Photo: Getty Images/Michael Vi
Can Walmart roll back inflation?
Walmart got Wall Street’s attention yesterday after it lowered its profit outlook for the second quarter and the full year.
The retailing giant now expects that its second-quarter same-store sales, excluding fuel, will come in around six percent higher. Double-digit food inflation has bumped up dollars spent on groceries and left fewer dollars for consumers to spend on higher margin categories, particularly apparel, according to a press release issued by the chain. The upside, according to Walmart, is that the company continues to gain share of the grocery category.
Walmart, like its chief rival Target, found itself at the beginning of the year with a glut of inventory in non-grocery categories and has been engaging in markdowns to move merchandise, which has reduced inventory and margins at the same time. The retailer, which has sought to manage supply chain expenses, said it has made progress in reducing its storage costs tied to backlogged shipping containers.
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Doug McMillon, Walmart Inc. president and chief executive officer, in a statement. “We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”
The retailer is anticipating that sales growth will slow against 2021’s high comps. Walmart now expects that U.S. sales will be up three percent, excluding fuel, in the second half of the year. The company said its operating income for the second quarter will fall 13 to 14 percent. Operating income for the full year is expected to decline 11 to 13 percent.
The progress that Walmart and Target have made on clearing their excess inventories may be a drag on the respective companies’ margins, but it may benefit the national economy as a result, according to a research note from Bank of America as reported by Yahoo Finance.
“General merchandise stores are overstocked but the good news is that excess inventories could put downward pressure on inflation as big box retailers mark down their prices to entice consumers,” wrote the authors.
- Walmart Inc. Provides Update for Second Quarter and Fiscal Year 2023 – Walmart
- The ‘good news’ about Walmart and Target inventory warnings, according to BofA – Yahoo Finance
- Retail inventories: too much or too little? – Bank of America
- Will Deal Days help Target clear its inventory? – RetailWire
- Target isn’t wasting any time in cutting the glut from its inventory – RetailWire
- Walmart and Target take different approaches to Amazon’s Prime Day – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What does Walmart’s downwardly revised outlook say to the greater retailing industry? Do you think markdowns by Walmart, Target and other large retailers can blunt the effect of inflation on the U.S. economy over the second half of 2022?
Poll
Loading …BrainTrust
Gary Sankary
Retail Industry Strategy, Esri
Ryan Mathews
Founder, CEO, Black Monk Consulting
Discounting by retailers will have a small impact on inflation — but the emphasis needs to be on the word small. Most inflation is in essentials — like food and gasoline — and those are not where Walmart nor Target nor anyone else is going to be discounting. They will be focusing on non-food, where sales have slumped (at least in volume terms) and inventory has piled up. More widely, Walmart’s downgrade shows the general direction of travel for retail: top line growth is not too difficult to secure, but bottom lines are being eroded from their highs of last year.
As an aside, gas prices here in Florida have dropped 20% in the past six weeks. Regular has gone from $4.99 per gallon to $3.99.
Walmart’s results should not be a total surprise. And we should expect to see similar results from others. When supply-chains seized, Walmart and other major retailers over-ordered in anticipation, and now they need to move a glut of product. I do believe that discounting by Walmart, Target and others will provide some modest relief against inflation, but only modest relief since essentials like food and gas are experiencing some of the biggest inflationary pressure.
Walmart can help a little bit as they do seem to have a moral streak (save money, live better), but how ’bout if we go after the oil companies and tax their massive profits (off intentionally inflated prices)? A 21% proposal was bantered around but went nowhere — try that and watch the pressure ease off us car-crazy US consumers. It always amazes me how we look at politicians when gas prices go up when in fact, they have nothing at all to do with that. Let’s get the real bad guys for a change.
Regardless of markdown mania, I don’t think there’s any retailer or combination of retailers that will blunt the effect of inflation in the back half of 2022 and beginning half of 2023. Inflation is here to stay and it’s going to put a damper on consumer’s spending habits until this time next year.
The drivers of our current inflation are far more complicated than be solved by any retailer lowering prices. This is a global issue. I think every little bit helps, and reducing prices where they can and holding the line on prices vs. margins in other cases will help their customers. Which is great to see.
When Walmart lowers its outlook, it’s proof of industry-wide profitability pressures. Inflation, lower spending, supply chain delays, labor shortages and omnichannel costs keep eroding profits.
Markdowns could boost revenue a bit. Subscriptions, private labels, digital ads, and fulfillment and delivery services drive revenue over the long term.
Slashing margins is really only possible in places where excess inventory and low demand already exists, so this approach only minimally can help both the retailer and the consumer. I would instead love to see retailers upcycling the excess inventory, or finding other ways to avoid the easy markdown “way out,” as selling unwanted items at extreme discounts is only going to go so far.
Unfortunately, when it comes to inflation, most of the strategies that can help turn things around make for unhappy shoppers. I appreciate retailers like Target and Walmart being willing to cut into their profits to aid customers, but there’s not really much aid they can provide with non-discretionary categories, and that’s what would help shoppers the most.
