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November 19, 2024
Walmart’s Business Is Booming, So Why Are Other Discount Retailers Struggling?
Walmart is riding a wave of booming sales figures in advance of the holiday season after releasing strong quarterly earnings results on Nov. 19. Consolidated revenue, consolidated gross margin, consolidated operating income, and U.S. comparable sales all saw significant growth, leading to an upbeat earnings report across the board.
With Walmart seeing such widespread success despite an uncertain American economy, why are other discount retailers — such as Family Dollar, Walgreens, and Big Lots, all of which are closing a large number of stores, per CNN — struggling to find their footing?
Walmart Is Setting Expectations for a Healthy Holiday Season After Recent Earnings
As Retail Dive outlined, Walmart’s recent earnings report underscored several key successes.
Consolidated revenue rose 5.5% year-over-year to reach a total of $169.6 billion, and net sales in the U.S. climbed by 5% to a sum of $114.9 billion. U.S. comparable sales also hiked upward by 5.3%, though this figure does not include fuel sales. Additionally, online sales represented a big win for the blue-and-yellow brand, with e-commerce sales rising 22% in the U.S. and 27% globally. Walmart CFO John David Rainey indicated that Walmart’s U.S. marketplace had grown by 42% during the third quarter, bolstering the notion that the company’s focus on e-commerce had been paying dividends.
Walmart President and CEO Doug McMillon was positive in remarks attached to the earnings report.
“We had a strong quarter, continuing our momentum. Our associates are working hard to save people time and money and to transform our business. Across markets, we continue to grow, and our newer businesses helped profits grow faster than sales while we worked to lower prices,” McMillon said of the company’s recent performance.
According to CNN, Walmart also reported a market share increase last quarter, with gains driven “primarily from upper-income households.” Those earning over $100,000 annually made up 75% of the company’s growth.
While Walmart Enjoys Success, Other Discount Retailers Face Gloomier Prospects — But Why?
A separate CNN report recently indicated that several prominent discount retailers have been facing serious challenges.
As of late October, Family Dollar had announced the closure of 677 stores, while Walgreens announced it was moving to close 259 and Big Lots was slated to shutter 360 locations.
Several reasons for these closures were offered by experts quoted by CNN, chief among them a hesitance for consumers to spend more freely on discretionary items after a so-called retail “sugar high” took place in 2021 and 2022.
“Companies were buoyed by Covid-related shopping patterns,” said Michael Brown, partner at global strategy and management consulting firm Kearney. “It kept these players alive that couldn’t survive in normal situations.”
Brown added that fierce competition coming from larger players in the discount retail market — Amazon and Walmart in particular — was pushing smaller chains out of the market. Because Walmart, Amazon, and companies of their size can utilize economies of scale to reduce their procurement and distribution costs, an advantage more modestly sized companies don’t have, they are able to offer a larger variety of products at a lower price point.
“Smaller discount retailers that cater to lower- and middle-income shoppers are under the most pressure, particularly from Walmart,” CNN suggested.
Macroeconomic concerns are also leading consumers to be more price-sensitive, with interest rates and inflation being persistent even as 2024 draws to a close. With Walmart attracting customers outside of its traditional demographic — with big growth recently from customers making more than $100,000 a year — and successfully making a move into the e-commerce space, the “end result is that its smaller competitors at the inexpensive end of the market have been getting squeezed out,” per CNN.
Can smaller discount retailers continue to compete against industry giants such as Walmart and Amazon? The answer may not be a foregone conclusion, but current headlines don’t seem to suggest it will be an easy task.
Discussion Questions
Will Walmart and Amazon continue to push smaller competitors in the discount retail space out of business?
What can smaller discount retailers do to increase their chances of survival in an increasingly competitive market?
Which discount retail chains could be next in line to close, and why?
Poll
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Cathy Hotka
Principal, Cathy Hotka & Associates
Neil Saunders
Managing Director, GlobalData
Carol Spieckerman
President, Spieckerman Retail
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Not all discount retailers are struggling. Aldi is doing phenomenally well. Most off-price players are on a tear. And Shein and Temu are going great guns. Basically, there is loads of growth in value. However, there is also a huge amount of competition and there is not enough growth for everyone to succeed. The players losing out generally have defective or sub-optimal propositions or have made operational missteps. Take Family Dollar as an example. Prices are not competitive enough and many stores are a complete mess. So it’s hardly surprising they’re losing customers. The same applies to Big Lots, which is a hodgepodge of product and often more expensive that Walmart and Target.
And Walgreens, which is mentioned in the article, is not a discount or a value retailer. It’s a mainstream drugstore chain and one that has never traded on price – it’s comparatively expensive!
