Walmart leverages operations to offset margin pressure from keeping prices low as inflation rises

By Elizabeth Crawford

- Last updated on GMT

Source: Getty/FG Trade
Source: Getty/FG Trade

Related tags Walmart

If Walmart’s decision to gain market share by holding down prices despite rising costs due to inflation set off any alarm bells for investors, the retailer’s strategic investments in operational improvements could help sooth any fears about margin pressures.

At the Stephens Investment Conference yesterday, Walmart CFO Brett Biggs told investment analysts that he feels “really good”​ about the retailer’s investments in fulfillment, automation and technology because they are driving efficiencies.

Leveraging these operational advantages allows the retailer to simultaneously play offense and defense by winning consumers over with lower prices at a time when money doesn’t stretch as far, and offsetting – rather than simply absorbing – higher costs due to inflation.

“The investments we are making – and that’s going to be, you know, in fulfillment, it’s going to be in automation, it’s going to be in technology – I feel really good about the returns on those. And we wouldn’t be investing if we didn’t think our returns could go up,”​ Biggs said.

Among the investments that Biggs called out as impactful are those in technology that provide back-of-the-store solutions. For example, standardization efforts at distribution centers, such as stacking pallets to optimize flow when they are unstacked in the back of the store.

Likewise, he said, “we’re at the leading edge of what’s going on in supply chain – from whether it is palletizing, whether it is moving goods in the back or otherwise making it easier to deliver – all those things.”

He added that these investments are contributing to Walmart’s longer-term algorithm, allowing the retailer to grow operating income faster than sales over mid- to long-term and in a way that will allow the company to spend more money on capex.

Walmart announced during its third quarter earnings call that it backed off capex spending slightly – dropping its forecast from $14b this year to $13b.

Biggs characterized this as “not a dramatic difference,”​ and emphasized that even though Walmart is not investing as heavily in new facilities, it is building fulfillment capacity – a move that should help it sustain longer term the market share gains it is seizing during the current inflationary cycle.

During the company’s third quarter call, leadership explained that unlike competing retailers that are passing inflation through to consumers via higher prices, Walmart prefers to hold its prices steady – making it more appealing to shoppers who are increasingly price-sensitive.

“We’ve been an inflation fighter all the way back to Sam Walton. And I think there are times, like this, when you can show the difference that you can make for customers. Customers are very aware of prices right now – whether it’s at the pump or in store – and we know they’re aware of that,”​ Biggs said.

He added that by keeping prices down, Walmart’s price gaps today are wider than they were coming into the pandemic, making it more competitive. This also affords the retailer wiggle room to be 'thoughtful' about pricing going forward. 

Walmart keeps food at the center as it diversifies

Walmart also hopes to maintain market share gains during this period by further diversifying the services it offers consumers – such as enhanced health care and financial planning and management services.

Biggs acknowledged that some of these extensions are difficult and require Walmart to tap experts in the space to succeed. But, he added, they are “worth it”​ because they allow the company to be more engaged with consumers’ lives – building loyalty among existing consumers and additional entry points for consumers who are new to Walmart.

Even as the retailer expands its reach in new areas, Biggs emphasized that Walmart’s move into food years ago remains it’s “greatest strategic decision ever.”​ He explained the food business is “phenomenal,”​ and helped transform Walmart to be more relevant and enhanced its ability to thrive in the future.

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