While Walmart can’t blunt inflation overall, it can certainly attract a lot of shoppers by lowering prices at a time of high inflation. The question is, can Walmart use its buying might to protect shoppers from the full force of inflation? In the short term the answer is probably yes, in the longer-term, no.
It’s a fascinating question, George — can 1 or 2 giant retailers actually impact nationwide inflation with their pricing strategies? I suspect that the categories where the giants are slashing prices are not the categories where inflation hurts the most, so even if Target and Walmart can have a meaningful impact on overall inflation numbers (a terrifying statement on the state of our economy better suited to a different discussion), their pricing strategies won’t ease the pain of inflation on essentials. In my opinion, we’ve simply got to focus on reducing underlying infrastructure issues (supply chain and energy/oil prices) if we want to make a dent in inflation.
Just-in-time was broken by the hoarding during the pandemic. Retailers moved to a just-don’t-run-out mentality so, as the supply chain disruptions lessen, markdowns are sure to follow. Walmart’s model of “sell merchandise before you have to pay your vendor for it” is also a mismatch in today’s out-of-whack economy.
Back to markdowns: It’s already tough to compete with Walmart on price, so I doubt that markdowns will create a wave of anti-inflationary pricing. In other words, I don’t believe this will do much to blunt the inflation beast, but lower gas prices will.
There is no doubt that Walmart and Target can influence the market when it comes to pricing — a large % of retailers include them in their competitive set and will move prices accordingly when one of them makes a move. There is a big difference though between taking down everyday “base” pricing on comparable items and running promotions and markdowns to clear through excess inventory on unique items. The best retailers are monitoring this very closely and know when and where to react appropriately.
Ultimately though, the numerous factors driving inflation and the overall U.S. economy remain beyond Walmart’s control. There are some positive signs that gas prices may be coming down, but there are also some long-term supply challenges such as electronic chips, fertilizer, and unfortunately grain — which could lead to more inflation. The best any retailer can do is to closely monitor costs, competitors and demand shifts and use the best analytics available to react accordingly as the market evolves.
Walmart and Target’s markdowns are a reaction to excess inventory if specific categories and not an across the board strategy to lower prices. This will not likely have a noticeable impact on inflation. The cost of almost all goods has increased and will continue to increase until gas and supply chain costs are in control. Retailers can’t survive selling goods at a loss and it is only a last resort to clear out excess inventory.
Walmart has put the retail industry and economists on notice, we are heading into an economic downturn and no one knows yet how mild or how severe.
Promotional discounts on high inventory categories will give Q3 a boost, especially in BTS apparel. However, as consumer purchasing shifts to more discretionary hardlines and giftables in November and December, the impact of inflation and the economic downturn will begin to crystallize.
I expect Black Friday and Cyber Monday will be more important than ever for both retailers and the economy in the back-half of this year.
The apparel segment of retailing is in trouble, while basics like grocery are doing fine, according to Walmart. Margin pressures will continue, as will consumers’ cutting back on discretionary spending. Will discounting have an impact on inflation? Nope, not at all. Inflation flows through the value chains over months and quarters, from raw materials and commodities to finished goods and shelter. Demand destruction is how inflation is brought down, creating excess inventories and the need to discount.
Walmart is the canary in the retail coal mine, a leading indicator of things to come. The company is clearly bearish when it comes to the impact of the economy on consumers. When a star retailer is worried, all retailers should be worried. Markdowns by Walmart and/or anyone else aren’t going to stop the impact of inflation. That’s the job of the Federal Reserve. All the discounts are is a financial Band Aid on an amputated economic limb.
Walmart’s outlook revision is a smart move to ensure continued success in future quarters. The smartest companies will take into account what they believe will be happening several quarters down the road and distribute the impact across all the quarters in between. The markdown does represent over purchase of inventory, but in part due to other market actions triggered, such as increased fed interest rates, and decrease in discretionary consumer funds due to energy prices.
Retailers will not be shifting the direction of inflation, except by putting their supply chains in order. Regardless of the retailer, that will take time as it’s more on the supplier side than the retailers. The inflation effects will continue until energy prices recede.
The fact that Walmart has been successful at moving merchandise at lower prices suggests the consumers have not pulled back on their spending activity, but are significantly more price sensitive.
That speaks well for the retail industry as a whole, although it is clear that price declines will be necessary in order to convince consumers to make purchases. Traditionally there is a segment that is highly priced sensitive; the data here suggests that the segment is expanding into a larger group of consumers who make purchases at regular to slightly discounted prices, which tends to be the largest group of consumers for most retailers. Engaging that large segment will be critical to any mainstream retailer’s success.
Discounting by major discounters will not lower the effect of inflation, that’s just their competitive model.
With gas prices decreasing and slashed prices at the big box retailers, one might think that inflation will get better, but I’m not optimistic. Now that consumers have pulled back, they will be much more cautious about spending again. I don’t see much changing until next year.