How Walmart Makes Money? Understanding Walmart Business Model

 How Walmart Makes Money?

This article is about how Walmart makes money. Firstly, we explain the business segments of Walmart and how the company generates revenue from each of those segments. Then, we present our analysis of Walmart business strategy and its impact on Walmart Business Model. Finally, we share the revenues, the profits, and the profit margins of Walmart for 2015.

Walmart literally sells everything. According to top business coach, Arman Sadeghi, it’s a good idea to check out a specialized store to compare prices. For example, if you want to buy used office furniture, you can decide to choose for Walmart, or a specialized store like BKM Office. The latter is usually the best option.

Walmart’s success can be attributed to having many stores across North America and having the leading market share in the supermarket sector. Another reason that Walmart has had such success is due to their targeted advertising. Crum marketing consultant is one of the many companies that work with multinational companies like Walmart in order to ensure their revenues grow year on year.

Walmart is the world’s largest company (in revenues) with $485 billion in revenue in 2015 (fiscal year ending January 31, 2015). Walmart has about 11,000 stores in 27 countries. Walmart has 2.2 million employees, or “associates, which makes it one of the biggest employer in the world.

Walmart Business Segments

Walmart business operations are organized into three business segments: Walmart U.S., Walmart International, and Sam’s Club. The company offers its products through various retail formats that include: supercenters, supermarkets, hypermarkets, warehouse clubs, cash & carry, home improvement, specialty electronics, restaurants, apparel stores, medication stores, and convenience stores, as well as digital retail.

source: peoplepng.com

• Walmart U.S.: Walmart U.S. is the largest segment and operates retail stores in all 50 states in the U.S., Washington D.C. and Puerto Rico. Walmart U.S. does business in six strategic merchandise units that include: Grocery, Health and Wellness, Entertainment, Hardlines, Apparel and Home. Walmart U.S. segment also offers financial services and related products, including money orders, prepaid cards, wire transfers, money transfers, check cashing and bill payment. Walmart also sells licensed and private-label store brands merchandise. It provides both physical and digital access to its customers.
  • Physical Access: The Walmart U.S. segment provides physical access through three primary store formats that include: supercenters in all 50 states, discount stores in 42 states and Neighborhood Markets and other small store formats in 31 states.
  • Digital Access: Walmart U.S. provides digital access to a broad assortment of merchandise and services to customers through e-commerce websites and mobile commerce applications. Digital Retail is integrated with physical stores through services like “Walmart Pickup” and “Pickup Today”. The Walmart U.S. segment also offers digital streaming services like Vudu and InstaWatch.
• Walmart International: Walmart International segment consists of operations in 26 countries outside of the U.S. and includes numerous formats divided into three major categories: retail, wholesale and other. It operates through its wholly owned subsidiaries and Joint Ventures across these countries. Walmart operates 156 distribution facilities to meet its customers’ demands. Walmart International segment operates e-commerce websites in 10 countries (Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico, South Africa and the United Kingdom). Digital retail supports physical stores with capabilities like “Click & Collect” in the United Kingdom and grocery home delivery business in Mexico.
• Sam’s Club: Sam’s Club segment operates membership-only warehouse clubs, as well as samsclub.com. It offers its subscription services to both individuals and business owners. It does business in five strategic merchandise units that include: Grocery and consumables, Fuel and other categories, Home and Apparel, Technology, office and entertainment, and Health and Wellness. Digital retail supports physical clubs and members through services such as “Club Pickup”.

Key Elements Of Walmart Business Model

Historically, Walmart maintained its global leadership in retail segment by leading on price and assortment. Walmart’s legendary EDLC (everyday low cost) and EDLP (every day low prices) strategy helped it become the world’s largest company. Changes in the retail environment and evolving consumer preferences have compelled Walmart to innovate upon its business model and include two new strategic levers.

Walmart business is being led by the following four strategic pillars:

1. Lead on Price
2. Invest to differentiate on access
3. Be competitive on assortment
4. Deliver a great experience

Following diagram highlights key elements of Walmart’s evolving business model that are helping Walmart execute its strategy. View this helpful definition of business model by Finance Strategists to learn more.

source: stltoday.com

Walmart Strategy To “Lead On Price”

Walmart has maintained its low price leadership position due to its continued focus on suppliers. Walmart has one of the largest supply chains in the world. Walmart spent over $365 billion to purchase merchandise for its stores in the fiscal year 2015. This economy of scale gives the company immense bargaining power with its suppliers. To further reduce the cost and achieve price leadership, Walmart uses cross-docking. In cross-docking, inbound shipments from suppliers are unloaded directly into outbound trailers at distribution centers. Walmart owns 158 distribution centers and is one of the largest in the world. Walmart Logistics has a fleet of 6,500 tractors, 55,000 trailers, and more than 7,000 drivers. These innovative strategies are helping Walmart succeed on the pricing front.

