There has never been a company like Wal-Mart Stores. It is by far the largest retailer in the world with nearly $500 billion in annual revenue -- a level only matched by global oil companies such as Royal Dutch ShellandExxonMobil.
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The company owes its incredible success to the combination of a simple strategy and aggressive expansion. Let's take a brief look at the history behind the top line and how Wal-Mart intends to hold onto its title.
Founder Sam Walton opened the first Wal-Mart in 1962 after a series of retail ventures earlier in his career. In the 1950s, he opened several smaller five-and-dime stores, which were successful but lacked the scale to create the profits necessary to rapidly expand business. The stores distinguished themselves from the competition by putting the customer first and offering rock-bottom prices.
Walton expanded on that idea, opening the first discount store in 1962 in Rogers, Arkansas. Unlike competitors, this store was huge, had bargain prices, and was located in a rural area. The everyday low prices strategy and a location off the beaten path attracted customers, and Walton expanded over the decade before taking the company public in 1970. That infusion of capital enabled him to add new stores even more quickly.
By 1980, the company had 276 locations and was adding 100 a year. Then, 1983 brought the first Sam's Club, and a few years later, Walton stepped down from the CEO post, having become the richest man in the U.S. By the early 1990s, the chain of discount stores had surpassed Searsand Kmartto become the biggest retailer in the country.
Over the years, Wal-Mart expanded internationally, establishing a particularly strong presence in Mexico and other countries throughout the Americas and entering major markets like the U.K. and China. In total, the company operates in 26 countries.
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Sales from U.S stores currently make up about 60% of revenue, or close to $300 billion. In the U.S., Wal-Mart has over 3,400 Supercenters and over 4,500 stores in total, encompassing a whopping 680 million square feet of retail space. Those stores generated $423 in revenue per square foot last year, with 56% of sales coming from the grocery division.
Internationally, it has another 6,290 stores and 367 million square feet of retail space, registering sales per square foot of $367. Finally, Sam's Club contributed $58 billion in sales last year and was the best converting real estate at $674 per square foot. However, the Sam's Club warehouse model gives it lower profit margins than standard Wal-Mart stores.
Wal-Mart vs. the competition
Though sales growth at Wal-Mart has slowed in recent years, the metrics are still head and shoulders above most of the industry. Compared to the top 10 retailers globally, onlyHome Depottopped Wal-Mart in return on assets or net profit margin.In 2013, Wal-Mart recorded a net margin of 3.5% and return on assets of 8.6%.
Costco, perhaps its closest rival, had a profit margin of just 2% and return on assets of 6.8% that year. On a sales basis, Costco uses its real estate more efficiently, generating sales of $1,100 per square foot, but its profit margin is nowhere near what Wal-Mart enjoys.
Meanwhile, Amazonis often seen as the biggest threat to the Wal-Mart business model. The e-commerce leader has been growing sales by about 20% annually, developing competitive advantages along the way and set to top $100 billion in revenue this year. Ironically, its success has come in many ways by taking pages from the Walton playbook -- putting the customer first and offering the lowest prices.
Since Amazon has barely any profits to speak of, a comparison between the bottom lines of the two companies is not relevant. However, using sales as a substitute, Wal-Mart still generates a higher return on assets at 238% vs. 163% for Amazon. That means Wal-Mart is not only more profitable than Amazon, it also derives a much higher level of sales from its assets as well.
Imagining the Wal-Mart of the future
Wal-Mart sales growth has slowed recently as U.S. superstores appear to be reaching a saturation point. Over the last 12 years, the company was able to more than double revenue to its current mark of $488 billion, but it will likely take much longer for it to double once again to nearly $1 trillion.
Store expansion has also slowed significantly -- total U.S. supercenters increased by just 3% last year, and much of that increase came from converting discount stores. Growth was similarly slow for international markets and Sam's Clubs. In contrast, the number of Supercenters grew by 17% in 2005.
Now, management is focusing on two growth avenues: first is its Neighborhood Markets. In fiscal 2015, the company added 232 of these smaller-format stores, growing the base by more than 50%. Performance at these stores has been strong with same-store sales jumping 7.7% in the most recent quarter.
However, Neighborhood Markets are less than a quarter the size of supercenters, and they contribute only about 3% of domestic square footage. Sales per square foot is likely higher at Neighborhood Markets because of their specialization,but the segment is too small at this point to have a significant impact on growth.Still, this is a valuable opportunity for Wal-Mart, and its growth could become more important if the company continues to expand the concept at a similar pace and comparable sales continue to build.
The second opportunity is e-commerce. Wal-Mart has clearly fallen behind Amazon in online retail, but it needs to make every effort to catch up. The company brought in $12 billion in online sales last yearand aims to triple that figure to $35 billion by 2018 with investments in distribution centers and technology. Still, compared with nearly $500 billion in total revenue, that barely moves the needle.
Internationally, the company announced recent expansion projects in Canada and China. As the second biggest economy in the world, China represents a huge opportunity, but Wal-Mart has struggled thus far to position itself in the region.
Meanwhile, CEO Doug McMillion is trying to improve service at supercenters, implementing a wage increase and leaning on suppliers to lower prices. If Wal-Mart is to achieve significant growth again, its supercenters will have to spruce up their image, address complaints of long lines and out-of-stock items, and deliver positive comparable sales. If that happens, Wal-Mart could accelerate store expansion once again and put up the type of growth rate that longtime investors are used to seeing.
The article The Largest Retailer in History: How Walmart Sales Reached $500 Billion originally appeared on Fool.com.
Jeremy Bowman owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Costco Wholesale, and Home Depot. The Motley Fool owns shares of Amazon.com, Apple, Costco Wholesale, and ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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