Walmart has a cart full of reasons to love inflation

Walmart Inc is defying fears that rising prices will derail the consumer recovery.
The world’s biggest retailer announced better-than-expected quarterly profit and delivered an upbeat outlook for US same-store sales this fiscal year. The shares rose as much as 3% in pre-market trading.
It’s good news, but it really shouldn’t be a surprise. Although other retailers may be fretting, Walmart has a cart full of reasons to love inflation.
For a start, Walmart, along with all other supermarkets, can benefit from higher prices that elevate the value of sales. If they can keep the amount of goods they sell roughly stable, that means that their same-store sales — a closely watched measure of performance — automatically rise. While Walmart’s historic strength is low prices, inflation likely helped to lift US same store sales excluding fuel by 5.6% in the three months to January 31.
US grocery same-store sales rose by a percentage in the high single-digits in the final quarter.
As the biggest US food retailer, Walmart has the most clout with suppliers. This helped it keep key items in stock during the supply-chain crisis. Now its scale should help it to get the best deals too, so that it won’t have to lift its prices as much as rivals. The company has already been talking to suppliers about swimming against the inflationary tide, in order to keep prices low and win market share. It said it had identified product areas where it could implement reductions and was paying close attention to the cheapest ranges.
What’s more, when American budgets are squeezed, people trade down — from big name brands to retailers’ private labels, and from pricier supermarkets to budget chains. Walmart’s supercenters and its Sam’s Club warehouse stores should benefit from both shifts, given their competitive prices and the fact that the brand has long been associated with value.
Of course, the next six months or so won’t be all that easy. Consumers are feeling the strain from both the end of stimulus checks and the rise of inflation — not just in food but in many areas of their lives. There is a risk they will defect to dollar stores and to the US arms of the German discounters Aldi and Lidl, both of which are expanding across the country.
Some customers moved away from the value chains during Covid, but they are now returning. Walmart must ensure its prices don’t drift too far above those of the discounters.
Additional challenges may come from supply-chain bottlenecks, which may linger through the first-half of this year, as well as Walmart’s own rising costs, including those tied to wages. These could still put pressure on earnings. Yet it’s worth noting that the gross margin rose slightly in the three months to January 31, 2022.
The company is also
continuing to invest in e-commerce, including its Walmart+ subscription plan, as well as in digital advertising, financial services and healthcare. This means capital expenditure will be at the upper end of its range of 2.5%-3% of net sales this year.
The US retailer’s obsession with defending itself against the march of Amazon has long made it vulnerable to the German discounters. As long as it recognises that these adversaries are as dangerous as the internet giant, it should be able to thrive under the most challenging grocery conditions in a decade.
—Bloomberg

Andrea Felsted is a Bloomberg Opinion columnist covering the
consumer and retail industries. She previously worked at the Financial Times