Walmart has a too much grocery problem

Discussion
Photo: Walmart
Nov 15, 2019
George Anderson

Walmart is coming off another strong quarter. The company posted a 3.2 percent increase in same-store sales, boosted by strong traffic in the chain’s stores, and a 41 percent jump in its online sales, with notable strength in grocery. With these results, the retail giant has achieved five straight years of quarterly growth.

Grocery now accounts for 56 percent of Walmart’s dollar sales in the U.S., and the category’s rate of growth, buoyed by expanded online purchasing options including store pickup and home delivery, was up in the mid-single-digits.

While grocery drives traffic and helps build incremental sales in other categories, it also comes with low margins, particularly when coupled with home delivery, and that has weighed on Walmart’s earnings. 

Walmart CEO Doug McMillon said in a statement that he was pushing his team “to do more and move faster,” as Walmart works to create a “more sustainable relationship with the customer, better execute the fundamentals, and improve the overall economics of the business.”

“Our strength is being driven by food, which is good, but we need even more progress on Walmart.com with general merchandise. We’re mixing the business out better to achieve better margin rates, but there is more work to do,” said Mr. McMillon.

“We’re committed to progress and building a larger, healthier eCommerce business,” he added. “Our customers want that, our marketplace sellers want that, and so do we. Grocery pickup and delivery, along with new offerings like Unlimited Delivery and InHome Delivery, will help us unlock advantages we have to serve customers in a way that reduces friction and enhances convenience. We need to translate this repetitive food and consumable volume into a stronger Walmart.com business that’s profitable over time.”

DISCUSSION QUESTIONS: What will it take for Walmart to make general merchandise a greater percentage of its overall sales mix? How likely is the retailer to achieve that goal within the next couple of years?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The challenge ahead for Walmart is about identifying and executing on focus areas and applying data, technology and e-commerce to deliver lifestyle value propositions."
"What Walmart now needs to do is keep grocery moving, but bolster online non-food sales."
"I find it interesting that Walmart admitted low margin groceries are putting a drag on their results. Welcome to grocery retailing!"

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16 Comments on "Walmart has a too much grocery problem"


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Art Suriano
BrainTrust

Walmart has been successful primarily because they do everything right. Why? Because they’re not afraid to take risks and, when something does not work out as intended, they quickly react and make the necessary adjustments. All grocers are struggling today with making shopping online and home delivery profitable, and no one has yet to figure that out. Shopping online and using home delivery keeps the customer out of the store, and with that is a lost opportunity for added sales and impulse buying. Walmart was one of the first retailers to introduce shopping online and pick up in the store, which did and continues to help store traffic. If any chain can make shopping online and home delivery profitable, it will most likely be Walmart with store shopping incentives for future visits or other methods to continue to get their customers in the store. Moreover, they’ll continue to find ways to control costs to make shopping online and home delivery profitable.

Neil Saunders
BrainTrust

Having a strong grocery business is not a problem: it is an advantage. Grocery drives footfall, cash-flow and is a category that everyone needs to purchase. It is also a segment that Amazon has, so far, not been able to crack.

The issue is that grocery is low margin. This means using it to drive online sales, as Walmart has been doing, is not beneficial to profits. What Walmart now needs to do is keep grocery moving, but bolster online non-food sales.

This has started to happen, but the progress is slow. Walmart needs to make more inroads outside of its traditional demographic base which is challenging as many still see it as a low-price retailer selling lower-order products and others are wedded to Amazon for online orders.

Dr. Stephen Needel
BrainTrust

The issue is not the ratio of grocery to general merchandise. The issue is growth in general merchandise. Grocery is growing at Walmart because they are doing lots of good things with their grocery business (better assortments, better produce – at least near us, etc.). They aren’t doing anything particularly different with general merchandise and that will keep them susceptible to Amazon. Keep in mind, grocery and general merchandise are often separate trips at Walmart – just stand there and watch for a while. To the extent that one has something perishable in the cart, that’s not likely to change.

RICHARD HERNANDEZ
Guest

Walmart started in the non-foods/GM business. They added grocery many years later in their evolution. It used to be that the GM/non-foods categories were the larger piece of the sales mix, but if food has migrated to the lion’s share of the mix, Walmart must take a hard look at their assortments with a fine-tooth comb and make changes to keep up with consumers’ ever-changing tastes. Somewhere down the line, decisions will have to be made – can you really be everything to everyone and still be successful? It is a very slippery slope.

David Weinand
BrainTrust

They’ve done a great job with grocery and that will drive traffic. For general merchandise, they should take a page from Target’s playbook and create stronger private label brands. These will have better margins and create another reason to shop.

Mohamed Amer
BrainTrust

Thirty years ago, Walmart was not a serious player in the grocery business. The grocery segment is not where Walmart started in 1962 nor established its strength; that was in general merchandise.

The challenge ahead for Walmart is all about identifying and executing on focus areas and applying data, technology and e-commerce to deliver lifestyle value propositions. Stronger apparel branding and focused marketing spend combined with cross-channel and platform execution will create the levers to drive the desired category sales breakdown and margins.

Jeff Sward
BrainTrust

Walmart has an “SOS” problem. “Stuff On Sale.” And it’s not that it’s bad stuff or bad value. It’s just presented as stuff. Seas of racks. No storytelling. Walmart is a very unemotional environment to shop in. And that worked fine for a long time. But now I think the bar is set a little higher. Macy’s is working hard on their SOS problem. So is J.C. Penney. The good news for Walmart is that their grocery business gives them the traffic. Now how do they leverage that traffic? Walmart could also benefit from their own version of Kirkland. A proprietary brand with an unassailable price/quality profile. Maybe they have it and it’s my blind spot. So — back to storytelling. Walmart has an opportunity to trade up and attract department store customers. If department stores can’t solve their SOS problem, Walmart can take a shot and win on price/value.