Great observations Neil. It is the tension between having the leadership, resources and skills needed to price and execute right coupled with the large number of competitors, some of whom are falling by the wayside as they simply can’t do one or more of these things well. But to your point, there are many who are successful.
Execution! Walmart stores are clean, bright, organized, and predictable. Too many off-price retailers are messy, chaotic and understaffed.
The questions(s) at the bottom, provide the answer to the question at the top: they’re struggling precisly because WalMart isn’t (i.e. the latter is drawing from the former) Discount is a pretty simple premise: you’re 100% based on price (well, beyond the obvious that you actually have to have something to offer). With huge buying power, and a huge customer base, competitors are hard-pressed to offer a reason to shop at their locations; facile solutions like “emphasize local” or “differentiate” are precluded by the nature of the price-emphasis.
A number of factors are driving Walmart’s business growth. Among them:
1. In recent years, Walmart has focused on expanding with a customer base with incomes of more than $100,000 a year, which is historically Amazon’s main customer base.
2. Despite Amazon’s strong online presence, Walmart has built a strong online operation of its own. Thousands of its locations now offer buy online, pick up in store, and Walmart+ offers same-day grocery delivery. U.S. Walmart online sales increased by nearly 25% YTD.
3. Walmart’s success reflects the desire for low prices and value among consumers of all income levels.
In addition, credit card interest rates have risen, making it more expensive for consumers to use credit cards. Other retailers have had to raise prices higher than many consumers can afford.
David – you’re spot on here, just missing 1 key factor. Walmart has greatly upped their merchandising game recently, both from a selection and in-stock perspective. Combine that with the best prices in the market, and their growth comes as no surprise!
“Everybody wants to save money, and everybody wants to save time,” Doug McMillon, President & CEO of Walmart
Walmart continues to win and dominate the retail world, providing its consumers with value, convenience, and time savings. This is all evident in their impressive Q3 results:
Walmart’s core customers and the continued rise of conscious consumerism are helping to fuel these sales increases. The emerging customer base earning more than $100K per year accounted for 75% of its gains. This is an arena where Amazon has dominated over the past 20 years.
However, consider the following elements as the competition between Amazon and Walmart continues to evolve:
Walmart’s resilience, adaptability, technological capabilities, and ability to attract new customers to its ecosystem are world-class. They are well-positioned to continue winning and thriving throughout the holiday season and in an uncertain economic and geopolitical future.
One word: diversification. Walmart’s competitors are not nearly as diversified from a business model perspective. Doug McMillon and other Walmart leaders have continually hammered on growing profit faster than sales. Another way of saying it is “growing service revenue faster than product sales.” Ad business up 28% with margins upwards of 70%? Nice!
Smaller discount retailers are outmuscled by Walmart and Amazon’s economies of scale, negotiating power and strategic partnerships. Smaller players also lack higher-margin B2B services like media, tech and logistics to offset pressure on their core retail business.
The answer to the headline question is: smart leadership and execution. Everything else is an excuse for poor performance, not a reason.
Walmart+ has been a huge success. I suspect it’s driving the significant growth in higher income segments. It gives people access to Walmart’s value without having to go to a store. Walmart has also significantly improved its private-label merchandise, especially in food. They support these products with great in-stocks and a well-executed fulfillment strategy that allows their customers to receive goods where they are and how they want.
There are 5 dynamics for Walmart’s continued success. Four of these factors are internal to Walmart and one is an external economic factor.
1) Leadership – Mr. McMillon and his senior executives are some of the best operators on the planet.
2) Execution – the Walmart supply chain system continues to get honed and refined with smart tech infusion. As they integrate new AI tools, you can bet they’ll find even more ways to create economies of scale.
3) Strategy – Walmart has never waivered on its EDLP strategy and continues to look for new products it can bring to consumers at low, compelling prices.
4) Culture – if you’ve ever worked with Walmart before, you know how deeply passionate their employee base is, going the extra mile to do what’s right for their customers. Many other competitors simply don’t have this secret ingredient.
5) Inflation – this is the one external factor that has buoyed financial results. Consumers are tired of paying exorbitant grocery prices, even those making over $100k!! So, Walmart reaps the benefit of its core EDLP strategy both online and in store. I expect Q4 to be really good for Walmart as inflation will continue to bite consumers up until Q1 2025.
As it turns out, eCommerce and OmniChannel Retailing are not “fads”, but core elements of success in modern retail. Walmart’s results, and the contrasting performance to other retailers, offers proof of that point. Understanding how a modern consumer wishes to be served, whenever, whereever and however they choose is certainly a core part of Walmart’s success.
Combined with a relentless fight to mitigate the impacts of inflation by pressuring suppliers to find cost savings, as well as leaning in on their own private brands initiatives, is another part of their success.
