The name Walmart (also known as Wally World) has become synonymous with retail throughout the years.
With its famously low prices and penchant for having just what every customer needs (and then some), Walmart is at the top of most households’ list any time a trip to the store is in the cards.
However, Walmart did not simply open its doors on Monday and become everyone’s favorite store on Tuesday.
Walmart’s ascent to the top of the retail world has taken many years of hard work and careful planning on the part of company leadership.
Now that Walmart is entrenched as the worldwide retail sales leader, let’s look at the top nine factors contributing to Walmart’s competitive advantages.
Walmart’s Competitive Advantages (9 Different Factors)
1. Cost Leadership
To state the obvious, Walmart’s primary competitive advantage is that it offers low prices that other retailers simply cannot match.
The slogan “Always low prices, always Walmart” has become embedded in the public consciousness, with many people automatically assuming that if they need to find an item at the lowest possible price, then a trip to Walmart is in order.
However, charging low prices is not something that a company can just do. In fact, cost leadership is a losing proposition for most companies, as the minuscule profit margins will quickly cause most retailers to see red.
For cost leadership to be a viable pricing strategy, several conditions must be met:
- Quality assurance: in many cases, customers equate cost with quality, with low-cost items viewed as “cheap” or “inferior.” While Walmart will never be a luxury retailer, its strong selection of recognizable brands and its “save money, live better” mantra provide customers with confidence that Walmart’s low prices are backed by quality.
- Strong private brands: private brands, sometimes referred to as generics, are those items that are exclusive to a specific chain of store. While the cost for these items is lower than name brand products, stores actually keep a higher percentage of private brand sales. Walmart’s private brands are highly recognizable, with its Great Value line alone doing more than $27 billion in annual sales.
- Elite supply chain logistics: an inadequate supply chain leads to higher retail costs at most stores, as businesses have to pay for factors such as shipping, storage, and security. In addition to its private brands manufactured in-house, Walmart has its own transportation fleets and warehouses that help keep its supply chain costs to a minimum.
- Volume: the retail industry, in general, operates on low margins, with some grocery stores operating on an average margin of under 3% per item. However, the large quantity in which items are sold makes these small margins add up. Due to its huge volume advantage over other retailers, Walmart can afford to capture an even smaller figure than 3% in profit, leading to increased customer savings.
Although it is difficult to secure a position as a cost leader in the retail industry, once a profitable position is obtained, it creates a true juggernaut, making low prices Walmart’s primary competitive advantage over other retailers.
2. Elite Distribution Infrastructure
Distribution centers are part of supply chain logistics, which has already been mentioned as a key component in Walmart’s cost leadership position.
However, a strong distribution infrastructure extends beyond its possibilities for low prices, with its ability to keep Walmart’s shelves stocked at all times, creating an equally powerful competitive advantage.
In 2021, consumers want instant gratification. In fact, with so many options to make online purchases, if a physical retailer is out of a desired product even once, that retailer has likely lost the customer forever to a competitor who can offer that product now.
Regional Distribution Centers
Walmart’s elite distribution infrastructure helps ensure that its stores’ shelves are never bare.
In the United States alone, Walmart has 45 regional distribution centers responsible for sourcing products worldwide.
These regional distribution centers use a highly sophisticated mix of software-driven inventory methods and automated conveyance to ensure that sufficient product is boxed and set to be distributed 24 hours a day.
Beneath these 45 regional distribution centers are a chain of 150 sub-regional distribution centers.
Each of these facilities is responsible for catering 75 to 100 individual retail locations, making customized deliveries on an as-need basis.
However, there are some limitations to this infrastructure, as Walmart US is unable to ship to Canada, plus a number of other countries.
A large Number of Locations
Then there is the sheer volume of stores themselves. As of January 2021, Walmart operated 4,756 stores in the United States, with an additional 599 Sam’s Club locations (its wholesale subsidiary).
With its highly mobile transportation fleet and so many interconnected facilities, Walmart can quickly and efficiently move products to where they are in demand, ensuring that customers are never frustrated with items being unavailable.
3. Brand Name
Walmart has developed its brand to the point where it has transcended the retail industry.
Other low-cost retailers can spend millions of dollars on marketing efforts to try and reach customers, but such efforts are likely to do little to distract customers from the low-cost brand that Walmart has established.
In addition to the increased awareness, a global brand name helps Walmart through the following factors:
- Greater leeway with customers: unestablished businesses often have one chance to make a customer happy. If they fail, the customer moves on. While Walmart certainly does everything it can to satisfy customers, a negative customer experience is more likely to be forgiven, as customers are more hesitant to doubt a renowned brand.
- Goodwill: in the business world, goodwill is defined as the quantifiable value of a company’s reputation. To this effect, the Walmart brand carries vast goodwill. While most businesses have to spend money to establish a reputation, Walmart is at the point where its reputation can purchase customers in and of itself. Sure, Walmart still spends on marketing, but its name does a significant portion of the work.
- Exponential network: everyone wants to be associated with success, and the Walmart brand is synonymous with success in the retail sector. This can lead to an increased willingness of local legislatures to collaborate on opening new stores in emerging neighborhoods, easier cultivation of investors and financial partners, and sponsorship opportunities that can further propagate the brand.
4. Customer Service
With so many options competing for customers’ attention in 2021, keeping customers happy has become an increasingly complex concern for businesses.
An unhappy customer’s negative review or viral tweet can quickly cause a hit to a business’ social capital that can be hard to overcome.
Walmart is attuned to customer needs and has some of the most favorable customer service policies in the retail sector. It allows customers to return items up to 90 days after the purchase, with or without a receipt.
This differs from many retailers, which limit their return window to 30 days and require proof of receipt.
Walmart has also stepped up its game to meet shifting customer demands during the COVID-19 pandemic.
