Besides Amazon, Who Else Could Threaten Walmart?

The 100-plus-year history of American retail is a story of new retail formats beating the old ones, over and over. Low prices are the core of it, but what matters most is how you use innovation to get there.

A small piece of news recently suggested that Walmart might have some competitors after all — that is, if you set aside Amazon, the e-commerce company that has been harassing it for more than a decade.

In early August, Dollar General announced it would buy 41 of the shuttered Walmart Express stores — a community supermarket format Walmart began opening in the US in 2011. All 102 of them are now slated to close.

With brick-and-mortar retail broadly in the doldrums and store closures everywhere, the news made Dollar General stand out — and what stands out most about the company is its sales growth. According to its latest quarterly report, same-store sales have risen for 27 straight quarters, and total sales have grown for 60.

Look at the history of retail and you find that the unremarkable companies are often the ones that come from behind with sudden force.

Dollar General has been around for quite a while. Founded in 1939, it is a chain of community supermarkets selling cheap, discounted everyday goods, planted specifically in the low-income neighborhoods of towns with populations around 10,000 or fewer. You could think of it as a "dollar store," though its products actually run from $0.50 to $60. Dollar General now has more than 12,000 stores nationwide. Walmart has just over 4,600.

So could Dollar General, a company older than Walmart itself, be the new competitor?

Before we get to that, it is worth going back through the history of American retail — this story of new formats beating old ones has played out many times already.

Low Prices, Technology, and New Consumer Markets

1862

A&P (founded in 1859) starts a dedicated mail-order tea business. Mail order offers lower retail prices and pushes out part of the traditional retail sector.

1872

Montgomery Ward (bankrupt in 2000) is founded, with mail order as its main sales model.

1880

Montgomery Ward's mail-order catalog becomes consumers' "wish book," running more than 250 pages and listing about 10,000 items.

1886

Sears is founded, also selling by mail order, aimed mainly at the conservative-spending rural market that buys only essential goods.

1912

A&P sets up economy chain stores, introducing a standardized, unified sales and management model; it cuts costs and retail prices through a "manufacturer direct to retailer" model.

1921

Sales of the Ford Model T, on the market since 1908, pass 5 million units. Cars spread much more widely through the 1920s.

1930

King Kullen, America's first supermarket, is founded on the edge of the city. The spread of the automobile makes it possible to shop at such remote supermarkets.

1930s

Supermarkets such as King Kullen and Big Bear expand, displacing chain stores like A&P.

1930s

Home refrigerators start to become common, cutting how often people shop and raising demand for supermarkets.

1940s-1950s

Supermarkets expand by acquiring small and mid-sized chains. Between 1949 and 1958, large supermarket operators including Kroger, Grand Union, and Winn-Dixie acquire 415 small and mid-sized chain stores between them.

1962

The first Walmart opens in Rogers, Arkansas, a Midwestern town with fewer than 6,000 people.

1970s-1980s

Walmart invests in aircraft, a private satellite network, and other systems to track inventory and sales data. In 1979, its annual sales top $1 billion.

1983

Walmart sets up Sam's Club, a membership warehouse club.

1988

The first Walmart Supercenter opens.

1998

Walmart opens Walmart Neighborhood Market, a grocery-focused store under 6,100 square meters.

2011

Walmart pilots Walmart Express, a community discount store format; in early 2016 it announced plans to shut it down.

Let's try to sum up what decided the rise and replacement of these retailers

1. Low prices — the most obvious source of competitive strength.

There is no question that at any moment in time this is a huge draw for consumers. The question is how you get there.

Whenever the American retail industry talks about the "sales revolution" of the 1920s and 1930s, A&P comes up. It was the first chain store to shape American food retailing for the long run, and the secret to its success was thin margins and high volume.

The company began as the Great American Tea Company, and renamed itself A&P in 1878 as it broadened its product range. Adding stores and selling goods cheaply had always been its operating philosophy. In 1912, A&P launched the chain-store model.

Cutting out the middleman, or squeezing him as far as possible, is an effective way to lower costs, and A&P was no exception. It controlled costs mainly by dealing directly with manufacturers. Its sheer scale gave it strong bargaining power with suppliers, which let it sell to mass-market consumers at better prices while protecting its margins — one study found that by the late 1920s, chain-store prices were 4.5% to 14% lower than those of independent stores.

For the first three decades of the 20th century, economy chain stores like A&P dominated American consumer society. But a new competitor soon appeared: the supermarket, with far larger individual stores.

One example was King Kullen, which also used a "direct from manufacturer" model with no middleman. On top of that, it tended to sit out on the remote urban-rural fringe, which cut rent; most A&P stores, by contrast, were downtown. King Kullen pushed self-service shopping, and cutting store staff sharply lowered operating costs as well.

So King Kullen could charge less. Richard Tedlow's book New and Improved: The Story of Mass Marketing in America cites a survey finding that in 1933, chain-store prices ran 12.8% higher than supermarket prices. Supermarkets also caught on because they offered shoppers a far wider choice of goods.

