By Dave Holloman
February 19, 2010
Wal-Mart, the retail giant that sits atop the industry in terms of size, released earnings for its fiscal fourth quarter on February 18. The main headline was the decrease in same store sales located in the United States. There is a first time for everything, and so it is with same store sales going down for Wal-Mart. Taking a deeper look, findings from its quarterly financials release can be used as a barometer to figure out where the economy is headed and what strategies can be pursued for success in the current economic recovery.
Wal-Mart’s decrease in US sales is a sign of shifting consumer behavior. While price deflation was cited as the cause for the decline, other trends are likely afoot. The company also noted that store traffic in US stores decreased. Yet, total consumer spending in the US increased at an annual rate of 2% during roughly the same period. So consumers are showing up to buy, just not as much at the local Wal-Mart. Just last year, these same Wal-Mart stores were growing sales greater than 2%. In the depth of recession, Wal-Mart benefitted as consumers traded down by walking into Wal-Mart. Many companies experienced significant shifts in demand to lower price-tiered products during this time. Now, with economic recovery appearing to take hold, consumers are moving once again. Some analysts suggested that low-income, financial pressed consumers were at the root of the sales decrease. A more compelling argument stems from consumers on the other end of the income spectrum. So the other trend occurring here is that some, likely higher income, consumers are going back up the price ladder and trading up amidst the recovery. Expect significant shifts in demand going forward as consumers behavior is on the move.
The other end of Wal-Mart’s revenue results were in international markets. With US sales growth down almost 2%, it was growth elsewhere that enabled Wal-Mart to deliver company-wide sales growth of more than 4%. While the company moderated its sales forecast for the US, it simultaneously shined a spotlight on China and Brazil as future growth sources. Does this sound familiar? The current economic cycle has accelerated the shift of the economic center of gravity away from the US and Europe and toward the BRIC countries, especially China and Brazil. This is the other, larger trend visible in Wal-Mart’s results. Companies used to view growth in BRIC markets as optional upside, but are now viewing growth in these markets as central to their strategies.
Despite the revenue challenge in the US, Wal-Mart delivered a 22% profit increase. While battling price deflation and a global slump, these results highlight just how good Wal-Mart is at executing the operations of the business. Company management indicated that lower inventories led to a 21% increase in free cash flow. That’s $2.5 billion dollars of inventory no longer sitting idle in the supply chain. Of course, this is not the first time we have heard about Wal-Mart’s ability to tighten its supply chain (see a review of Wal-Mart’s Q12006 release). The company has the ability to continue improving its supply chain, time after time, quarter after quarter. The larger message here is that the competitive race in grocery retail will intensify with a heightened focus on supply chain. Five years ago, coming out of the last global recession, the retail competition was about format, with a landscape split at the extremes between luxury and discount. “Mass and Class” as it was sometimes called. What no one could have predicted was the reemergence of the grocery chain. The center channel revitalized itself and came back after being written off as obsolete. No similar demonstrative change appears today on the horizon. So now, the industry competitive race will be defined by companies that make their assets as lean as possible. Supply chain is moving to the forefront.
After settling into recession, consumer behavior is on the move again. Brazil and China are becoming the economic center of gravity. Supply chain is moving to the forefront of retail. In all these things, Wal-Mart is a barometer for the future.
