Signs of pressure on two of the world’s leading retailers, US-based giants Amazon and Walmart, will send a shiver down the spines of businesses in the UK, writes George MacDonald

The US often sets the tone for what happens on this side of the pond and this time it probably means perspiration – cold sweat, in fact – rather than inspiration. 

Walmart, which had already signalled tougher times in May, this week shocked the markets when it slashed full-year profit expectations by between 11% and 13% in an unscheduled update overnight.

The Bentonville giant said fuel and food price inflation “is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel”. Further discounting is expected.

Amazon, meanwhile, increased the cost to customers of subscribing to its Prime service – in the UK, it will be 20% more. The price rise was the first in almost 10 years, so was an event so rare it must have been the only option in response to “increased inflation and operating costs”. 

When Amazon and Walmart sneeze, the fear is that the whole retail industry will come down with a bad case of the cold.

Essential vs non-essential

So, what is the read-across to the UK? While grocers have, like Walmart, attempted to keep a lid on food price inflation of almost 10%, it is close to the highest level since 2008.

The big British grocers have, like Walmart, established clothing and general merchandise lines, and there are some signs of pressure.

At Sainsbury’s, for instance, general merchandise sales fell 11.2% in the first quarter – 6.2% down on a three-year basis. Clothing was down 10.1% in the quarter, although up 3.9% compared to 2019/20.

Sainsbury’s reported those numbers at the start of this month. The grocer maintained its profit expectations, so it is not in the same position as Walmart.

In a value-driven market, grocers with strong fashion propositions, such as Tesco and Sainsbury’s, may well take less of a hit in the category than Walmart because of their style credentials – although the JS numbers show nothing can be taken for granted.

“Amazon’s unsurpassed convenience and reliability will protect it… it will be interesting to see whether subscription specialists in categories such as beauty and recipe boxes prove as resilient”

However, weaker players in discretionary categories such as apparel are likely to find themselves in a similar position to Walmart, faced with the prospect of having to mark down more aggressively than hoped. The wider pressure was evident perhaps in the fact that Asos has reportedly postponed some autumn orders.

Amazon’s Prime price rise will probably be borne – however grudgingly – by customers. In absolute terms, a shift in the monthly UK price from £7.99 to £8.99 will not break many people’s banks. 

While Prime includes services such as movies and TV series, it is different from services such as Netflix – where customers have been cancelling subscriptions – because Prime has features such as rapid delivery of food and general merchandise. 

Amazon’s unsurpassed convenience and reliability will protect it. But retailers without the efficiency prowess or scale of Amazon, and the span of essential as well as discretionary products, will have less wriggle room on fees. It will be interesting to see whether subscription specialists in categories such as beauty and recipe boxes prove as resilient as Amazon is likely to be.

Retail on top form

Consumers are not in a happy place at the moment. Confidence is at a record low, worse even than during the 2008/09 financial crash. October will bring more punishing household energy price rises, eroding spending power in the run-up to Christmas.

This year’s golden quarter could be more of a nail-biter than ever for many retailers. Amid such uncertainty, reading the room on consumers’ willingness and ability to spend is harder than before. Will they buy early in order to budget? Will they buy late, perhaps prompting big pre-Christmas Sales? Might they actually splash out, desperate for some relief and to celebrate after a year of anxiety and conflict? 

Whatever happens, retailers will need to be on top form of whatever they are most famous for and agile enough to pivot trading strategies as necessary as the coming months unfold.

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