What is the secret to Walmart's success?

Walmart is enjoying record highs on Wall Street with its stock up 30 per cent in the last 12 months.

Reliable dividends - paid for 50 years in a row - have certainly helped, but that is only part of the story.

The business has performed at the upper end of expectations too.

Sales in the first three months of this year were six per cent higher than the first quarter of 2023. Adjusted operating income climbed by 30 per cent.

What investors like most though is a carefully crafted strategy promising future growth.

Walmart’s strategy is boring but reliable. The scale of the business forms the foundation for its success by maintaining cost leadership.

Slowly though, the company has looked for adjacencies, new opportunities that complement this value proposition.

The result is that Walmart has added “convenience” to “everyday low prices”. This is a powerful formula as it enhances Walmart’s existing strategy, rather than trying to reinvent it.

Economies of scale still matter in business strategy

The Scottish economist Adam Smith laid the intellectual foundations for economies of scale in the 19th century.

In a nutshell the proposition is that unit costs of production come down when the size of operations increases.

Large companies can negotiate better terms with their suppliers and utilise their facilities more consistently. This helps them to cut costs on the distribution side.

Walmart has always been a master of this approach. If firms wanted their products to reach the US mass market, bypassing Walmart seemed impossible.

This allowed the retail giant to squeeze its supply chain to enhance its competitive advantage. Most suppliers had to choose between Walmart’s terms or not being stocked at all.

Today, online retailers – most prominently Amazon – present a real alternative and economies of scale seem less critical.

Technological advancements have reduced the costs of small batch production and distribution considerably, while consumers expect ultra-customisation.

But with inflation kicking in, the Walmart model has proved solid.

As The New York Times noted, more affluent consumers have begun shopping at Walmart more often to keep their household spending in check.

How Walmart broadened its base

The second pillar of Walmart’s strategy is adjacencies. In 2016 it ramped up its e-commerce operations with the acquisition of US e-commerce firm Jet.com for $3.3 billion.

Since then, online sales have grown steadily. Only Amazon has a larger market share in US e-commerce sales.

Besides a series of acquisitions, two decisions have been particularly important.

First, there was a realisation that the last mile of delivery is particularly costly. As a result, the retail chain borrowed an idea from Target and promoted curb-side pick-up at its Walmart stores.

Secondly, it followed Costco Wholesale and Amazon and built a membership model in 2020. Walmart+ has enjoyed double digit growth, creating a new reliable income stream that locks customers into its platform.

Both initiatives increase the convenience offered to customers. Convenience complements everyday low prices by enhancing the shopping experience. It also attracts more affluent customers.

The company has catered for this customer base by stocking bigger ticket items such as AirPods and MacBook Air.

What can we learn from Walmart's strategy?

Walmart has avoided trying to radically reposition itself within the market.

Instead, it has has adapted its ‘tried-and-tested’ model to carefully rejuvenate and expand its business.

When I studied how companies thrive and survive for longer than a decade, I found this kind of cautious approach often worked best.

Don’t chase after every shiny new innovation or idea. Many will prove to be over-hyped and could leave your business counting the cost of failure.

This article was first published by Forbes.

Further reading:

100 years of Disney: Three lessons for strategists

How can an SME out-innovate bigger companies

Five questions to unlock open strategy in your organisation

Can doubt be helpful for managers?

Christian Stadler is Professor of Strategic Management and teaches Strategic Advantage and Strategy and Practice for the Executive MBA and Global Online MBA.

Learn more about strategy on the four-day Executive Education course Creating Strategic Advantage at WBS London at The Shard.

For more articles on Strategy and Organisational Change sign up to Core Insights.