Walmart’s primary message to Wall Street and other stakeholders at its 2023 Investment Community Meeting is that they now have the foundation and investments in place to capture more market share, while also allowing margins to expand and driving return on invested capital (ROIC) higher. Additionally, the business seems to be at an inflection point where automation/robotics across the supply chain and ancillary revenue streams (including advertising and data monetization) are scaling. Interestingly, we heard nothing on healthcare services, which pre-pandemic was considered one of Walmart’s priorities for expansion and growth.
- The company referenced its investments in associates, merchandise/price, and omnichannel capabilities. As it relates to associates and wages, to our ears, this implies that management believes that associate engagement, loyalty, opportunity, and pay have reached a sufficiently high level that additional large system-wide step-ups in hourly wages are no longer required to retain associates. If true, that implies that the nation’s labor market tightness (and wage spiral) has peaked and will settle; technology investments in productivity tools are also to play a big part in boosting the sales per labor hour productivity level. On merchandise/price, this implies that management believes that Walmart’s price gaps to grocery competitors have reached a level where they are capturing meaningful market share (which is also demonstrated in their results, as shown in the table below). As it relates to omnichannel, after 25+ years of iteration and pluses & minuses in execution on e-commerce, management believes it now has a winning model and asset set, and its brick & mortar stores are foundational to that model. Management said that “we are now at an inflection point and starting the next chapter of retail.” (Recall that Walmart delivered +17% e-commerce growth for Q4 2022, which was similar to Amazon’s U.S. GMV growth, and well ahead of industry growth at +5%.)
- Walmart CFO John Rainey shared that the omnichannel pick-up/curbside/delivery customer spends $1K more annually at Walmart than the store-only customer and that curbside (200M orders in 2022) has been a key unlock for gaining Walmart+ members. Moreover, the unit economics on its digital orders continues to improve through systems optimization and automation, as is shown in the graphic below. (Just this past week, Walmart announced that 2,000 fulfillment center employees were no longer needed.)
- All of the above is to fuel a faster rate of growth over the next several years than they delivered pre-pandemic. Management aspires to deliver compounded annual growth for Walmart Inc. of +4%, which implies that Walmart U.S. needs to nearly match that rate. From 2011-2019, the compounded comparable-store sales rate for Walmart U.S. was +1.1%, and for 2019, the comp was +3.6%. And so, a higher growth rate on a bigger business is “interesting.” Walmart U.S. 2022 revenue of $420B is $80B more than it was in 2019. ($80B is roughly the size of Albertsons.)
- Growing at a 4% rate in grocery (in an environment where food-at-home is less subject to less inflation, which will likely be the case next year) will require taking a lot of market share. Walmart has about 31% of market share in U.S. grocery, assuming a total market size of $800B. Should the market grow at +2%, and Walmart at least +4%, that would imply less than 1% growth for all competitors. Assuming ongoing gains by hard discount (Grocery Outlet, Trader Joe's, Aldi, etc.), that would leave conventional grocery stores and small format specialty banners, in aggregate, in decline.
- Our analysis suggests that nationally branded packaged food pricing drove the grocery industry’s outsized category dollar value growth from 2019 through mid-2023 (we will have more in-depth commentary on this topic in the weeks to come). Starting this summer and looking out for the next several years, we think that the industry’s dollar value growth will be driven by retailer brands (also known as private label brands or store brands). The grocers that have the best quality, supply chain, capacity, and value for their brands are going to be the ones that win market share. The grocers that stand out in private label prowess are Sam’s Club, Costco, Trader Joe’s, Aldi, Kroger, Publix, Albertsons, H-E-B, and Target.
- What struck us about Walmart U.S. CEO John Furner’s comments was the focus on doing more with and growing the retailer's general merchandise business (and only making general references to the grocery business). Driving growth in general merchandise and maintaining the total sales mix is imperative for Walmart (and Sam's Club, Target, and Costco) because it needs the higher gross margin of the general merchandise categories to grow overall operating margins and payroll leverage; it’s the business’ flywheel. Last year, Walmart’s general merchandise business declined from $126B to $119B. Key strategies for growth going forward include keeping and growing their newly acquired higher-income customers are: (1) cleaner, brighter, clearer stores (remodels); (2) elevated brands; (3) fresher, faster-turning, stylish merchandise sections (the graphic below); (4) more locally relevant merchandise; and (5) strong values, meaning both lower price points and sustainability practices/messaging. And so is Walmart U.S. eyeing Amazon’s and Target’s business and customers with clearer purpose, new and effective capabilities that are in place, and new revenue streams to invest in doing so, absolutely. It’s a new chapter.