Walmart: Lessons from the Past

Passing on savings to the customer has always been a cornerstone of Walmart since its foundations. Walmart founder Sam Walton’s legendary thrift (even executives flew coach class and shared hotel rooms on business trips) was put to work in crafting this new business model. This model, first implemented in 1962, relied on volume of transactions rather than margins to get ahead of competitors. Now, over half a century later, the fact that Walmart has an annual revenue of around $421.8 billion worth of goods throughout the world is a testament to the viability of such a retail model.

Throughout its meteoric rise from Bentonville, Arkansas to the farthest reaches of the world, Walmart’s constant message has been for the customer to “save money” in order to “live better” and has provided unremittingly low costs in every market it penetrates. But while this tactic allowed the company to grow to a market cap of $245 billion, it has also made Walmart notorious for one of its primary cost-cutting measures: the maintenance of low employee wages. Walton once wrote, “No matter how you slice it in the retail business, payroll is one of the most important parts of overhead and overhead is one of the most crucial things you have to fight to maintain your profit margin.” In setting sales associate’s wages at 3% below market, Walmart is continuing on Walton’s legacy of cost-cutting.

Though this practice has led to over $15 billion in earnings for the current fiscal year, it has also led to several employee strikes and national media attention. While noted economist Ernek Basker and others have argued that the expansion of Walmart into any given community brings a net financial benefit to community members as gains from low prices outweighs the cost of slightly diminished local wages, the fact remains that to many Americans, the word “Walmart” is as associated as much with low wages as is low prices. Recent spates of bad press in the media, coupled with several largely unsuccessful attempts by Walmart employees to unionize, has garnered the corporate giant a negative societal reputation it cannot seem, despite its $2.1 billion advertising budget, to shirk. Once minor, these public relations problems can no longer be ignored as the United States’ economy continues its slow progress back to pre-crash normalcy and Walmart—which bases much of its business model on demand for inferior goods—will now have to compete against higher quality suppliers as well as online markets. In order to expand or simply maintain its existing market penetration in the developed world, Walmart will have to look to the past and imbibe two other maxims of Sam Walton.

Walmart was once the retail leader in supply chain management but has since lost that title to ecommerce giant Amazon. Although Amazon’s $74 billion in revenue for 2013 is dwarfed by Walmart’s revenue of $473 billion, the market caps of these two companies ($134 billion and $246 billion respectively) imply a much more bullish outlook for Amazon’s growth potential. But Walmart does not have to play the role of a sprawling, established retail giant—it should leverage its current resources towards the continued expansion and development of its ecommerce platform. In 2013, Walmart’s global online sales grew 30% to $10 billion and similarly spectacular growth is expected for 2014. Canadian markets have been an epicenter of online sales growth for Walmart, with a 145% increase in online revenue in 2013 alone. While Walmart has been pressing e-commerce throughout the developing world, this growth in Canada should be an indicator to Walmart executives that the company also has the ability to break into developed markets. Walmart’s position in American and Canadian markets has recently been less stable than it once was; demand for food and basic consumer goods continues to show a steady rise, but there has been a relative dropoff in sales in stores where merchandise is the primary offering. An emphasis on e-commerce could allow Walmart to reclaim former position as a market leader in merchandise sales.

Walmart still has the edge over Amazon as far as profitability goes. Gross annual profit margins for the online retail giant have been quite weak: -0.65% as of June 30, 2014. Walmart’s profit margin, by comparison, consistently hover around 3.5%. This profitability advantage, coupled with an advantage in sheer revenue, confirms that Walmart can leverage its cash to make strategic investments in areas such as ecommerce. Walmart, however, will have to act on this advantage now or risk losing it in the face of new economic developments. Just as Sam Walton once invested in the latest computing technology to maximize his corporation’s productive efficiency, so should today’s Walmart executives use their economic largess to become leaders in e-commerce.

Regardless of how much Walmart is willing to invest in the future of its online sales component, it will inevitably have to address worker satisfaction and wages—a flashpoint that has become an endemic public relations and employee retention issue. In finding a solution to the issues of low wages, Walmart could look at Costco Wholesale Corporation. Walmart’s business model is often compared to that of Costco’s, with pundits such as Forbes’ Rick Unger arguing that “the time has come for Wal-Mart to take a lesson from Costco and consider the potential upside of treating employees like human beings.” However, calls for higher wages and better employee benefits ignores the innate differences between how the two stores of the two companies are run. At Costco manpower is focused almost exclusively on checkout and security while Walmart distributes employees across the store to directly aid in the shopping process. As a result of Walmart’s policy, each store has to hire many employees. In fact, Sam’s Club, a Walmart subsidiary, has in fact tried this business model, operating on a membership payment model with far less employee-customer interactions. Today, the 632 Sam’s Clubs in the United States still lag behind Costco in a crucial metric: “Costco’s sales on a per-store basis were much higher as it generated nearly as much total revenue with one-third fewer employees. Consequently, profit per employee at Costco was $13,467 compared to only $11,039 at Sam’s Club.” It is clear from the relative failure of Sam’s Clubs that an alternative store and business model is not the optimal way forward for the company.

Instead of trying, at an enormous financial and restructuring cost, to remake itself into a second-rate Costco, Walmart should focus its efforts on incentivizing employees by giving them stake in the company. Sam Walton was known for his emphasis on promoting the idea of Walmart as a shared corporate venture throughout the chain of command. By giving employees equity options and stock benefits, Walmart executives would be welcoming its over 200 million employees into the veldt. Though unusual in the retail industry, shift towards an equity compensation plan would not be unprecedented; Starbucks has, since 1995, given all of its fulltime employees the option of purchasing company stock at a discount each fiscal quarter. This policy may be the reason that Starbucks has, as a corporation, managed to escape media and national scrutiny despite the fact that its average wage of $8.79 per hour is even lower than Walmart’s average of $8.89 per hour. Walmart has already adopted other employee incentivizing programs such as one that allows some fulltime employees the opportunity to obtain a discounted college degree at one of several online universities. However, if Walmart develops a comprehensive employee discount stock-purchase programs in a way that doesn’t hurt the bottom line, the morale and company image could be radically improved.

With 11,000 stores under 71 banners in over 25 countries, Walmart has an unprecedented tactical avantage over its competition. While some pundits see the business model Sam Walton created as outdated, exploitative and unworkable, the current successes of the company are largely the effects of Walton’s policies. Current Walmart executives can boost profit margins, relieve employee and media tensions, and expand into new e-commerce markets by following more closely the tenets of their founder. Walmart has the assets necessary for expansion into new markets, regions, and sectors. By looking back to the past, Walmart might find its path into the future.