Walmart is getting back on its feet

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IN THEORY THIS should be a good time to be Walmart, the oldest American retailer in the era of 1970s stagflation. Inflation is back, but no one knows better than the Bentonville Beast how to use the power of rumble. to convince suppliers to lower prices. Supply chains are collapsing, but Walmart’s weight is such that it chartered ships and bypassed rail services to deliver Halloween and Christmas products earlier this year. Workers are scarce, but he managed to add 200,000 jobs to his global payroll of 2.3 million in the three months to September. “There’s a level of excitement in the air, you can feel it,” said Doug McMillon, its managing director, enthusiastically as Walmart raised its year-end sales and profit targets after strong third quarter results on November 16.

There is a conundrum, however. Investors don’t buy it. Over the past year, Walmart’s stock price has fallen behind not only Amazon, the e-commerce giant, but also other US big box retailers, such as Target and Home Depot. On November 16, its shares fell another 3% as investors worried about what Morgan Stanley’s Simeon Gutman described as slightly “sticky” profit margins. Is the stock market, so enamored of all new things, missing the story of the decade’s turnaround? Or is there something else to worry about, namely Amazon’s hot breath on Walmart’s neck?

There are few more engaging advocates in turnaround history than Felix Oberholzer-Gee of Harvard Business School, who co-hosts a weekly podcast with two of his fellow professors titled “After Hours” – a dose of bonhomie à la “Seinfeld” for business enthusiasts. The trio, who exchange in-depth business talks with topics ranging from Scandinavian crime drama to cocktail making, may not be regulars on the aisles of Walmart. But they are cheerleaders. “Walmart is on fire,” Mr. Oberholzer-Gee exclaimed in a recent episode. He admits that investors haven’t gotten the hang of it yet. But maybe that’s just because their mindsets are hardened against traditional retailers, he argues.

The story of the turnaround has two parts. The customer is first. Since the shutdowns ended, shoppers have returned to Walmart stores, but not yet in sufficient numbers to prove that its nearly 800 square feet of US retail space – more than the size of Manhattan – is worth it. to be cherished. The company claims it does. He says having stores within ten miles of 90% of Americans is essential for an “omnichannel” strategy that encourages shoppers to buy in-store, online, or a combination of the two.

But with consistently lower footfall, her challenge is to attract online shoppers without cannibalizing those who visit the stores. It meets with some success. Polls suggest its new Walmart + subscription service, a lower-cost rival to Amazon Prime, is attracting young, urban, and affluent online shoppers who might not be seen dead in a Walmart store (a partnership with the map platinum from American Express reinforces the impression of upward mobility). According to Mr. Oberholzer-Gee, Walmart.com has also started to display “forward-thinking” brands such as Ray-Ban which generally avoid physical Walmart stores, which is more attractive to this cohort. Additionally, Walmart is rolling out Uber Eats-style home delivery to 900 cities through its Spark network of gig-economy drivers. It’s an intriguing bet. Walmart, the emblem of the suburbs, is temporarily settling in the metropolitan heart of Amazon.

The second part of the story is profit. Unlike Amazon, whose e-commerce business doesn’t contribute much to profits, Walmart has to justify the returns on everything it does. This prompts him to think sideways, as online profit margins are meager. As a result, it seeks to cover the cost of its e-commerce distribution network by attracting third-party merchants, rather than just selling Walmart products. He’s building a fast-growing advertising business called Connect, which Mr. Gutman says could generate $ 2 billion in operating profits, or 8% of last year’s total, by 2025. services ranging from paying bills to cryptocurrencies. All of these could strengthen the bottom line without hurting physical store sales.

The twist of the story, however, says Marc Wulfraat of MWPVL, a logistics consulting company, is Amazon. While Walmart may be encroaching on its urban territory, Amazon is on the counterattack through the suburban hinterland. Its weapons are the distribution centers, the vast warehouses from which retailers ship goods across the country. In 2018, says Wulfraat, the size of Amazon’s distribution network in America exceeded that of Walmart. Since then, Amazon has sought to double it again, building what Mr. Wulfraat estimates to be an additional 140 square meters of fulfillment centers, as much as Walmart has built in America in its 59-year history.

It is a formidable operation. Mr Wulfraat says that every week Amazon is building what some retailers are building in a decade. “It’s almost like a war effort,” says Ken Murphy, abrdn, an asset manager who invests in Amazon. He believes the logistics blitzkrieg is part of Amazon’s efforts to cut delivery times so drastically that people will have little incentive to visit stores. This makes Walmart, with its vast network of stores in America, vulnerable.

Banana armies

Defeat is not inevitable. More than half of Walmart’s domestic sales are groceries, which people are still hesitant to buy online. This gives him some protection against the Amazonlaught. So far, Amazon’s ownership of Whole Foods, an upscale grocery chain it bought in 2017, and its Fresh supermarket formats, have been tentative attempts to take on its Bentonville rival.

But if Amazon masters the art of cashier-less shopping, as it tries to do, it could change buying groceries like it has everything from selling books to cloud computing. So far, Walmart can boast of keeping Amazon at bay while reinventing itself for an omnichannel world. And yet the grocery wars barely started. And the size of Amazon’s arsenal is increasing.

This article appeared in the Business section of the print edition under the headline “Walmart Gets Its Bite”

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