Walmart, the largest private employer in the U.S., has recently declared that it would increase the wages for a half-million of its employees.
Companies like Gap, Ikea and McDonald’s, in order to reduce turnover and attract more workers, have also moved to set hourly wages at or above $9. In comparison, Walmart’s biggest competitors like Costco and Target, even after Walmart’s salary increase, offer far better wages to their employees. Aside from competitive pressure to hire and retain low-wage workers, political pressure for higher wages increases steadily.
For the retail giant, which for years has been the target of widespread criticism over its low pay structure and increasing reliance on part-time workers, the threat of employee turnover has already materialized, and Walmart is now facing one of the highest staff turnover levels of any U.S. firms.
Will Walmart’s decision to raise salaries, which will cost them $1 billion per year threaten the company’s leading position in retail? Or, are the strengths of the company solid enough to survive this bold decision to raise employees’ salary?
The major opportunities
Surprisingly, the results of our SWOT analysis for Walmart (which can be found here) shows that the employment problem is not the biggest threat that the company is going to face in the near future.
As we can see from the picture below, Walmart’s strengths and weaknesses are equally solid. On the one hand, the company’s strengths allow for the use of their opportunities and allow it to overcome threats (green line). On the other hand, the weaknesses are strong, and limit the opportunities and intensify the impact that the threats have on the company (red line).
This close connection between the different features is a result of the current stage of the company’s development process and the consequences of it.
Walmart has a universally recognized brand, and moreover, is the world’s second largest company by revenue and the largest retailer in the world. These attributes obviously will determine the further direction of the company’s expansion, which today has a total of 3,859 international locations. The company operates in all states and territories of the United States, and additionally in 15 foreign countries.
Unfortunately, the market where Walmart mainly operates is quite saturated and, in some areas, is still experiencing the effects of a painful recession. Due to these facts, the company, in order to maintain a level of stable growth needs to use its biggest opportunity and expand in not yet exploited consumer markets such as Latin America and Asia (especially India and China).
This opportunity can be effectively supported by two factors. The first and the primary one is company’s investment capabilities. During fiscal year 2014, the company generated total revenues of $ 476 billion, which was primarily comprised of net sales of $473 billion.
The second one is Walmart’s strategy which is based on a model that consists of selling a range of low- and higher-end goods at a very low markup. The low markup means that in order to be successful, the company needs a high sales volume and needs to keep costs at a very low level.
For years, the large scale of the company allowed it to receive huge discounts from its suppliers. At the same time, the company has built strong a cost reducing strategy based on a technologically advanced information system that supports its logistics. This system collects real-time information about customer’s orders, tracks inventory and shares detailed information about the company’s condition for better decision-making and more efficient supply chain management.
These two major factors allow the company to keep sales prices lower than competitors, which combined with the widest selection of products among retailers, create a strong relationship with the customers who benefit from having a better chance to find everything they need for a reasonable price in a single place. Undeniably, such an approach could win over clients from Asia and Latin America.
When we look at the list of obstacles that might threaten the company’s further expansion we can see that the first and one of the major weaknesses is poorly prepared investment decisions. The company has already retreated from markets in South Korea and Germany. After eight years of trying, Walmart couldn’t save its 85 German stores, which consistently lost money.
There were a couple of reasons for such a result. The first was the lack of analysis of the local markets and the specifics of local customers’ expectations. Moreover, poor management practices (participation of employees in morning motivational exercises and a controversial ethical code) just didn’t fit in the local cultural context. These kinds of bitter lessons show that in the future the company should carefully prepare to meet the local customer and employee expectations.
Additionally, Walmart is involved in multiple lawsuits involving questionable business practices, unpaid wages and arguments with community activists trying to keep its stores out of their neighborhoods. These issues can eventually lead to bad press which, combined with the growing strength of competitors, may result in a decreasing number of the retailer’s loyal customers.
Unsurprisingly, the competition does not sleep. Retailers in the U.S. such as Costco or Target have already taken actions to attract more customers and potential employees with a better offer and a positive company image (e.g. significantly higher employees salary).
Increasing employee turnover is another issue for the company to address. The cost of the process is high — it involves both the cost of training new employees and the cost of their lower efficiency during their first months of employment. Additionally, it might prevent the further expansion of the American retailer or even become a threat to its current position.
Using the power of strengths
But Walmart still has an enormous number of strengths. Beside the possibility of expanding abroad, the company has another field that looks promising — online retail market. Nowadays, in America, only less than 1% of food and beverage sales currently occur online. But gradually consumers have begun to realize that shopping for food online is not only more time-efficient and cost-effective, but is also more organized compared to the in-store experience and can be done with less physical effort.
This trend can only be strengthened by rapidly advancing mobile technology accessibility. It is also a chance for Walmart. The company, in order to take advantage of emerging new means of distribution, needs to carefully utilize its retail intelligence to lock in their target audience with better marketing efforts and user-friendly services.
But doing online business comes with challenges. One of them is being able to deliver orders fast while maintaining the quality and freshness of food. Many smaller businesses struggle with this issue and Walmart, using their extensive experience in technology and optimization of logistics can outpace them easily.
On the other hand, in order to truly conquer the online retail market, Walmart needs to face growing competition from internet-based retail stores or marketplace companies such as Amazon or eBay. Lucky for them, from the very beginning, this American firm has a big advantage: a vast physical presence across the entire country. For example, their stores can be utilized as in-store pickup places. This feature is particularly useful when customers purchase the item online and prefer to travel to the store to get it, avoiding a long time spend in the aisles.
Summary - a big one can do more
Despite the previously mentioned threats, a well recognized brand and investment capabilities can open many doors for Walmart. The company has the ability to easily make partnerships with large companies providing various services e.g. healthcare insurance, travel agencies, coffeehouses. Its investment potential gives them the ability to arrange takeovers of smaller competitors and mergers with various retailers which can strengthen its domination on the market.
In Walmart’s case, their biggest challenge is to wisely make strategic decisions and draw conclusions from their previous mistakes. Last year, Doug McMillon, President and CEO of Walmart, at the company’s Annual Shareholders Meeting named three core principles and goals for the company:
“Second, we will invest in our people. As we change and grow, it will be our associates who will make the difference. Finally, we need to be at the forefront of innovation and technology. We will lead with urgency to get ahead of change.”
These concepts, if implemented, might not only bring a bright future for the company, but also cause a positive change for their loyal customers and thousands of employees. We are looking forward to observing the transformation of these words into reality.