Improvement of product offerings that appeal to higher income consumers while not abandoning the lower income consumer is also a key part of Walmart’s success.
Finally, investing in people by increasing pay and investing in training and development that drive retention and keep the highest caliber talent on board are all elements of Walmart’s success in recent times.
Many discounters are “playing not to loose” instead of “playing to win” and being aggressive by investing in the future of their business. Walmart suffered through some difficult quarters a few years ago, and took the investment community along with their plans to remake the company for the longer term future. Those investments are now paying off, and in a big way.
Yes to all observations. Walmart truly understands and executes on all fundamental elements of merchandising. Right product, right place, right time, right price. Add to that all platforms are visually appealing and well classified which also makes them easy and enjoyable to shop. Merchandising 101 with the addition of all modern enhancements.
Walmart is most certainly delivering exceptional results, but it’s more than just because of scale. Walmart has had a scale advantage for decades, but it has done what many other retailers have not: continue to innovate, invest and create new revenue streams. They have invested in the frontline teams, increasing wages, providing productivity tools and training; they have evolved their supply-chain and logistics systems to improve efficiency; they continue to test new product lines, concepts and technologies, deploying the ones the work and terminating the ones that don’t. They don’t rest on their laurels. Many of the other retailers mentioned have had success, but due to complacency, poor strategy or execution have failed to produce consistently meaningful business outcomes.
This inconsistency is a prime example of how the retail landscape has shaken out. A rising tide doesn’t rise all ships in this economy. Walmart has such a breadth and depth of assortment. That ability to one-stop shop is what it has over dollar stores.
Many of my fellow RetailWire brain trust members have already touched on the key answers to this. Larger discounters are doing splendid- Ross, TJX , Burlington are coming off peak revenue and double digit YoY net income growth. The store closure metric is the real red herring. For Walgreens it’s only about 3% of stores- just focused on efficiency. Big Lots has been struggling for some time now, but it’s slowly coming up for air- the closure for them is more significant.
Playing in the race to the bottom price focused market is hard for smaller players, so they are pushed to maintain tiny 2 person staffs and dont have the assortment flexibility that Walmarts would have. The tiny discounters can shift to ecommerce and play against Temu and SHEIN, but sourcing then becomes the issue- but that is their real strength anyway, purchasing at fire sale prices and selling at low cost to the consumer. There may be more competition, but the demand for low cost goods won’t vanish- just like Walmart, they’ll take from the higher end of the market- rich folks.
Walmart owns the “every day low price” perception. They’ve spent a couple of decades cultivating that moniker and now it’s deeply enshrined as its Brand Promise. And they deliver on that promise, across both the physical store and ecommerce channels. With exclamation points added by Walmart+. And they dominate as a destination for non-discretionary items. And they have a well balanced checkout process. And they have a great employee culture. And…… It’s easy to frequently say ‘and’ in a positive sense when talking about Walmart. It’s also easy to say ‘and’ a lot in a negative sense when talking about other discount chains. Walmart’s several decades of operational excellence is now serving them very well.
Any competitor (not just Walmart or Amazon) can push another retailer – small or large) out of business. They just have to offer more value. That can come from price, convenience, or anything that offers what a customer perceives as “value,” meaning it’s worth doing business with you more than someone else.
WalMart executes successfully on the promise of saving you money, evident not only because of low prices, but a clear value alignment in supported item variety, selection, and the merchandising sets themselves. A shopper never has to think about whether WalMart has food staples they want, whether basic home goods are in stock, or at a low price. This is executed like a well-oiled machine, without diversions into other formulas or distractions. Can’t say the same for other retailers in the low price segment.
Walmart has a v12 engine and is firing on all cylinders. That’s why they continue to win, and why Target, obviously not a smaller discount retailer, continues to struggle…their engine isn’t big enough (ie: revenue streams, customer base, assortment, etc) and clearly needs a tune up (ie: inventory management, enough said). The question about Walmart and Amazon domination is not a new one, the reality is, yes they will continue to push out smaller competitors, but it doesn’t have to be that way. With the right value proposition and customer experience, there is room for more than just two winners.
Walmart and Amazon will keep squeezing out smaller discount retailers because they dominate on price, selection, and convenience. These giants have the resources to undercut competitors and attract every income group, leaving smaller players scrambling.
If smaller retailers want to survive, they need to stop trying to out-smart Walmart. Focus on niche markets, local connections, or unique product offerings. Double down on customer service and community involvement—things the big players can’t replicate at scale.
Otherwise, they’ll be stuck in a losing game of trying to compete on price and convenience, which Walmart and Amazon will always win.