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The Walmart flywheel continues to grow.
The world’s largest retailer reported growth across its digital business on Nov. 15 in earnings for the third quarter of fiscal year 2023. Executives also detailed how those pieces fit together, and fed into the company's strategy to provide value at a time when cusotmers are looking to save money amid high inflation.
Key digital metrics from Walmart's earnings were as follows:
- Company-wide, 13% of sales for the year to date started on a digital channel.
- Walmart US ecommerce grew 16% year-over-year. That outpaces overall net sales growth of 8.5%.
- Walmart’s ecommerce marketplace, which includes third-party sellers, added 8,000 sellers in the third quarter. It now has 370 million SKUs. That number increased 50% in Q2.
- Walmart Connect, the retailer’s US advertising business, grew 40% year-over-year. The quarter saw the highest spend all year in sponsored search ads.
- Walmart+ memberships and the data business Walmart Luminate “continue to grow,” the company said, but did not offer specifics.
- International ecommerce sales were 23% of total sales, up 400 basis points year-over-, primarily due to Flipkart.
- Walmart China ecommerce sales grew 63%, and penetration reached 41% of sales.
- Sam’s Club ecommerce sales were up 20% year-over-year, with contributions from curbside pickup and ship-to-home.
'A different multiple'
Walmart CEO Doug McMillon described how the different pieces of the digital business all fit together to form the company’s flywheel.
“We're scaling our newer businesses and connecting them to our larger, established retail businesses, primarily by how we design digital interactions,” McMillon told analysts, according to a Seeking Alpha transcript. “One example is how our growth in ecommerce, especially the marketplace, fuels our ad business. More items and sellers drive GMV and improved customer satisfaction. And it also drives success in advertising. They're mutually reinforcing.”
The same architecture applies to the “atoms” side of ecommerce that moves an item to a customer’s door after a sale. Growing the marketplace in turn provides more opportunities to provide third-party sellers with fulfillment services from its advancing logistics network and last-mile delivery through its Spark driver platform and GoLocal delivery-as-a-service program.
As virtuous as it is, the concept of the flywheel is straight out of the Amazon playbook. However, it's important to note that Walmart believes its unique advantage lies in building across its massive footprint of physical stores and ecommerce. Executives were careful to talk about how the digital channels were part of an “omnichannel” business that could serve customers however and wherever they wanted to shop, as opposed to an all-digital business. It's also clear that grocery will continue to be a major driver of Walmart's business. The company is gaining share in the category, and it is proving to help lift Walmart overall as spending ticks down on other types of merchandise.
Nevertheless, it’s clear that executives see digital as the channel where the company can realize new scale. As CFO John David Rainey put it, not only are businesses like advertising, data services and fulfillment faster-growing , but they also bring higher margins.
“Hopefully, we look up a number of years from now and we've got a much more diverse and durable earnings stream that also there's a different multiple ascribed to those earning streams than what exists today. We're quite excited about the opportunity in front of us,” said Rainey, who joined the company this year from PayPal.
Inventory and inflation
As the country’s largest grocer and a retailer where many people turn for low prices on large, stock-up trips, Walmart is seeing the effects of inflation up-close. Fuel prices remain high, and the company describes food inflation as “mid-teens.” This is leading consumers to make “frequent trade-offs” and prioritize everyday essentials, said Rainey. This means consumers are trading down in categories like meat and poultry, baking goods, baby and dog food. Some customers are opting for private-label in larger numbers over the name brands.
In this environment, the company is seeing gains on multiple levels. Walmart has something for high-income consumers. More customers who make $100,000 or more are shopping for groceries at Walmart, with three quarters of share gain in the category coming from this demographic. Meanwhile, the penetration of the company’s private-label brands increased 130 basis points, showing that it also has options for people who want to take prices even lower. That speaks not just to how it can respond in the moment, but how it is built.
On the topic of the other great issue facing retail in 2022, Walmart has also improved its inventory position. It was among retailers facing a glut of inventory as a result of supply chain and forecasting issues that resulted in a pileup of goods moving from being stuck in transit to the backrooms of stores. For the quarter, inventory was up 13% for the quarter, and 12.4% for Walmart US. That’s down from around 26% last quarter. Inflation, rather than units, is driving about 70% of the increase, the company said.
In-stock levels remain “heavy” in American stores, said Walmart US President John Furner, but McMillon added that the merchandise causing the glut “is getting down to the point where we probably won't be talking about that going forward.”
The priority on providing value amid inflation and the convenience of the digital business are tied together for Walmart.
With more high-income consumers coming to Walmart during tough economic times, the company wants to drive loyalty that could remain even when prices come down.
Walmart has tuned its shopping experience to this. Many of those new high-income customers are turning to Walmart for groceries, and they are also more likely to shop online. With updates on its app over the last year, Walmart has put general merchandise and food items all together. Coming to Walmart for one category may lead a shopper to leave with an item in another. So offering quality fresh food, apparel and home goods during this time can help Walmart “stand tall,” McMillon said, but the shopping experience at Walmart can play just as big of a role in the equation as the goods.
“We're focusing on earning repeat business from customers who are now shopping with us more frequently than before,” McMillon said. “For example, a strong presentation throughout fresh and apparel are priorities, along with executing pickup and delivery to create a delightful experience that saves them time. And in the case of Walmart US, it also means selling more Walmart+ memberships. As more people look to us for value, we want them to see that the experience of shopping with us is also compelling due to the new capabilities we develop.”
A late holiday surge?
Given its massive size and proximity to a large breadth of consumers, Walmart is well-positioned to see what’s coming next. For the crucial holiday quarter, the expectations lag behind the most recent results.
It expects net sales growth to slow to 3% over last year, which would be down markedly from 8.5% growth of this quarter. LIke Amazon before it, the company is taking a conservative approach to the holidays given the darkening economic picture.
“Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, given persistent inflationary pressures in food and consumables,” Rainey said.
While a lot of the focus at Walmart and other retailers this fall has been on early holiday sales, McMillon said that price-sensitivity among consumers could lead to a surge right at the end of the holidays as people stretch dollars, as well.
“This will be one of those years where we're watching sales closely up until the last minute of Christmas Eve, and then we'll do a lot of business after Christmas,” he said.
Looking ahead past the quarter, Rainey indicated that the company is planning for inflation to remain “somewhat elevated.” The consumer is “stressed,” he said, and stimulus payment-boosted savings will recede the longer that prices remain high. In particular, inflation in dry groceries and consumables is expected to remain high.
"That's the area where we need to partner even more with our suppliers and come up with more creative solutions and try to do the best we can of relieving that pressure for customers and members," McMillon said.
At Walmart, that means a mix shift where groceries gain share while general merchandise lags will remain. But it’s also a time when the company believes its "value proposition really shines." That’s not just true in its ability to offer low prices, but in the growing assortment it is offering on its ecommerce marketplace.
“It shows you that not only are we providing products at the price point that customers want, we're providing additional products and assortment for them to buy,” Rainey said.
Trending in Retail Channels
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.