In trying to beat Amazon, Wal-Mart learns to emulate it

In the cutthroat race for consumer dollars, Wal-Mart Stores Inc. has pulled ahead.
Shares in the world’s largest retailer rose 2% on Thursday after it reported an eye-popping 63% year-over-year increase in the latest quarter in US online sales, along with its eleventh straight quarter of year-over-year sales growth at established stores.
It’s been a decades-long journey, but it seems Walmart is finally getting serious about e-commerce. It has also managed to rev up sales growth — at a time when Target Corp. and other competitors seem to be sputtering along — by focusing on two key factors: low prices and food.
And for good reason. Really, the only advantage Walmart still has over Amazon.com Inc. is food. It makes up more than half of Walmart’s U.S. sales; and now that the company is making online grocery ordering and in-store pick-up more widely available, food has also been driving Walmart’s
e-commerce sales.
But the smartest thing Walmart has done lately is aggressively slash prices, reminding consumers why they shopped at the chain in the first place. Walmart began cutting prices last year in a bid to fend off the U.S. invasion of German discounters Aldi and Lidl. Walmart’s U.K. chain Asda got hammered by these companies across the pond, and Walmart has vowed to not let that happen again.
The price cuts — which have Walmart selling some basic goods such as bananas and milk at cost — have also put serious pressure on competitors, including Target, dollar stores, and regional grocery chains. In some cases, an average basket of groceries can be as much as 20 percent cheaper at Walmart than at competing stores, according to Wolfe Research.
Now other chains are fighting back with their own discounts, fueling a price war across the sector and contributing to the longest deflationary period for groceries in half a century.
The year-over-year change in prices for the US Bureau of Labor Statistics’ “food at home” category has been negative for 17 months in a row, the longest continuous stretch of deflation since 1956.
Lower prices get customers in the door, and they have boosted Walmart’s US traffic. But the price declines have a negative impact on total sales and profits, pushing average customer ticket this quarter down by 0.1% from a year ago and further straining margins.
Despite all this, Walmart’s shares are up 25 percent in the past year. Unlike its food, Walmart’s stock is no longer cheap, trading at 17.1 times forward earnings. That’s well beyond the valuations of Target, The Kroger Co. and Dollar General Corp. And this has happened even as Walmart has stopped delivering the stellar earnings growth its investors once enjoyed.
It’s absolutely necessary for a company looking to reinvent itself in the age of Amazon to sacrifice short-term earnings gains for market share (that’s pretty much what Amazon has been doing since inception). I’ve been arguing for Walmart to follow suit for years.
But Walmart should keep in mind this retail race is not a sprint; it’s a marathon.
Recent sales gains have bought Walmart time — and leeway from investors. They don’t seem bothered that Walmart’s operating income has declined for 14 straight quarters. Nor do they seem concerned that its return on invested capital has fallen from the year before in five of the past seven quarters. They have shrugged at how, in the latest quarter, the amount Walmart spent on dividends and share repurchases dropped by 1.5% and 20.1% from a year ago, respectively.
Walmart will have to keep outgrowing rivals in the face of an intensifying price war, growing competition from German discounters and Amazon’s foray into fresh food. Otherwise, it won’t be able to justify its hefty investments and paltry profits to investors for long.
— Bloomberg