for small shopping trips. A Neighborhood
Market store was one-quarter the size of a supercenter and carried one-fifth the number of items
available there. The smaller size also gave Walmart a useful format for trying out new merchandise
and service concepts. For example, the company first tested pharmacies in Neighborhood Markets
and found them to be an attractive new revenue stream. Walmart also experimented with private-
label grocery and household products in its Neighborhood Markets. While the number of such
stores had increased dramatically, in 2015 there were still none in New York, New Jersey, Ohio,
Michigan, Pennsylvania, and many other states.
INTERNATIONAL EXPANSION
In the early 1990s, Walmart's executives turned to global markets for growth opportunities. The
company's initial move outside the United States was to the south, where it entered into a joint
venture with Cifra, Mexico's largest retailer. Walmart purchased Cifra outright in 1998. In similar
moves, Walmart acquired 122 Canadian Woolco discount stores in 1994, and 21 hypermarkets in
Germany in 1998. One year later, Walmart completed the purchase of ASDA, a 232-store
supermarket chain in the United Kingdom with $14 billion in sales. In 1996, Walmart entered
China. By 2020, Walmart operated in 26 countries, producing 28% of the company's revenue.

While international sales grew quickly, Walmart often faced savvy competitors who matched the
company's management skills and sophisticated consumers who were not impressed by its mid-
western frugality. The company was forced to exit Germany and South Korea in 2006. In June
2012, Walmart’s senior executives in Mexico were charged by the US Justice Department for
allegedly bribing local officials to sidestep zoning laws in order to fast-track new store permits. In
2019 after years of investigation, Walmart agreed to pay $282 million to regulators for allowing a
third-party to bribe officials in Mexico, Brazil, China, and India. In view of these setbacks, Walmart
scaled back its ambitions in international expansion.
E-COMMERCE
With a market share of 1.6% of US online sales, Walmart was lagging behind Amazon (12.1%),
the largest e-retailer in the world. Amazon didn't have brick-and-mortar stores and optimized its
distribution to the particular needs of e-tailing. In contrast, Neil Ashe, CEO of Global e-commerce
for Walmart, admitted at the company's 2015 shareholder meeting “we're rebuilding the business
from scratch.” In 2016, Walmart acquired Jet.com for $3.3 billion in order to compete more
effectively with other online retailers. Jet was an e-commerce startup that offered a broad selection
of merchandise and operated on a unique pricing scheme: Prices dropped when the customer
purchased multiple items from the same distribution center, when the customer purchased multiple
units of the same item, and when the customer waived their right to return the item.

Despite continued efforts, however, Jet was never profitable and Walmart finally closed it down in
2020. Jet's demise was gradual: Walmart first shifted much of Jet’s budget to Walmart.com, Jet's
team was transferred to Walmart.com, and Jet cofounder Marc Lore became CEO of Walmart.com.
Lore introduced free two-day shipping for orders over $35 without a membership fee, a move that
was a direct threat to Amazon Prime. Walmart's physical stores were a key advantage against
Amazon, and this enabled it to introduce two-hour express delivery. From 2016 to 2019,
Walmart.com sales tripled and the company became the second biggest player in e-commerce but
still lagged far behind Amazon.

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Continuing Challenges
In 2013, Doug McMillon became the fourth and youngest CEO in the history of Walmart.
McMillon had started out in a Walmart distribution center as a summer intern and had spent almost
his entire career at the company. When McMillon was appointed CEO, he led the largest retailer in
the world: an international behemoth with 2.2 million associates (1.4 million employees in the US
alone) and $482 billion in annual sales. Walmart revenue's surpassed those of its top five
competitors combined. As McMillon soon learned, the company's scale invited scrutiny, posing
management challenges in two distinct areas: labor relations and community impact.
LABOR & COMMUNITY RELATIONS
Walmart had a long history of staunch opposition to labor unions and the company's reputation as
an employer had grown to be negative. Poor labor relations impacted the turnover rate among
associates - about 50% each year - more than double than that at Costco and other retailers. Small
communities began to see a nearby Walmart store as a detriment to local business. Unable to compete
with the discounter, small rivals were forced to shut their businesses; it was estimated that 70% of
the initial increase in local jobs due to Walmart was lost thus. Supported by unions and grassroots
groups, towns began used zoning laws to stall the company's expansion plans.