In addition to the aforementioned flexible return policies, Walmart now offers returns free by mail or via scheduled pickup from your home.
5. Advanced Use of Automation
While the threat to blue-collar employees’ jobs is real, the competitive advantages that automation can provide a company cannot be understated.
To this effect, Walmart has deployed automation far more extensively in both its distribution centers and stores than most of its competitors.
In its distribution centers, Walmart uses automation to sort and box products, convey products to the proper warehouse space, and load and unload trucks.
Within stores, scan-and-go kiosks allow Walmarts to stay open 24/7, pandemic conditions notwithstanding.
By employing widespread automation in its business model, Walmart can positively affect its bottom line by eliminating many of the traditional labor costs, such as wages, theft tracking AI, benefits, employee error, and paid time off.
Walmart’s implementation of automation also improves customer satisfaction by eliminating the waiting line at the checkout.
It is not uncommon for most retailers to see only a fraction of the registers in operation as employees help in other areas of the store or take their 15-minute break.
At Walmart, all scan-and-go kiosks are operational at all hours, keeping customers from getting frustrated due to backups in the checkout line.
6. Economies of Scale
Economies of scale are defined as proportionate savings in cost gained by increased levels of production. In layperson terms: Buying in bulk saves you money.
Walmart can offer such affordable private brands, such as Great Value and Equate, because it can manufacture those products in such large quantities that the price per unit becomes minuscule.
Walmart can capitalize on economies of scale because it knows demand for the end product will be there.
At the same time, smaller businesses cannot create economies of scale because any per-unit savings would be more than offset by unpurchased quantities that went to waste.
Economies of scale also help Walmart when sourcing products from overseas. The cost to transport via cargo ship is usually similar whether the ship is fully or partially loaded.
To this effect, Walmart can fill enormous cargo ships, making the per-unit cost of foreign shipping smaller for Walmart than for its competitors, which may be required to ship on partially filled liners or purchase more expensive space in a crate that fills piece-by-piece from various companies.
7. Financial Strength
Everyone is familiar with the old adage, “It takes money to make money.” Walmart, which generates over $500 billion in annual revenue, has money.
The competitive advantages that having so much cash on hand affords are too great to list, with some of the most prominent including:
- Investment in new sectors: the start-up capital prohibitive for most companies is no issue for Walmart.
- Opening new stores: likewise, acquiring new real estate and paying monthly rents is less of Walmart’s concern than other retailers.
- Maintenance: Walmart has ample funds to invest in landscaping and building maintenance to keep its properties attractive to customers.
- Increased spending on automation: while all businesses know the benefits of automation, few have the funds to make the significant up-front investment.
- Greater marketing budget: Walmart can afford to pay for premium advertising spots and hire the best professionals to keep their brand contemporary.
However, one of the most significant advantages that its financial strength offers is the ability to take a loss. Not every product will be a hit, and some products simply will not sell.
While this can be crippling to businesses that need every ounce of revenue to achieve profitability, Walmart can markdown prices, clear the inventory, brush off the losses, learn from the mistake, and refocus efforts on more profitable options.
Its financial strength also helps it maintain its flexible return policies. Even though all businesses try to adhere to the maxim “the customer is always right,” it can be difficult for struggling retailers to accept a return on a product that has clearly been misused or does not meet its return requirements.
With Walmart’s strong financial foundation, such non-qualifying returns are easily absorbed to ensure continued customer loyalty.
Just as being a cost leader is a risky proposition for most businesses, so too is spreading too thin into too many products and sectors.
In fact, with such phrases as “core competency” and “target market” being key tenets of business success, most companies are advised to focus on what they do best.
Once again, though Walmart seems to operate outside of the norms, they have an inter-industry stronghold that smaller competitors cannot overcome.
Despite its department store roots, Walmart is now the largest seller of groceries and pet supplies in the United States.
It also offers a broader selection of financial services than any other store in the country and features thriving home improvement, tire and automotive, fish and game, and outdoor departments as well.
Walmart did not start out as a highly diverse company. It was able to reach its current state through slow expansion and meticulous investment into new sectors. Today, Walmart’s board diversification affords it the following competitive advantages:
- One-stop-shop status: customers would not expect to be able to wire money at a home improvement store or purchase a fishing license when shopping for children’s clothing, causing many stores to be struck from a customer’s consideration set. On the other hand, Walmart will draw customers operating under the confidence that Walmart must have what they are looking for, no matter what the need.
- Unforeseen purchases: Walmart generates significant revenue from customers who purchase items they had no idea they would buy when walking in the door. Seeing all of the different departments jogs customers’ memories, and Walmart captures a sale that would have been lost to a competitor with a less comprehensive store.
- Flexible margins: stores that operate within a specific sector often have a very limited profit margin range that they can accept and remain profitable. Due to its diversification, Walmart can use strong earnings from one department to allow them to accept lower than average profits in another, putting further pressure on their industry-specific competitors and helping Walmart maintain its cost leadership status.
9. International Expansion
Although Walmart generates most of its revenue from sales in the United States, it has continually increased its presence abroad. Today, it operates in over 25 countries, with foreign sales of $119 billion, equaling approximately 24% of all company revenues.
As Walmart continues to penetrate new markets, its global presence will give it a security blanket in the event that consumer behavior changes in the United States.
This advantage gives it a significant leg up over its domestic peers. The company also gains valuable experience by exploring international markets and can further leverage its economies of scale.
When it comes to retail, no name rings quite as loudly as Walmart. Through years of hard work, continuous innovation, and expansion into new sectors, the company has earned the top spot in the world’s retail sales rankings. Through the nine points of competitive advantage listed above, it is easy to see why the company has achieved this rank and is in a strong position to remain there for the foreseeable future.