What is the secret to Walmart’s success?

American retail giant Walmart is currently flying on Wall Street. Its shares are at an all-time high, up 30 percent in the last 12 months. This was helped by reliable dividends paid for 50 years in a row. But that’s only part of the story. The company itself also performed above expectations.

Sales in the first three months of this year were six percent higher than in the first quarter of 2023. Adjusted operating profit increased by 30 percent. However, what investors like most is a carefully crafted strategy that promises future growth.

Walmart’s strategy is boring but reliable. The basis is the scale of the business, which creates the fuel necessary to maintain the position of cost leader. Slowly, however, the company began to look for connections, new opportunities that would complement this value proposition.

As a result, Walmart added “convenience” to “everyday low prices.” This is a powerful formula because it reinforces Walmart’s existing strategy rather than trying to reinvent it.

Economies of scale still matter

The intellectual basis for economies of scale was created by Adam Smith and formalized in the late 19th century^vol century by economist Alfred Marshall. In short, it is assumed that unit costs of production fall as the size of the operation increases. Large companies can negotiate better terms with their suppliers, use their facilities more consistently, and reduce costs on the distribution side.

Walmart has always been a champion of this approach. If you wanted your products to reach the mass market in the US, bypassing the retail giant seemed impossible. Knowing this, the company squeezed its suppliers. Most were faced with a choice between agreeing to Walmart’s terms or not stocking up at all.

Today, online retailers – primarily Amazon – provide a real alternative, and economies of scale seem less important. Technological progress has significantly reduced the costs of producing and distributing small batches. Additionally, consumers expect ultra-personalization.

Or at least that’s what we thought. With the advent of inflation, Walmart’s model has proven to be solid. As noted by the New York Time, wealthier consumers also began to shop there more often, wanting to control their household expenses.

Developing adjacent capabilities

The second pillar of Walmart’s strategy is neighborhoods. In 2016, it stepped up its e-commerce operations with the $3.3 billion acquisition of Jet.com. Since then, online sales have been growing steadily. Only Amazon has a larger share of the e-commerce sales market in the US. Apart from the series of acquisitions, two decisions were particularly important.

First, there was a realization that the last mile of delivery was particularly costly. So it borrowed products from Target and promoted curbside pickup in its existing stores. Second, it followed in the footsteps of Costco Wholesale and Amazon and built a membership model. With double-digit growth since its launch in 2020, Walmart+ is creating a new reliable source of revenue and locking customers onto its platform.

Both initiatives increase the convenience offered to customers. Convenience is complemented by everyday low prices. It also attracts more affluent customers, a segment the company actively caters to with larger products like AirPods and MacBook Air.

What others can learn from Walmart

Strategically, Walmart refreshed its tried and tested model rather than making radical positioning changes. When I studied how companies thrive and survive for over a century, the most important lesson was that this cautious approach often works best. My advice: Don’t chase every new shiny innovation or idea, because many of them will turn out to be overblown and may leave your company counting the costs of failure.