As the cost of sour community relations became more visible, Walmart began to soften its stance.
The company shut down the campaign-style war room created to battle unions and disbanded
"Working Families for Walmart," a company-supported advocacy group. The company's attempts
to put on a friendlier face seemed to pay off. Rather than trying to embarrass the retailer, unions
started to work with the company on proposals for improved healthcare. David Nassar, of Walmart
Watch, a largely union-financed PR group noted, "It is fair to say we have been less in-your-face."
SAME STORE GROWTH
Walmart's expansion began to falter in the mid-2000s, and in 2015 McMillon acknowledged that
same-store sales had slowed to virtually zero in 2014 and had been negative in some preceding
quarters. However, Walmart was able to increase its comparable store sales to 4.0 percent and 2.7
percent in 2019 and 2020 respectively. By comparison, Walmart's key competitor, Costco posted
gains of 5% annually from 2015 to 2019. One growth challenge was sales cannibalization. By 2006,
60% of the US population lived within five miles of a Walmart, and 96% lived within 20 miles of
one. There were still some potential areas for expansion, such as California and New York, but the
company acknowledged that "additional stores may take sales away from existing units."
MARGINS
Grocery margins were another area of concern. The company remained the price leader in the food
business, but supermarkets such as Kroger and Publix were beginning to close the gap. The
innovations that Walmart had created in merchandising, logistics, and transportation had been well
studied by its competitors and were being duplicated. Germany's Aldi and Lidi had even surpassed
Walmart: both companies offered a smaller number of SKUs, reduced store format and rudimentary
shelf displays. Consumers were reported to have saved more than 20% by shopping at Aldi
compared to Walmart. Similarly, smaller, no-frill, ‘dollar stores’ created enormous price pressure
in general retail. Even though they were smaller, people shopped at them for fill-in trips because
they were more centrally located and smaller than supercenters. In 2014, Dollar Tree announced it
was taking over Family Dollar to create a chain with more than 13,000 stores and $18 billion in
annual sales; and competitor Dollar General had around 12,000 stores.
CUSTOMER PREFERENCES
Customer preferences appeared to have evolved in ways that hurt Walmart. Shoppers seemed to
have become increasingly sensitive to the appearance, cleanliness, and convenience of the store

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environment. The allure of EDLP did not always overcome the minimal customer service,
disheveled aisles, and aging physical spaces that could make a trip to Walmart exhausting and
depressing. In the 2019 American Consumer Satisfaction index, Walmart scored at the bottom, far
behind competitors like Target, Sears, and Costco.

Upscaling the Walmart Experience

Walmart's competitors had long emphasized their superior products and a more pleasant shopping
experience to compete with the company's low-price value proposition. Former Target President
Bob Ulrich said, “If Walmart was striving to be the king of logistics with enough muscle to force
vendors to deliver on price, Target could deliver on a great store experience and a product that was
exciting and unique.” Ulrich set up a trend-tracking department, founded a user-experience research
center, and aggressively pursued design leaders to create unique products for Target stores. Target's
eye-catching ads suggested that shoppers could find joy in buying a broom or a toothbrush. This
positioning appeared to be a success; for a similar mix of merchandise, Target's prices exceeded
those of Walmart by about 10%, but Target's same-store sales still grew more quickly.
Lured by the attractive margins of products with a stylish design, Walmart introduced branded
clothing at higher price points beginning in 2000. To support these efforts, the company installed
simulated wood floors and more dressing rooms in its stores, moved its office from Bentonville to
a 40,000-square-foot space in New York City's Fashion District, and added more than 300 fashion
merchandisers to the company's payroll. These forays into the world of fashion suffered from “slow
growth in sales”, and the executive in charge resigned in 2010. One analyst commented: “Without
the nuances of making a brand have an essence, as opposed to just a product, there is no additional
sale. … apparel just becomes a commodity business.”
UPSCALING 2.0
Under McMillon's leadership, Walmart renewed its efforts to reposition the company. An important
goal was to improve customers’ in-store experience. To increase the engagement of its associates,
McMillon raised the hourly wage of 500,000 employees to $9 in early 2015, and to $12 in early
2020. The company also adjusted the pay bands for many full- and part-time workers, raising
compensation for those making more than the starting wage. It added staff to shorten check-out
lines and hired almost 8,000 department managers. McMillon introduced this new management tier
hoping to improve the availability and presentation of products. In early 2015, in-stock positions
were close to 95%. The company also developed new training programs.
To strengthen its grocery business, Walmart broadened its relationship with Wild Oats, a well-
known label for organic products. In an aggressive move, the company promised to sell organic
products at the same price as conventionally produced items. Competitors typically charged a 25%
premium. The company also worked on getting produce to its stores more quickly, and hoped to
train associates to cull fruit and vegetables so as to leave only high-quality produce on the floor.
The estimated cost of all these initiatives was about $1 billion. When Walmart announced its first
quarter results for 2015, its share price fell by more than 4%. By early June, Walmart's valuation
had declined by more than 10%. Barclay’s analyst Meredith Adler noted: “Perhaps investors were
hoping that the many initiatives would have benefited results this quarter. We don't think that view
was realistic, since many initiatives are still being rolled out.” Others were more skeptical: as
Patricia Edwards, a retail fund manager pointed out, “The challenge that Walmart faces is value.
An upper-end consumer defines value differently ... If it was just price, they would drink the office
coffee instead of going to Starbucks!”