Walmart, which came later, pushed this much further — more on that shortly.

2. New technology — the most important accelerant.

One precondition for low prices is scale. Each new retail format serves a broader market than the one before it, and that is hard to reach without better technology and infrastructure.

First came the rapid build-out of American transport. From 1921 to 1935, the length of newly paved road in the US grew from 620,000 kilometers to 1.62 million kilometers, and the railroad already ran from coast to coast, so goods could be sold across a much wider area. A&P's strategy, in fact, was built around urban rail: it sited its stores along the streetcar lines that radiated across cities.

Then came the automobile. In 1930, the number of registered cars in the US reached 23 million, nearly three times the 1920 figure. This was exactly the opening that supermarkets seized in the 1930s — most of them opened in the suburbs and offered large parking lots. What consumers meant by "convenient location" shifted from "close to home" to "easy to park."

In the story of supermarkets replacing chain stores, one more thing mattered a great deal: the refrigerator. For the food industry it was arguably the most important invention of the 20th century. Between 1930 and 1941, refrigerator sales in the US — which had totaled 1.9 million units up to that point — shot up by another 20 million. It cut how often people had to shop and encouraged them to buy more at once. For the same reason the shopping cart was invented in 1937: it met people's growing appetite for shopping and, in doing so, raised the standard for how many items a store carried and how much floor space it needed. That was the shopping environment the supermarket now offered.

The opening of coastal ports and land border crossings, along with cold-chain technology and the shipping container, also created chances to expand the scale of the business and source goods globally.

3. The formation of a national market.

Once the technology could support selling a product nationwide, large manufacturers started building national brands. The real engine behind this was television advertising.

Between 1950 and 1963, the share of American households with a TV set grew from 9% to 91.3%; by 1978 it had reached 98%. Manufacturers of every kind began using that screen to pitch their products to consumers across the country. In 1949, US TV ad spending totaled $12.3 million; two years later it reached $128 million. By 1969 it had surged to $3.5 billion.

Television also did a great deal to spur market segmentation in packaged goods, which is why supermarkets like Walmart could stock such a dazzling range of products. So while traditional chain stores were still focused on their own private-label goods, supermarkets were welcoming national brands in — everyone who bought a given brand got exactly the same thing, and that eventually produced a single unified market.

Before that, the thing that let consumption cross regional lines was mail order. The growth of the 19th-century household-goods retailers Montgomery Ward and Sears was built on precisely that.

Mail-order catalogs were first invented in the 1870s. Sears founder Richard Sears was selling watches by mail as early as the 1880s, then widened the business to other household goods; the model was still working in the 1930s. A&P's early success owed something to it too.

As Sears saw it, mail order had no geographic limits and needed no sales staff, which saved on labor. But its bigger advantage was how well it suited the rural market. Rural consumers spent conservatively and bought only "important goods and daily necessities," which was exactly what Sears sold — with lower prices and more handsome catalogs as the draw.

As the automobile spread in the 1930s, though, Sears' retail business overtook its mail-order business for the first time, in 1931.

What made the automobile's effect on American retail so deep was the new demographic and urban structure that shifts in the American population produced. From 1970 on, more Americans lived in the suburbs than in cities, and whether commuting to work or doing anything else outside the house, they needed a car.

One reason A&P later declined was that it clung to downtown locations too long. Walmart caught the trend at just the right moment.

So, looking back, what went into Walmart's rise?

Scale, low prices, suburban locations, and a deft use of technology to run more efficiently. None of these four was new; other retailers had practiced all of them before Walmart. What made Walmart formidable was that it took each one close to its limit.

Walmart opened its first store in 1962. American retail then still belonged to the supermarket, a format that stayed enormously attractive for more than a decade after World War II because the baby-boom population kept growing, people's material needs were expanding fast, and shoppers wanted a place built for family shopping.

That was the opening Walmart founder Sam Walton saw. But rather than build a large supermarket on the urban-rural fringe, Walmart put its first store in Rogers, an Arkansas town of fewer than 6,000 people. Through years of expansion after that, Walmart's base remained towns of under 10,000.

Walton found that supermarkets mostly chased busy areas with heavy foot traffic and strong demand, which left thinly populated towns as an empty market, full of opportunity. Walton's own account is less strategic: in his 1992 autobiography Made in America, he said he set up shop in small towns simply because his wife preferred small-town life.

As noted above, the car and suburban culture both gave retail new room to grow — even in a small town you could reach a far wider range of consumers. And what drew still more of them in was Walmart's rock-bottom prices.

"Say I bought an item for 80 cents. If I priced it at $1, I could sell three times the volume I would at $1.20. The profit on each item was lower, but the volume made the total profit higher."

An episode Walton recounts in his autobiography shows how strictly Walmart held to this. In negotiations with Procter & Gamble, Walton said he would rather give up P&G as a supplier than accept a wholesale price higher than expected, because that would force Walmart to raise retail prices to hold its margins — and raising retail prices would break Walmart's low-price principle. We've written in detail about how Walmart reshaped the pricing rules of American retail, and the "Walmart effect" that came out of it.

