“Dry grocery and consumables has mid-double digit inflation that feels stubborn to us” in a way that fresh food and general merchandise does not, and it is prompting us to look for new solutions, Walmart CEO Doug McMillion said this week at the Morgan Stanley Global Consumer & Retail Conference.
He explained, “With fresh food, the pricing on proteins, dairy, et cetera, is very volatile. It is moving around quite a bit. Chicken right now is up, beef is down, fruit and veg is in pretty good shape from a price perspective with disinflation or moderate inflation. So, we’ll manage that, like we always do. … But dry grocery and consumables where the farmer input costs, supplier wage, their own input costs have driven prices up, that feels to us like it’s going to be here for awhile. And we’re trying to figure out with our suppliers what could we do that’s different that would help mitigate some of those costs?”
Potential solutions include rooting out waste in the system, for example from a transportation perspective and making sure trucks and rail cars are as full as possible, or possibly adjusting packaging so that there are smaller options with lower entry points and larger options that offer price per unit value, brainstormed McMillion, adding another option could be improving forecasting.
The problem with these ideas is that many manufacturers already implemented them earlier in the inflationary cycle when they were trying to keep from raising prices initially and then in second, third and sometimes fourth or fifth waves.
Walmart’s already small appetite for price increases is diminishing
Having done all they can to manage their costs, McMillion said, “unfortunately, some of those suppliers are still pointing us towards more inflation next year on top of the mid-double digits this year, and we don’t like that for any reason.
“We don’t like it for families. We don’t like it as it relates to mix and what that can mean for us. So, we’re pretty incented to try and make that turn happen faster than it might normally.”
And in cases where it can’t convince suppliers to hold their prices with an optimistic eye toward market share gains and long-term growth, McMillion suggested they may lose slots.
“We will allocate space to private brands and tertiary brands to the degree that we need to, to help make this work for families,” and to maintain Walmart’s current price gaps compared to other retailers, with which the retailer is currently happy, McMillion said.
Product mix, new incomes offer little relief for food suppliers
McMillion acknowledged that Walmart does have some wiggle room for taking on higher prices in some categories because of its diverse product mix which allows it to offset tight margins in some categories with higher prices to pad margins in other areas.
In addition, McMillion noted that as Walmart adopts an increasingly omnichannel approach to retailing it is also pulling in additional income from advertising, membership fees and data monetization that can help its balance sheets.
But this doesn’t necessarily transfer to food suppliers as this is a category where Walmart is looking to keep prices down, even if it squeezes category margins, because it is draws in foot traffic – including increasingly from higher income consumers looking to save on their grocery bills.
For example, Walmart recently held down prices for traditional Thanksgiving foods and products to help consumers avoid inflation during the holiday – and by extension drive traffic and increase the chance that shoppers would spend that ‘savings’ in other parts of the store – perhaps for holiday decorations and gifts or winter apparel.
This likely wasn’t a one off hit that suppliers could take and make up for later based on McMillion’s observation that “the team is still looking for more places to be able to do that to help those that need help the most.”
As manufacturers continue to navigate prices, shelf space and inflation-management options with Walmart they can take comfort in McMillion’s confidence that potential consolidation (such as merger between Kroger and Albertsons) in the grocery industry likely will not alter – or further squeeze – Walmart’s margins causing it to place more pressure on suppliers.
When asked if consolidation in the grocery segment might produce a “stronger competitor” that could force Walmart to rethink its pricing strategy, McMillion said, “We have had and will have a strong set of competition. We’re not worried about that.”