Walmart is A-OK with the cautious consumer
Walmart is A-OK with the cautious consumer
A bellwether company reports. What can we learn? A lot, it turns out
Walmart offers value and the people go wild, especially higher income people
Walmart says ‘AI is not a bubble’
Grocery delivery keeps growing . . . maybe because everyone is working, no one can shop?
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Random Walk’s ‘draw it in crayon’ model of the economy is that everyone is employed, but no one is really getting richer, and if anyone has structural tailwinds at their backs, it’s still lower-income service workers.
Plus, services in general have gotten worse—rising labor costs force providers to keep costs down in other ways, and so even if the headline price is the same, the experience offers less bang for the buck. That, or the price isn’t the same at all, once the additional fees for formerly included services gets totaled up.
That being the case, what you’d expect to see is exactly what you’ve been seeing: a big downward compression towards value and cheaper stuff.
It’s what Random Walk dubbed (many moons ago) “Hey, Small Spender!”—a consumer economy generally oriented down-market. That means more trade-downs, more cheap tchotchkes on the internet, and more Kirkland ‘private’ brands, while at the same time, less luxury, less premium or exclusive experiences, and less extravagance generally.
It’s not so much that discretionary spending would disappear entirely, but that the mix of discretionary spending would downshift.
Depending on your political priors, you might even celebrate the change as a “broadening of the middle class.” Or you might lament that fast food is the new dining out. Or both. That’s up to you.
Walmart offers value, and the people go wild (even the rich people)
Anyways, a fun way to track the hypothesis (which has been pretty spot on) is to pay close attention to companies that ought to ride that thematic wave.1
Say, for example, Walmart, who did a bang up job in its most recent report, beating estimates for both sales and earnings.
That’s a nice ~7% one-day bump for the Bentonville grocer.
It shouldn’t have been a surprise, however.
Walmart, of course, has sustainably fed, clothed and supplied more low(er) income people than probably any other organization in history. If the game is value, then Walmart is gonna win.
And what did Walmart attribute its success to?
Walmart’s same-store sales comp grew by 4.2% because “value/convenience” resonated, and “upper-income households” are showing up, more and more.
As Walmart’s CFO explained:
Customers continue to be discerning and choiceful, looking for value to maximize their budgets, while leaning into seasonal celebrations. The pace of sales was largely consistent by month during the quarter. Across categories, we're providing low prices and winning customer consideration, including in general merchandise with Walmart U. S. Comp sales growth in hardlines, home and fashion.
We're also seeing higher engagement across income cohorts with upper income households continuing to account for the majority of gains even while we grow sales and share among middle and lower income households. We're seeing private brand penetration continue to increase and we're highly encouraged by customer uptake of our new food brand, BETTER Goods and the early excitement surrounding the relaunch of our young adult fashion brand, No Boundaries.
To recap:
more discerning customers, looking for value
higher engagement across all income cohorts, “with upper income households continuing to account for the majority of the gains”
increased penetration of private (i.e. off label) brands.
It’s just so on the nose, you see why Random Walk would devote a whole post to it.
As an aside, another Random Walk darling of the great squashening was in the news today. The beauty brand Ulta ULTA 0.00%↑ went ripping on the news that Warren Buffett took a $227M stake in the company.
Ulta was trading relatively cheaply at 12x earnings, and is also a likely beneficiary of the Lipstick Effect.2 Make up is a good source of cheap indulgence (just like movies and chocolate).
Walmart says: AI is not a bubble
Anyways, back to the Walmart story, and the nuggets therein.
If you’re keeping score in AI Bubble or Not?, this certainly jumped out as a win for Team Not-Bubble:
“100 times more productive to us Gen AI versus having people work through each product display page.”
Again, not a killer app, or even a revenue generator, but AI is making a time-consuming and onerous process, much less time-consuming and onerous.
GenAI is the calculator to the abacus, in this scenario. That dog will hunt, I would think.
Is a tight labor market a grocery delivery tailwind?
The other interesting tidbits that related to long-running Random Walk areas of interest are (a) advertising revenue grew 30% because grocery is an ad business, as I’ve come to learn;3 and (b) e-commerce continues to grow.
In general, e-commerce continues to gain share, albeit slowly:
e-commerce was ~27% of retail in July, a 90bp yoy increase.
In Walmart’s specific case, the convenience of not-shopping appears to be driving those gains (whereas, elsewhere, Random Walk speculates it’s cheap tchotchkes on the internet). Here’s a crazy idea: perhaps when labor force participation rate is at a maximum, then fewer people have the luxury of going to the grocery store themselves?
In other words, a tight labor market is an unexpected tailwind for grocery delivery. Maybe? Certainly Instacart and Uber did awfully well.
Idk. It’s a stretch, but I do wonder.
Have a good weekend everyone.
Previously, on Random Walk
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Whether one might invest in those companies, is a question of price, risk- and time-preferences, and strategy. Random Walk offers no investment advice, and should not be relied on for anything other than a good time.
I was long Ulta, but I bailed in March before the company (predictably) guided down . . . which maybe gave Ole Warren the entry price he needed. Who knows. I’m out, he’s in, happy hunting.
Also, another reminder of just how stupid the whole “google is a monopoly” shakedown is. A monopoly on what? One particular way of selling ads? Walmart has one of the biggest troves of first person shopping data on earth. They’re gonna do just fine selling ads. If you’re looking to buy ads, you have plenty of places to choose from. It’s all just so stupid and destructive.
I love Walmart! Just to get that bias out of the way, though it takes some of the wind out of my opinion that this is an excellent article.
Walmart is tightly bound by the high level purpose of saving people money so they can live better. That is front and center. Everything flows from that.
I detect a vibe shift with Walmart. Shopping at Walmart had been seen as down-market and a bit icky for those invested in thinking highly of themselves. In these circles it was a faux pas to admit you shopped at Walmart. This crowd would somehow manage to drop the fact that they shopped at places like Whole Foods and Trader Joes. If Walmart was discussed it was to tut-tut about people who shopped there, or to tell a funny self-depricating story about the time you were totally stuck, had no other option, went in for your quick purchase (which, of course, was a success) and were suitably amused/appalled at the deplorables in the store.
This drove me crazy and I got a kick out of rushing to Walmart's defence and pasionately defending them as vastly superior on every dimension that mattered.
These days, the opportunities to defend Walmart don't come up. Dissing them is no longer a thing among the self-superior crowd. That Walmart is seeing its biggest sales gains among high income consumers supports the vibe shift.
Work long hours and can only shop in the late evenings? Walmart is open for you. The other places are not.
Don't want to find out later that the same thing you got is actually much cheaper someplace else? Zero risk of that if you bought it at Walmart.
Two minutes in any Walmart tells you that they do a way better job at diversity and inclusion than any Trader Joe's, Whole Foods or other places that are set up to make you pay more so you can flatter yourself.
If I'm right about the vibe shift, things don't look good for those places.
By the way, Walmart's eCommerce platform that continues to make steady gains - that's Shopify (https://marketplace.walmart.com/solutions-providers/shopify/).
One of the shocking things I learned from dealing with their (and every other big box) pharmacy is that they really are a middle class company. The people who shop there are actually healthier than your average person on Medicare.
Truly downmarket people live in areas that don’t have a Walmart or similar store.