The challenges flagged by Walmart, and its responses to them, likely give a taste of things to come for the US giant’s counterparts on this side of the pond, writes George MacDonald.

Walmart fascia

Walmart’s update last week revealed that while sales rose in the first quarter, profits were much lower than expected and full-year earnings will slip rather than rise. 

Unnerved investors sent shares into a tailspin. Walmart’s stock took its biggest one-day tumble since 1987 and was soon followed by Target and other consumer companies as Wall Street digested the implications of a downbeat earnings outlook.

Some of the factors putting Walmart’s profits under pressure are already familiar to British retailers – the impacts of inflation on the costs of doing business and on consumers’ spending power.

American shoppers, with the benefits of a government stimulus package behind them, have been counting the cents and focusing spend on essentials. General merchandise stock levels are up – partly because the retailer did not want to run short because of still-disrupted supply chains but also because of slow sales.

As Walmart chief executive Doug McMillon put it: “We knew that we were up against stimulus dollars from last year but the rate of inflation in food pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food.”  

Shoppers respond to tough times

Shoppers have enthusiastically taken to price rollbacks, which have got general merchandise moving more. 

Walmart finance boss Brett Biggs made a good point as he recalled a lesson from early in his career. He said Walmart can play with margin in general merchandise categories, bringing prices down while still generating a worthwhile margin, which improves the overall mix. When times are tough, he noted, shoppers notice and act on lower prices more keenly than ever.

The same can be expected in this country, potentially playing to the strengths of the big grocers such as Tesco and Sainsbury’s that have extensive general merchandise ranges as well as food. They can make the same margin manoeuvres. It is an option not open to some specialists, which will need to be able to tell compelling marketing stories to make a quality or value-for-money case. 

While Walmart’s approach makes sense, there is no getting away from the fact that it has failed to meet profit expectations. 

Its experience shows that catering to customers in the present circumstances is inevitably going to bring some pain. That has already been evident in the UK in the reactions to Tesco’s results in April – record profits last year were overshadowed by muted expectations. The gloomy noises from the US rattled City investors last week, sending the FTSE 100 down.

In the present environment, as during the heights of Covid, those best positioned to navigate the storm will be those with the cash wherewithal – evident again at Tesco, where free cash flow is one of the retailer’s key metrics.

While the pressure being felt by consumers may prompt investors to shun retail stocks, the longer-term winners in the present environment will be those like Walmart that pull the levers they have available — and some costs will certainly be passed on – while never losing sight of their core purpose. 

As McMillon put it: “Price leadership is especially important right now and one-stop shopping becomes more than just convenience when people are paying over $4 (£3.18) a gallon for fuel.”

While customers may have less to spend, now is the time when they must be front of mind constantly – not a time to run the business for the share price.

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