Lee Peterson
BrainTrust

Mr. McMillon is correct to focus on general merchandise, but that’s a lot easier said than done. For starters, what category? Apparel’s in a multi-decade funk as digital natives have totally changed that game. CPG is CPG and there you’re up against Amazon and others who sell for super low margins. Broadly, “general merchandise” is another way of saying, “we’re not sure what, but the rest of the store.”

To me the answer lies in a thorough, long term private label strategy, which has never been a Walmart strength. And the road to developing private label is an equally long term play that mostly involves top to bottom talent. In other words, recruiting top flight R&D, brand strategy, packaging, merchandising, social media, etc., people to Bentonville. That means there’s lots to do and a long way to go. But if anyone has the wherewithal to do it, it’s old blue.

Dick Seesel
BrainTrust

The success of grocery and other commodity business at Walmart is a double-edged sword: It drives foot traffic and market share, but it throws off the potential margin mix of the overall business. As others have already pointed out, the general merchandise offering is subject to much more competition (Amazon and Target, to name the obvious), and Walmart’s assortments are probably in need of an update.

But Walmart’s other opportunity to change the business mix is to get more aggressive on pricing in their non-food businesses. Lower margins in general merchandise don’t happen in a vacuum, because they are still favorable compared to grocery. Something closer to a 50/50 mix of business would help Walmart’s margins overall, and would help it recapture market share on the nonfood side.

Michael Terpkosh
BrainTrust

I find it interesting that Walmart admitted low margin groceries are putting a drag on their results. Welcome to grocery retailing! Walmart does need to find the correct balance between grocery and general merchandise. Looking at Target, they have the opposite issue. Target is great with their general merchandising and branding across the store, but they continue to struggle with the grocery side of the business. For Walmart to find the right balance, they must up their game on general merchandise branding and offerings. This includes some upscaling of products/brands to drive incremental sales and profits.

Harley Feldman
BrainTrust

Great customer service. As the grocery business provides great service, Walmart customers will be willing to expand their grocery orders to other categories. In a recent survey, Walmart’s online service scored above Amazon’s in customer satisfaction for the first time so their efforts must be working to some extent. It is likely that Walmart will continue to improve its mix of sales beyond groceries due to the major efforts they are putting into that strategy and the satisfaction consumers are receiving. Also, Walmart has many more store locations than Amazon, allowing it to offer Buy Online Pick Up in Store in 10 times as many locations as Amazon.

Bob Andersen
Guest

Walmart and all grocery retailers should take a page from Hy-Vee’s merchandising playbook. Hy-Vee cross merchandises non-food products on EVERY aisle. Maybe too much, but it must be working and it certainly boosts their bottom line.

Richard J. George, Ph.D.
BrainTrust

Walmart has invested & innovated such that these grocery sales results are to be expected. Recall, the logic behind Supercenters, namely having grocery aisles placed horizontally versus traditional supermarkets with vertical aisles. Every time you turn a grocery aisle, the plan was to lead you into higher margin non-grocery aisles. However, these transition middle store aisles have failed to capture the grocery shopper’s attention.

Walmart needs to rethink what the transition assortments should be and once selected, merchandise them well. Walmart has the shopper visits, now is the time to upsell.

Craig Sundstrom
Guest

Uhmm, isn’t Walmart’s very business model low margin? (OK, OK five yards for roughing the writer: there’s low margin and then there’s loooooow margin.)

If I were a WM investor or an exec who had to answer to them, I’d be much more worried about the multiple and seemingly contradictory goals of expanding e-commerce and staying profitable while dancing around the edge of the rabbit hole that is “free … everything.”

Ricardo Belmar
BrainTrust

How is it that Walmart’s success at grocery sales has become a problem for them? Grocery is a low margin business, and once it became Walmart’s majority revenue source, it was bound to drag down overall margins and profitability, especially by driving online and delivery grocery sales. Interesting that they’re having the opposite problem as Target who wants to drive more grocery business, but is killing it with their private line labels and general merchandise.

Walmart has taken a very generic approach to their non-grocery business online, despite the increase in e-commerce sales. It’s not easy to discover new products and many of the products they offer can be found elsewhere. That said, Walmart has proven they know how to invest appropriately to turn around portions of their business, and I believe they’ve learned from all of their recent acquisitions (despite having to sell some of those off or shut them down).

David Naumann
BrainTrust

Too much grocery business could be worse, they could have a not enough business problem. The real problem for Walmart, at least in the U.S., is that they may be hitting a ceiling on growth. They have stores within 10 minutes of 90% of the population and there is a finite number of customers in the U.S. and continuing to garner more market share from competitors becomes more difficult. Future growth will likely come from outside the U.S. or by expanding into new categories with new brands or acquisitions of existing brands.

wpDiscuz
Braintrust
"The challenge ahead for Walmart is about identifying and executing on focus areas and applying data, technology and e-commerce to deliver lifestyle value propositions."
"What Walmart now needs to do is keep grocery moving, but bolster online non-food sales."
"I find it interesting that Walmart admitted low margin groceries are putting a drag on their results. Welcome to grocery retailing!"

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