Walmart Strategy To “Invest To Differentiate On Access”

The retail sector is witnessing multiple access strategies by traditional and new age competitors. These strategies and Walmart response can be clubbed into following three major areas that are highly dependent on their channel partners.

source: ctpost.com

• Improve the shopper’s accessibility to physical stores. Traditional grocers like Walmart are being squeezed by aggressive competitors taking bites out of the grocery pie. Price-conscious shoppers are being targeted by no-frills retailers like Dollar General and Aldi. Experiential retailers like Whole Foods, HEB, and sprouts are aiming at higher-end shopper. Walmart that has been traditionally focused on building supercenters and mid-size discount stores is now pursuing small store format growth to offer fresh and prepared foods and improve shopper’s accessibility.
• User-friendly online shopping platforms for anytime convenient shopping. To meet the increasing demand of online customers, Walmart has invested heavily in digital and mobile shopping platforms. Walmart works with leading technology partners and has also set up its own tech base in Silicon Valley @WalmartLabs. Walmart acquired several tech companies to develop its global technology platform. Walmart due to its large infrastructure is also able to offer omnichannel options to its customers. Customers can order online and get shipment directly from stores. It also offers click-and-collect. The customer orders online and can collect from certain stores.  Walmart E-commerce sales were $12.2 billion in the fiscal year 2015.
• Provide high end difficult to access services under one roof. Walmart is also investing in other high-end services that have accessibility and pricing challenges like health insurance and clinical care. Walmart is the only U.S. retailer that operates its own pharmacies, vision centers, and care clinics, and offers preventative and wellness products in-store and online. Walmart is well positioned to position itself as a health and wellness brand with the help of its channel partners like QuadMed and direct health.

Walmart Strategy To “Be competitive on assortment”

Walmart has been consistently leading on product assortment strategies that cater to local needs and has large varieties across physical and digital channels. Walmart offers large product assortments through its merchandise units. Its merchandise assortment caters to local tastes across International businesses. Walmart has large varieties across physical and digital channels.

Walmart Strategy To “Deliver a great experience”

Walmart employs 2.2 million employees that are critical to delivering a great shopping experience to its shoppers. Historically Walmart was criticized for its employee unfriendly policies, which include lower minimum wages, minimal reskilling and training programs, and unclear career growth. Walmart has recently announced its intentions to increase the hourly wages and provide better employee experience. It hopes that its investment in training and retaining the employees would help it deliver a great shopping experience to its customers across channels.

How Walmart Generates Revenues?

Walmart generates its revenues by directly selling products and services to individuals and business owners.

source: impactbnd.com

Product revenues

Walmart sells Grocery, Health and Wellness, Entertainment, Hardlines, Apparel, and Home products.

• Grocery consists of a full line of grocery items, including meat, produce, deli, bakery, dairy, frozen foods, floral and dry grocery, as well as consumables such as health and beauty aids, baby products, household chemicals, paper goods, and pet supplies.
• Health and wellness include pharmacy, optical services, over-the-counter medications, and clinical services.
• Entertainment contains electronics, toys, cameras and supplies, photo processing services, cellular phones, cellular service plan contracts and prepaid service, movies, music, video games, and books.
• Hardlines consist of stationery, automotive, hardware and paint, sporting goods, fabrics and crafts, and seasonal merchandise.
• Apparel includes apparel for women, girls, men, boys, and infants, as well as shoes, jewelry, and accessories.
• Home includes home furnishings, housewares and small appliances, bedding, home décor, outdoor living, and horticulture.

Service revenues

Walmart generates service revenues from:

• Financial services and related products. This includes service charges for money orders, prepaid cards, wire transfers, money transfers, check cashing, and bill payment.
• VUDU Movie Streaming Service. This includes subscription revenues for renting, buying, and watching movies, and TV shows on demand.
• Clinical Services. This includes service charge for preventative and routine health services for a standard set of common health ailments and screening needs that can be performed without urgent or emergency care including, but not limited to, wellness and preventive care, primary acute care, chronic condition management, referral to specialists, lab tests, and immunization.
• Health insurance services. This includes service charges for providing healthcare insurance from directhealth.

The following diagram shows how the money flows in from the different customer segments and the key cost elements where the money flows out to.

source: finimize.com

Walmart Revenues By Business Segment FY 2015

In FY’15 (fiscal year ending January 31, 2015), Walmart generated $485.65 billion of total revenues. Of these total revenues, Walmart generated:

• $288.05 billion revenues, 59.31% of the total, from the Walmart U.S. segment.
• $136.16 billion revenues, 28.04% of the total, from the Walmart International segment.
• $58.02 billion revenues, 11.95% of the total, from Sam’s Club segment.
• $3.42 billion revenues, 0.70% of the total, from the membership and other income.

Walmart Profits and Profit Margins FY 2015

Of the $485.65 billion of Walmart total revenues in FY’15, $365.08 billion were the cost of sales. This resulted in $120.56 billion of gross profit and a gross margin of 24.83%. Operating, selling, and administration costs were $93.14 billion.  This resulted in $27.15 billion of operating profit and an operating margin of 5.59%. After interest and other non-operating income and expenses and income taxes, Walmart had a net profit of $16.36 billion and a net margin of 3.37%.