Guided by its founding mantra of "everyday low prices", Walmart has risen to become the number one retailer in the world.
The intense focus on low cost is made possible by Walmart's substantial size, economies of scale, and the nation's largest distribution and logistics network.
The company has spent decades and tens of billions of dollars building, adapting, and perfecting its huge network of stores. Today, 90% of the U.S. population lives within 10 miles of one of Walmart's 6,000 stores, served by a logistics network that...
- sources products from more than 100,000 suppliers in over 100 countries
- has over 150 distribution centers which average over 1 million square feet
- runs a fleet of more than 6,100 trucks, 61,000 trailers, and 7,800 drivers
- has each distribution center support 90-plus stores within a 150-mile radius
In a highly competitive, low-margin industry like retail, few rivals have the financial resources or patience to attempt to replicate the company's extensive supply chain.
Over the past 70 years, Walmart has proven itself capable of adapting to grow its business. In the 1980s, for instance, Walmart concluded that it had largely saturated the U.S. market with its traditional discount centers.
In response, the company launched Hypermarkets and then Supercenters, massive stores averaging 180,00 square feet in size that combine groceries and general merchandise under one roof. Walmart is now America's largest grocer with about double the market share of its nearest competitor, Kroger (KR).
With the introduction of the first Sam's Club in 1983, Walmart copied the success of Costco's warehouse business model to charge members an annual fee for the right to buy large quantities of goods at bulk discounts. Sam's Club now has nearly 600 stores across the world and generates 12% of the company's sales.
In the 1990s, Walmart began expanding overseas and experimenting with Neighborhood Markets, smaller stores designed to miniaturize a Supercenter in urban markets.
Each step of the way, Walmart further dominated the retail scene while bolstering its competitive advantages.
That said, the company will need to adapt once again as e-commerce retailers like Amazon (AMZN) encroach on Walmart's territory. In fact, starting around 2014 Walmart suffered through several years of declining same-store sales, revenue, and earnings.
Since then, Walmart has aggressively pursued acquisitions and internal investments to improve its online presence, remodel its existing stores, and recreate Amazon's focus on convenience.
For example, by leveraging and continuing to invest in its nationwide distribution network, Walmart is able to offer free two-day shipping on online orders and can even ship next-day to most parts of the U.S.
However, there are several risks that could suppress Walmart's pace of earnings and dividend growth for the foreseeable future.
Where Walmart was once the clear leader of low prices on almost anything imaginable, Amazon has quickly gained market share by offering an even greater number of products and services delivered in an ever-more convenient and affordable manner.
Competition isn't abating, either. Walmart's CEO Doug McMillion himself said that he expects the pace of change in e-commerce to accelerate in the coming years.
In other words, Walmart may find itself confronting and responding to a never-ending barrage of disruption in the retail industry. One year it's two-day shipping, the next it's two-hour delivery of fresh produce, all table stakes for competing in modern retail.
Even if Walmart succeeds in adapting to change, their success may not translate into profits. Since 2015 the company's operating margin has steadily eroded from 6% to 4%, indicating that growth in online sales isn't necessarily translating to higher earnings.
As it has in the past, Walmart may be able to cut costs via its efficient supply chain to improve profit margins. Automation could, in the future, reduce costs further. But in a highly competitive retail world, most savings end up being passed on to consumers.
Moreover, rising labor costs may further pressure Walmart's profitability. Target and Amazon have announced minimum wage increases in an effort to create a happier workforce with lower turnover, creating growing competition in the labor market as well.
Income investors should expect Walmart's slow pace of dividend growth to continue for the foreseeable future as the firm works to adapt its business and prove that its omnichannel investments can drive profitable growth.
Finally, while Walmart is working to replicate its U.S. success in China and India, these regions have different consumer cultures and well-established incumbents who've spent decades optimizing their own product mixes and distribution networks. Walmart lacks the same dominant logistics infrastructure in these markets that it enjoys in the U.S.
In the end, whether Walmart tries to grow domestically or abroad, the company faces intense competition from well-capitalized and nimble rivals.
Walmart has done an admirable job adapting to changing industry conditions over the years. That includes an impressive entrance into e-commerce that should help the world's largest retailer remain relevant for a long time.
Given the company's accelerating pace of e-commerce investments, Walmart seems likely to keep raising its dividend at a modest pace of 2% per year for the foreseeable future.