Advancements in digital technologies have disrupted the retail industry by threatening to obliterate the traditional brick-and-mortar stores. The emergence of the internet and electronic commerce has seen many retailers include online outlets to augment their physical presence in the marketplace. Any retailer that does not have an online platform will not capture the market in which consumers prefer convenience, an outstanding shopping experience, and value for their money. Besides contemporary customers being discerning and highly-informed, they have become increasingly selective in their purchases, forcing retailers to develop strategies of attending to their unique needs. Moreover, the ongoing covid-19 pandemic has forced many businesses to explore virtual operations to comply with the physical distancing and elimination of unnecessary movement and crowding, as a public health requirement (Mondor Intelligence 2). In this regard, although many current retail companies combine their physical presence with an online one, it is not clear whether they should do away with the brick-and-mortar stores altogether to run online stores exclusively. Walmart is a huge global retailer faced with this operational dilemma. The ensuing report discusses the dilemma Walmart faces regarding its business model amid fierce competition and an unpredictable business environment. In addressing this problem, three solutions are presented and explained, with the view of developing an intervention that best addresses the issue.
Sam Walton founded Walmart in 1962 and incorporated the company in 1969. From a single store in Arkansas at its inception, Walmart has grown into a retailing behemoth with over 10,000 stores and employs about 2.3 million people globally. Walmart is now a public corporation listed in the New Your Stock Exchange after it went public in 1970. It growth accelerated much in the 1980s, making it the largest retailer in the United States, based on revenue. However, it has lost that position following the slow growth of revenues and profits. Nonetheless, by 2021, Walmart operates more 11,695 stores across the world, although they are highly concentrated in the United States, where half of them are located (Alsharari 4). As such, nearly 90 % of Americans reside within 15 miles from a Walmart store because the company believes in making shopping convenient (McBride para 4). Nonetheless, Walmart opened its online store in 2016 to complement its physical presence. This may be considered a late entry into the electronic commerce arena considering its rivals, such as Amazon, entered the market as online retailers with the advent of the internet back in the 1990s. However, now Walmart customers can shop and have their purchases delivered with them venturing outside their homes.
In 2020, Walmart made $559.2 billion in revenue, which was a $35 billion increase from the previous year. Its shareholders made $8.7 billion in the same period. Walmart makes its money by retailing diverse types of products to consumers through its physical and online stores. The company sells these products at a low price to ensure that it makes profits on high volumes at low profit margins to benefit the consumer. Therefore, Walmart employs the everyday low price (EDLP) strategy, which is embodied in its vision and mission statements. Its vision is to be the destination for customers to save money no matter how they want to shop. Similarly, its mission is to help people worldwide save money and live better lives – anytime and anywhere – in retail stores and through e-commerce (Walmart 6). Therefore, most shoppers that frequent Walmart are those earning $49,900 or less (Mondrose para 3). Walmart believes in sharing its benefits with its customers and letting the average American enjoy decent lives despite their financial disempowerment.
In turn, Walmart has developed a huge and enviable supply chain that incorporates direct sourcing of goods, large inventory held in numerous warehouses, an enormous distribution network to ensure that the merchandises are available in its numerous stores and consumers’ order are fulfilled globally. In this regard, Walmart is considered the pioneer of the modern supply chain in the world. Besides, Walmart has decided to make its everyday low price focus a global campaign for poverty reduction in the bid to make its vision and mission a reality.
The retail industry is estimated to be worth about $20.3 trillion and has been growing at a subtle rate of 2.4% annually since 2015. Its value is expected to reach about $29 trillion by 2025. Despite this slow growth, the retail industry is experiencing disruptive changes due to the infusion of digital technology and mobile devices into the shopping experience. Now people can order their supplies in the comfort of their homes and have them delivered to their doorsteps without leaving the house. This is made possible by the proliferation of online stores, which are virtual shopping platforms that enable consumers to view their desired goods and compare prices between retailers before making their purchases. This development has disrupted the traditional physical brick-and-mortar store business model, and threatened its survival, more so during the ongoing Covid-19 pandemic (Mondor Intelligence 2). Besides, this trend has increased the competitiveness in the retail industry because shoppers can use digital technology to gather information about diverse suppliers and compare their offerings without having to visit several stores physically.
Therefore, the online space and electronic commerce are the new arenas of competition among retailers today. Retailers want to outdo each other in providing the most engaging and memorable shopping experienced that exceeds consumers’ expectations. In this regard, the main retail industry is dominated by few large retailing corporations, such as Walmart, Amazon, Costco, Kroger and Schwarz Group.
Impact of COVID 19
The ongoing covid-19 pandemic interfered with the economic activities globally, including retail business operations. When the viral and highly-infectious disease broke out at the end of 2013, stay-at-home advisories were given by public health authorities across the world. Similarly, movement ceased as airports closed, and people were forced to work from home to avoid physical interaction that spreads the disease. The retail industry had to devise new ways of keeping their sales up, and those with online shops enjoyed increased sales, causing a 74% increase in online sales in 2020. This shift might be irreversible as consumers develop new shopping attitudes and embrace digital technology as they gain more confidence in using them, courtesy of the Covid-19 pandemic.
