Walmart, bellwether retailer, feels the inflation squeeze

Walmart is feeling the financial pinch as the cost-of-living crisis continues to worsen, according to a recent re-earnings announcement. 

Walmart said it expects operating profits for the full year to fall by up to 13%. With bigger-spend items languishing unsold as consumers re-prioritise their finances toward essentials such as groceries, Walmart is being forced to cut prices to move inventory that isn’t selling.

Why it matters

As the nation’s largest retail brand, Walmart has long been a bellwether for the retail category and changing consumer behaviors. When Walmart is making difficult choices in the current economic climate, it’s a good indicator that other retailers are likely to suffer too. Case in point: shares of other US retailers also slid in response to the news, including Target, Amazon, Best Buy and Costco. 

The overstock vs shortages conundrum

Overstock issues affecting retailers are largely a result of ongoing supply chain issues. While shortages impacted product availability for many brands in the first half of 2022, delayed deliveries have seen a glut of products arrive out of peak buying season and at the same time as shoppers are cutting back on discretionary spend. Overstock is now a common problem, forcing brands to slash prices which can have longer-term brand perception ramifications.

Signs of the times 

• US shoppers are cutting back on discretionary spending such as clothing, homeware and appliances as inflation hits their wallets.
• The profit warning from Walmart indicates difficult times to come for US retail more broadly, despite investments in e-commerce and new store designs over the last few years.
• More of Walmart’s sales are coming from its less profitable grocery arm, and fewer from higher margin products such as electronics, which thrived during the pandemic with shoppers looking for entertainment at home. 
• Target, one of Walmart’s main competitors, was also forced to issue “rapid revisions to sales forecasts, promotional plans and cost expectations by category” as the economic situation worsens.
• E-commerce players aren’t exempt from retail pain: Shopify, an e-commerce engine for direct to consumer businesses, laid off about 1,000 employees as the company’s CEO admitted Shopify’s bet on behavior changes as the result of the pandemic didn’t “pay off”.

Source: New York Times, Reuters, Bloomberg