Walmart Sells Groceries at Cost. The Money Is Made After You Leave.

Buy a gallon of milk at Walmart and the company makes almost nothing on it. After paying suppliers, paying the cashier, lighting the store, and trucking the milk in, what's left of your dollar is a couple of pennies. On $642.6 billion in net sales in fiscal 2024, Walmart kept just $16.3 billion in net income¹ - a margin so thin it looks like a rounding error. And that thinness is the point. Walmart sells the groceries at almost cost on purpose, because the milk was never where the money was.

The official story is that Walmart is a master of razor-thin retail margins - a company that wins by squeezing fractions of a cent out of billions of transactions. That's half true and entirely misleading. The thin margin isn't a feat of operational genius Walmart endures. It's a loss leader Walmart can now afford, because a different, far richer business has quietly grown up inside the store.

The CFO said the quiet part on an earnings call

Here is the number that reframes the whole company. Walmart's chief financial officer told investors in 2024 that advertising had grown to nearly one-third of the company's operating income.⁶ Not a third of revenue - a third of profit. And that advertising business generated about $4.4 billion against $681 billion in total revenue, less than seven-tenths of one percent of the top line.⁶ Sit with that gap. A sliver of revenue throwing off a third of profit only happens when the sliver costs almost nothing to produce. Selling search placement to the brands already sitting on Walmart's shelves has no cost of goods, no truck, no warehouse. It is margin in its purest form, bolted onto a store that was going to exist anyway.

Read that line carefully, because it's an admission. Growing operating income faster than sales is not what a traditional retailer does - a retailer's profit tracks its volume. Walmart is telling investors the relationship has decoupled. In fiscal 2025, total sales grew about 4% while operating income climbed more than 8%.⁵ Profit grew twice as fast as the store. The margin mix is shifting in real time, and you can see it in the operating line, not just the strategy deck.

Why the cheap milk is the moat

The mechanism runs in a loop, and it only closes if the prices stay low. Cheap goods pull in shoppers. The shoppers create traffic - in stores and, increasingly, on the app and the website. That traffic is an audience, and an audience is the only thing an advertiser actually wants to buy. So the brands that stock Walmart's shelves pay Walmart again, this time for visibility in front of the customers Walmart's low prices attracted. The advertising income then subsidizes the low prices, which pull in more shoppers, which deepens the audience. The thin retail margin isn't a weakness the ad business compensates for. The thin retail margin is what builds the ad business. Underprice the competition, capture the foot traffic, and rent it back to your own suppliers.

What 'razor-thin' actually hides

The popular framing collapses two different numbers into one slogan. Walmart's gross margin - what's left after the cost of the goods themselves - runs in the mid-twenties percent, which is unremarkable for mass retail. What's razor-thin is the net margin, and it's thin because Walmart spends an army's worth of SG&A running the largest store network on earth. Walmart U.S. alone did $441.8 billion in sales in fiscal 2024, 69% of the company, and it carries the highest gross profit rate of the three segments.² The point is that the thin net margin is a choice about how to deploy a healthy gross margin - plow it into rock-bottom prices and operational scale, and let the high-margin layers do the profit-growing. It's worth noting one trap here: the $4.4 billion 'advertising costs' line buried in the 10-K is what Walmart spends on its own marketing⁴ - a coincidence that it nearly matches the $4.4 billion it earns from selling ads. Same number, opposite direction.

Isn't this just an Amazon impression - and can it last?

The fair objection is that this is barely a story yet. Advertising is real but still small in absolute dollars - $6.4 billion in fiscal 2026⁸ against revenue measured in hundreds of billions. Membership income, around $4.4 billion,⁷ is likewise a fraction of the whole. Strip the ancillary layers away and Walmart is still, overwhelmingly, a company that moves groceries at thin margins. That's true. But it misreads what matters in a margin-mix shift, which is the derivative, not the level. The high-margin layers are growing five to six times faster than the store⁶, so each year they capture a larger share of incremental profit - and that's exactly what produces operating income rising twice as fast as sales.⁵ The second honest counter is durability: retail media is fashionable, and where Amazon went, every retailer is now crowding in. The advertising load on a shopper's screen has a ceiling, and Walmart is buying its way past the obvious limits - its Vizio acquisition, closed in late 2024, drove triple-digit ad-revenue growth⁸ by reaching shoppers on their televisions, not just their carts. Whether that ceiling is near or far is the real open question. What's no longer in question is which business is funding which.

Walmart spent decades teaching the world it was the company that won on pennies - the operator so disciplined it could profit on margins that would bankrupt anyone else. The truth turned out to be stranger and more durable. Walmart doesn't profit on the pennies; it profits in spite of them, on a second business it grew inside the first. The thin retail margin was never the achievement. It was the bait. And the company is now growing its profit twice as fast as its sales by selling something that was free to make all along: your attention, on the way out the door.