Walmart’s reign as America’s biggest retailer is under threat

That status comes with benefits. It gives Walmart power in negotiations with product manufacturers and in dealing with government officials over policy issues. It’s also a point of pride: Job postings often tout working at the “Fortune 1" company as a perk.

Its reign is looking shaky lately. If current sales trends persist, Amazon is likely to overtake Walmart soon. Amazon reported $575 billion in total revenue last year, up 12% from the previous year, compared with Walmart’s revenue growth of 6%.

Walmart’s behemoth size means that to meet its own sales target of around 4% growth each year, the company has to find an additional $26 billion in sales this year. That’s no easy task. About 90% of Americans already shop at the retailer. The pandemic and rising inflation boosted Walmart’s revenue by $100 billion since 2019.

It faces continued uncertainty in consumer confidence and while it’s spending in some areas, it’s pulling back in others. Earlier this week, Walmart told workers it would cut hundreds of corporate jobs and ask most remote workers to move to offices.

While Amazon’s and Walmart’s businesses compete head on, there are big differences. Amazon earns much of its profit from non-retail operations such as cloud computing and advertising, while grabbing retail market share with fast shipping. Walmart gets the bulk of its sales and profits from U.S. stores, while growing side businesses like advertising and digital sales.

Walmart executives are most wary of Amazon’s ability to keep increasing profits through its non-retail business, while eating more of the retail landscape with ever-faster shipping and a bigger product selection, people familiar with the company said. Internally some executives are highlighting Walmart’s role as a good corporate citizen and emphasizing that it’s important to be the best at serving customers and workers, not just the biggest, say some of those people. Its scale can also have downsides, say some, like outsize attention on every misstep.

Walmart is “constantly striving to be the best version of ourselves, staying true to our values and offering quality, affordable goods and services," said a spokeswoman. “Everything else will take care of itself."

Walmart has worked to uncover new sources of revenue. Earlier this year it reached a deal to buy television seller Vizio, in large part to build its advertising business. Walmart sold $3.4 billion in ads in fiscal year 2023, a 28% increase over the previous year. That’s still far behind Amazon, which had $11.8 billion in ad sales in just the first quarter of 2024.

Not all of Walmart’s new ventures have succeeded. Last month, the company announced it would close all 51 locations of a chain of health clinics it had opened next to its stores over the past five years.

Walmart competes fiercely with most other retailers, too, including discounters like Aldi and traditional grocers such as Publix and Kroger.

As Amazon’s growth skyrocketed during the first years of the pandemic, Walmart executives discussed expectations that Amazon’s annual revenue could soon surpass $700 billion. A particular threat is groceries, an area that gives Walmart—the country’s largest grocer—most of its U.S. revenue. It also projected that Amazon could grab up to 20% of the U.S. grocery market by 2030, according to people familiar with the situation. Instead Amazon’s overall growth cooled in 2022, before picking up again recently.

Walmart is looking for ways to bulk up its retail side and sell more products to more people. In January, it announced plans to build new stores, its first major store expansion in nearly a decade. Last month Walmart launched a new line of premium foods in a bid to draw new shoppers and encourage current shoppers to spend more.

It’s revamping stores to bring people in for more than inexpensive necessities. To fuel expansion online, it’s wooing more third-party sellers to Walmart.com. And executives are putting more emphasis on decoding today’s confusing consumer habits to gain an edge.

Walmart’s core shoppers are low- and middle-income consumers, cohorts that make up the bulk of the U.S. population. The company is looking for more ways to chase high-income consumers—a group Walmart defines as households that earn more than $100,000 a year, who tend to shop more frequently at Amazon, Target, Trader Joe’s and Costco. Walmart attracted many of those shoppers in recent years and now aims to keep them.

Doug McMillon, chief executive of Walmart, said he tries to keep his vast organization of 2.1 million global workers focused on simple, all-encompassing goals such as lowering prices and building trust with shoppers.

McMillon wants the company to focus on making some of its general merchandise better appeal to everyone, including higher-income shoppers—for instance, by mixing inexpensive children’s clothes, socks and other basics with more trendy looks and colors through new brands, he said.

“People with money, generally speaking, have almost always shopped at Walmart, but they buy Tide. They don’t buy apparel," he said.

That balance has proved difficult in the past. In the wake of the 2008 recession, Walmart aimed to keep and attract more high-income shoppers with trendier apparel. Instead it lost sales among shoppers looking for basics.

The difference this time, say executives, is that Walmart has more data on shopper behavior and preferences—and the evolution of easy online shopping has changed people’s perception of the brand.

Internal data show Americans rate Walmart nearly as high on convenience as they do for low prices. Walmart’s online pickup and delivery services helped achieve that, McMillon said.

“People with money prize convenience and we are getting more convenient all the time," he said.