Walmart also leverages its online presence to stay in business. Its online sales have been growing at 78% since 2016, when it launched the platform (McBride para3). However, most growth in Walmart’s online sales has been witnessed during the pandemic. It is also during the pandemic that Walmart introduced an express delivery service that consumers could select when making online orders to complement its existing delivery and pickup options. This service promises to have shopping delivered to the customer’s doorstep within 2 hours of ordering. Unfortunately, although online sales increased at Walmart, they did not increase the profits generated, and therefore, it is difficult to discern the impact of e-commerce on Walmart’s revenues and profitability.
The consideration of the retail industry and Walmart has revealed challenges that the traditional business model is experiencing due to the increasing popularity of the industry-disrupting online stores. Walmart is struggling with low profits and slow growth, even after leveraging its online shopping platform and speedy delivery services. Therefore, the pertinent question is whether Walmart should retain its traditional brick-and-mortar business model or focus on e-commerce instead. This is because although Walmart’s net income increased by 123%, its Earnings before interest, taxes, depreciation and amortization (EBITDA) decreased. The reason behind this is because Walmart pumped huge capital into developing its online retail service. Despite these investments, Walmart has not been able to created economies of scale in the groceries section of its online store. Therefore, large overheads persist in retaining physical stores that have seen a huge reduction of human footprint and traffic since the pandemic began (Trefis Team para 3). The company has not managed to take the runaway operational costs, which have been increasing each year.
To address this dilemma of whether to retain physical stores or focus exclusively on online stores, Walmart should consider the following solutions.
First, Walmart could engage its most fierce rival, Amazon, and compete with it directly. In this option, Walmart could decide to imitate amazon’s business model and therefore invest heavily in creating an equally large distribution network, automation of the retailing processes, and an intensive research and development initiative. This is a capital-intensive undertaking in which Walmart would have to pump in $10.2 billion to augment the $6 billion budget currently to generate revenues of 6.7 billion annually. Walmart would take 10 years to break even although its revenues would grow steadily at 15% during this period.
Second, Walmart could consider concentrating on physical shopping in its brick-and-mortar stores and abandoning its online store altogether. Already, Walmart has developed great expertise and accumulated much valuable experience in running physical stores. In this case, Walmart will require to invest $2.2 billion on top of the $1.13 billion it is currently pumping into expanding and remodeling its physical stores. This approach would deliver an extra $5 billion, which is an additional 1% in revenues. The company can break even within a year after investing in remodeling and expanding its current stores and abandoning the capital-intensive online store presence.
Third, Walmart could downgrade the first option by competing alongside Amazon instead, which is less capital-intensive. This means that Walmart should intensify its ongoing strategy of automation while accelerating its global growth through acquisitions. This option would require a capital injection of $6 billion to supplement the ongoing $ 1billion budget. Although this option delivers similar benefits as the first ($6.7 billion in revenues), Walmart could break even in 6 years, which is a much shorter period compared to the 10 years for the first option.
This report considered the challenge Walmart was experiencing following the changes in the retail industry during the ongoing coronavirus pandemic. Although Walmart has embraced online technologies and leveraged them to survive through the ongoing pandemic, its growth and profitability have remained stunted, causing the company to reconsider its strategy. In deciding whether Walmart should retain its brick-and-mortar business model of focus on developing its online retailing platform, three solutions have been developed. Walmart could enjoy short-term and long-term benefits by combining the three solutions. This is because the solutions that offer shorter breakeven times do not necessarily deliver higher or faster growth. Specifically, Walmart should grow its physical and online stores and use Amazon as a competitive benchmark. This means that Walmart should concentrate on improving the in-store shopping experience of consumers in the short term, while using Amazon as a competitive yardstick in the long-term. In this regard, Walmart can gradually build its e-commerce capabilities without abandoning the traditional brick-and-mortar business model, which has made it survive to date.
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McBride, Stephen. “Walmart has made a genius move to beat Amazon.” Forbes. 8 January 2020. https://www.forbes.com/sites/stephenmcbride1/2020/01/08/walmart-has-made-a-genius-move-to-beat-amazon/
Mondor Intelligence. Retail industry – growth, trends, covid-19 impact, and forecasts (2021-2026). https://www.mordorintelligence.com/industry-reports/retail-industry.
Mondrose, Peter. “Here’s a breakdown of Walmart shoppers by demography. Business Pundit. 19 June 2015. https://www.businesspundit.com/heres-a-breakdown-of-walmart-shoppers-by-demographic/.
Trefis Team. “How much does Walmart spend on selling, general and administrative costs.) Forbes. 17 December 2020. https://www.forbes.com/sites/greatspeculations/2019/12/17/how-much-does-walmart-spend-on-selling-general-and-administrative-expenses/
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