Better, Not Bigger: Walmart's Supply Chain Strategy

During the past year, Walmart WMT has experienced a -0.03% decline, and the red triangle in the diagram is pointing downward. 

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According to the retailer, in its two-day investor community meeting that was just concluded on Wednesday, it is their intention to grow its revenues by about 4% annually over the next three to five years and to increase its operating income by more than that amount. In his presentation on Wednesday, Walmart's Chief Financial Officer John Rainey told investors that the company's operating income is expected to grow much faster than revenue in the future. The bullish message appears to have been well received by investors: the shares closed 1.7% higher on Wednesday.

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A number of different levers have been outlined by Walmart in order to achieve the goal, such as the sale of more categories of general merchandise, which has a higher margin than the general merchandise it sells now. Walmart believes that its investment in supply chain and technology will really move the needle, since Walmart believes this will reduce costs and improve delivery speed and accuracy. As the company seems to be striving to retain its e-commerce customer base in order to increase higher-margin revenue streams such as advertising, the company seems to be aiming to retain and grow its e-commerce customer base.

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With its capital expenditures on American stores growing by 72% between 2017 and 2018, Walmart has also increased its supply chain and technology expenditures by more than twice as much, so it is putting its money where it speaks. In consequence of this, Walmart has increased its capital expenditures by approximately 2.8% of its revenue last year to 2.8%, and these expenditures are expected to continue for years to come. In the period 2017 through 2021, Walmart spent approximately 2% of its revenue on capital expenditures.

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Walmart’s plans seem focused more on improving how it uses its existing assets than on a heavy supply-chain investment. Investors familiar with Amazon’s overbuilt fulfillment network might be alarmed by the mention of heavy supply-chain investments. Walmart has a built-in advantage because 90% of American households are within 10 miles of its vast network of stores. E-commerce fulfillment is cheaper than building a brand new fulfillment center since setting aside floor space is cheaper. Since such stores have reduced the population of employees on the retail floor, Walmart has already seen a faster picking speed on online orders and a higher weekend store traffic because of the lower employee density on the sales floor.

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It is likely, however, that Walmart will eventually automate most of this picking process. By the end of three years, the company expects to be able to automate 65% of its stores and move 55% of all fulfillment centers to automated facilities. The company estimates that, as a result, unit costs could be reduced by approximately 20%. It would possibly benefit investors to have regular updates on average delivery times and picking speed so they can appreciate Walmart's progress because these are improvements that are taking place behind the scenes. Walmart might have to provide more information going forward to help investors appreciate its progress. 

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Walmart will ultimately have to prove that it can recover its profits from the e-commerce investment it made a few years ago to what they were before it made such a heavy investment. As a result of its e-commerce efforts, Walmart experienced a return on invested capital of 9.1% on average over the past five years—a far cry from its 13% to 15% return on invested capital before it became a significant part of Walmart's business model.

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In order for Walmart to thrive, it needs to live up to expectations associated with a tech-centric future as the market has never been more tech-driven.