Tracking customers

Decoding confusing consumer data has become a central tool in Walmart’s effort to grow, say executives. They increasingly rely on a team of data scientists and researchers whose goal is to “represent the objective voice of the consumer," according to Jen Acerra, who leads the group as vice president of consumer insights and strategy for Walmart U.S.

Retailers have struggled to keep up with disorienting shifts in consumer behavior in recent years. First, amid pandemic lockdowns and supply-chain problems, merchants didn’t have enough supply to meet demand. Then they had far too much as demand fell. Inflation soared and people soured on the economy, but consumers kept spending. More recently, consumers have become more selective in their spending, cutting back in certain areas so they can splurge elsewhere.

“It’s a confusing time," McMillon said. “You can find data that would support a number of arguments."

Acerra, a 43-year-old who came to Walmart in 2021 after working at large consumer companies like Kraft and Hyatt Hotels, works in a small Walmart office in Chicago along with some of the company’s advertising executives. She leads data scientists, advanced analytics experts and consumer researchers who sift through millions of pieces of data a day for clues on who is shopping in its stores and how.

Over the past year her team zeroed in on a term that underpins much of Walmart’s current U.S. strategy: “customized moderation." It means shoppers are moderating spending in certain areas based on their needs, not just spending less overall.

Low-income Walmart shoppers last summer bought more shelf-stable produce, like melons instead of berries, to reduce waste. Middle-income shoppers gravitated to items from less-expensive store brands, such as Walmart’s Great Value frozen chicken nuggets. And higher-income people were drawn in by the food, turning to Walmart for fresh items like salmon and watermelon on top of detergent, boxed cereal and toilet paper.

Instead of scrimping to spend less, consumers are scrimping to splurge on a trip or concert tickets, said Acerra. Since the pandemic’s lockdowns a few years ago, people are “more carpe diem," about their spending, she said.

As the acute chaos of the pandemic receded, the research team’s data also revealed an opportunity. Walmart’s customer satisfaction scores were dropping in part because Walmart was attracting more high-income shoppers. These consumers were more vocal than other shoppers when they didn’t like what they found.

To upgrade stores, executives have made plans to better stock shelves, improve customer service and checkout times, and highlight more products like trendy furniture and clothing that appeal to affluent shoppers in stores they visit most frequently. “We’ve got to work harder to keep them coming back to us long after this inflation pressure subsides," said Acerra.

Easier checkouts

Sprucing up stores and adding new products are retail fundamentals but hard to do consistently, especially when retailers limit how much they spend overall on store or warehouse labor, often a retailer’s greatest expense.

Heading into last year’s holiday season, knowing that consumers of all kinds were moderating their spending, Acerra and store operation executives tested ways to boost shopper experience scores, said Cedric Clark, Walmart’s executive vice president of U.S. store operations.

Walmart expanded the use of new technology on store workers’ phones that directs them on keeping better track of inventory and moving products from backrooms to shelves, which increased in-stock levels late last year, he said.

Stores have focused on the checkout process, increasing a metric Walmart calls register utilization, to calculate if registers are adequately staffed. By November, stores with better register utilization reported higher customer scores.

Store managers also had a higher percentage of their bonus tied to actions that tests showed led to better customer experience, such as staying on top of cleanliness and out-of-stock items. That correlated to higher sales.

When it comes to checkout, all shoppers want a great experience at “that last moment they have up front, and that was a big part of our improvement," said Clark. Checkout is still one of the biggest customer pain points and Walmart continues to test ways to make it better without increasing cost, said executives.

Based on the data, Walmart is doing more of what the company calls “clustering," stocking some stores with specific products to cater to specific consumer groups, said Julie Barber, Walmart U.S.’s executive vice president of general merchandise. That includes all the items on the nonfood side of a store. Shoppers have bought less of those products as they spend more on food, rent and gas, but they tend to have higher profit margins than groceries.

Stores that attract more high-income shoppers are using prime space at the end of aisles or near the entrance to display kitchen items from Beautiful, a home goods brand that partners with Drew Barrymore and includes small kitchen appliances in hues such as lavender and sage green.

Those stores also feature outdoor goods from Walmart’s Better Homes and Gardens brand, which are “similar to items you find at like a Pottery Barn," said Barber.

Stores that cater to more low-income shoppers will feature items it calls “opening price point" products, such as colorful outdoor plastic dishware priced at 50 cents.

Walmart is also introducing a line of premium food called Bettergoods this year, including items such as cardamom rose raspberry jam and curry chicken empanadas, with more adventurous flavors and health considerations like gluten-free.

Some of these efforts are bearing fruit. In the most recent quarter, Walmart said its sales continued to rise and it is gaining a larger share of shoppers in most categories. A large piece of the share gain in nonfood items is thanks to more higher-income shoppers and those buying online, Walmart’s Chief Financial Officer John David Rainey told analysts earlier this year. “They’re clearly shopping us in new ways," he said. Walmart reports its next quarterly earnings tomorrow.

Write to Sarah Nassauer at Sarah.Nassauer@wsj.com