Walmart's rapid growth from the 1970s through the 1990s owed a great deal to technology — mainly communications and computers. No retailer before it had that chance.

In 1968, Walmart expanded beyond Arkansas for the first time. In the early 1970s, Walton bought his first private plane, an Air Coupe, which became one of the most important investments of his life.

"From the air we could see local traffic patterns, figure out which cities and towns were growing, and then judge how competitive a location was — if there was any competition at all." Flying over the country, Walton picked the sites for more than 120 Walmart stores from the sky. "That practice put us at least 10 years ahead of our competitors in the industry," he recalled later.

Through the 1970s, Walmart built four distribution centers totaling 1.5 million square feet. While its rival Kmart had yet to grasp how computers could help its business, Walmart was already using computer systems to connect warehouses and stores. By 1987, Walmart had spent $24 million leasing what was then the largest private satellite network in the US, using it to track inventory and sales data and to link stores, distribution centers, and headquarters.

The point of the private satellite network was that it tied the high-speed computers at headquarters to 16 shipping centers and the systems of thousands of stores. Every scan at a checkout register went into the computer, and once stock fell to a set level, the store system automatically signaled headquarters to reorder. The process made distribution more efficient.

After the 1980s, Walmart applied much the same method to its suppliers. Today it has its own automatic replenishment system: computers work out order requirements from past shipment data, and that data is linked to the systems of big suppliers like Procter & Gamble, so restocking happens on its own whenever inventory drops to a set level.

The key to all this is that it sharply cut the time stock sat in Walmart's warehouses. By pushing inventory costs upstream onto suppliers, Walmart lowered its own costs and raised its inventory turnover at the same time. Inventory turnover is, at bottom, a measure of how efficiently a retailer puts capital to work in a given period, and it rests on reading consumer demand and shopping habits accurately. A&P's success before the 1930s also depended on keeping turnover high — except that back then there were no computers or private satellite networks to help, only careful ledgers and hand calculation.

If the mail-order market, the national consumer market, and the suburban market were the openings earlier retailers had uncovered, the one Walmart found — invented, more precisely — was people's demand for one-stop service. In 1988 Walmart set up the supercenter, which met not only people's shopping needs but also the basic services of daily life.

In a supercenter, shoppers can buy everything from housewares and appliances to packaged and fresh food, and can also find a bank, a gas station, a McDonald's and more. Later supercenters added pet stores, garden centers, pharmacies, vision care centers, photo shooting and printing, hair and nail salons, and the like.

The format first appeared in the late 1970s, when Walmart added a pharmacy, an auto service center, and a jewelry counter to its existing discount stores. It gave shoppers extras they could not get at other supermarkets, and those extras became a draw in their own right.

The giant supercenter, first built in 1988, is now Walmart's most profitable format. Since 1988, Walmart has opened more than 100 supercenters a year in the US on average; today there are more than 3,400 across the country, about 76% of Walmart's US stores, ranging from 6,400 to 24,200 square meters.

So will this new competitor, Dollar General, become a giant?

Dollar General CEO Todd Vasos says 60% to 65% of its customers are price-sensitive, low-income shoppers. Cheapness is its biggest selling point.

But cheapness alone is unlikely to make it an industry giant. The American market has no shortage of discount community stores like Dollar General — Family Dollar and Dollar Tree are "dollar stores" too — and they get their low prices by lowering the level of service and the grade of the product, which is fundamentally different from Walmart getting low prices by making its supply chain more efficient.

In other words, Dollar General is not an innovator. And does it really have a price advantage?

A writer at the financial site Motley Fool found back in 2012 that while the price tags at Dollar General are lower, comparing unit prices — laundry detergent by the ounce, say, rather than by the bottle — shows Walmart comes out cheaper.

Dollar General is not as cheap as it looks, and the financials bear that out. Its gross margin runs around 31%; Walmart's is 24%.

Its real opportunity is convenience. And the reason that convenience counts as an advantage now is, again, e-commerce: people need to visit big shopping centers like Walmart less often. What Dollar General offers, in other words, is a more precisely aimed service.

On that note, the grocers that expanded fast in the 1980s — Whole Foods, Trader Joe's (mostly in California), Wegmans (mostly in cities in the eastern and northeastern US) — also found their customers through more precisely aimed service.

Still, Walmart's biggest threat in the future is probably Amazon.

Set against the high inventory turnover Walmart built with its automatic replenishment system, the huge trove of consumer data Amazon holds lets it predict consumer behavior rather than merely track it — which means it can know its turnover efficiency in advance. Over 20 years, Amazon built more than 50 warehousing centers across the US and mastered delivery from warehouse to customer, the point where e-commerce logistics parts ways with traditional retail logistics. More important, just as Walmart wrote the rules for the supercenter, Amazon has written the rules for e-commerce — and for Walmart, or any other retailer, that is not an easy wall to breach.

Low prices, technology, and the market are all in its hands. Amazon is not just a retail company; it is a technology company too.

Cover image from ilovevegan and VCG