Wal-Mart (WMT +0.42%) is no one's idea of an innovator. For most of its recent history, the retail giant was known for its rapacious expansion, paying rock-bottom wages, and offering the lowest prices around.
But that's changing now. Competition from Amazon.com (AMZN +3.92%) and, to a lesser extent, Costco Wholesale has forced Wal-Mart to rethink its longtime strategy.
Image source: Wal-Mart.
Since CEO Doug McMillon took the helm in February 2014, the company has been fast adapting to the new retail landscape in order to keep up with competitors and changing customer habits. Let's take a look at a few of the major changes McMillon and Co. have made over the last year.
1. Raising wages
Wal-Mart sent shockwaves throughout the retail industry in early 2015 when it announced it would hike wages above the national minimum wage of $7.25. It raised its base wage to $9/hour in April 2015 and followed it up with another hike to $10/hour in February 2016. Wal-Mart also said it would invest in training to streamline promotions and reduce turnover.
Those wage hikes will cost the company $2.7 billion annually, but the decision appears to be paying off. Before it made the initial announcement, Wal-Mart's customer satisfaction was at the bottom of the industry, and it had poor internal store performance scores based on things like cleanliness and out-of-stocks.
Now, the company is expected to report its ninth straight quarter of comparable sales growth this week -- a streak that did not start until McMillon took control -- and its second-quarter comp of 1.6% was its best in several years.
2. Acquiring Jet.com
Perhaps the biggest change Wal-Mart made this year was buying e-commerce start-up Jet.com for $3.3 billion, a record sum for an American e-commerce company.
More than obtaining ownership of Jet.com itself, Wal-Mart seemed to be most interested in overhauling its own e-commerce operation, which it can now do with the help of Jet's "smart basket" algorithm, which gives customers the ability to lower prices, and with access to the mind of Jet.com Founder Marc Lore.
Wal-Mart pursued Lore's first company, Diapers.com parent Quidsi, but lost in a bidding war to Amazon in 2010. Lore spent two years at Amazon before leaving to start Jet.com, and he has now committed to spending five years at Wal-Mart.
Already, he is putting his stamp on the retail giant; it recently announced that several e-commerce executives would be leaving the company, and it lifted its online inventory from 8 million items to more than 20 million. With those changes and the expansion of its grocery pickup program, management expects online sales growth to accelerate to 20%-30% in the second half of the year, from just 8% in the first quarter.
3. Slowing down new store growth
Wal-Mart plans to open just 59 new stores next year, which marks its slowest store expansion this century. Of those 59 stores, 20 will be Neighborhood Markets, the grocery-only stores that average about 40,000 square feet, four will be Sam's Clubs, and 35 will be Supercenters, some of which are conversions from Discount Stores, which lack a full grocery.
The plan is a marked divergence from Wal-Mart's historic strategy of blanketing the country with stores. With more than 5,000 locations including Sam's Clubs nationwide, Wal-Mart claims it has a store within five miles of 70% of the U.S. population. In other words, the marginal benefit of further penetrating the country has fallen, and the company can instead use its existing store network as a platform for e-commerce and to grow profits through increased same-store sales.
Scaling back on new store openings allows the company to spend more money cleaning and improving stores and expand its grocery pickup program.
With Amazon shaping up as its principal rival, Wal-Mart is best off investing to attract customers to its existing stores and improve its e-commerce platform. Though the company sees flat profit growth next year after a decline this year, these moves are helping it become more competitive for the long term, which will ultimately benefit investors.
