Walmart and Target clash with investors over strategy to keep prices low despite inflation

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  • Investors are selling shares of Walmart and Target because discounters have pledged to absorb some of the higher costs rather than passing it on to consumers.
  • Walmart CEO Doug McMillan and Target CEO Brian Cornell both say they are playing the long game to win new customers, deepen loyalty, and maintain sales momentum.
  • “It’s about market share, market share, market share,” said Brian Yarbrough, a retail analyst at Edwards Jones. “And generally when you focus on market share that can come at the expense of profitability.”

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Walmart and Target posted strong third-quarter performances this week, beating Wall Street’s expectations and already this season to begin shopping for the holidays in gifts and celebrations. Yet the investor reaction was swift: a brutal sell-off.

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Target shares were down nearly 5 per cent on Wednesday. Walmart closed down nearly 3% on Tuesday following its earnings report. Shares continued to fall on Wednesday, wiping out all of their year-over-year gains.

Both sides are at odds over the retailer’s strategy of absorbing the rising costs of shipping, labor and materials rather than delivering them to customers with higher prices. Walmart CEO Doug McMillan and Target CEO Brian Cornell have both drawn a clear line. Their strategy: Keep prices low—even if it means hitting profits—for customer loyalty.

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The pushback they’re hearing is this: why not charge shoppers more? Americans have a strong appetite for shopping. They squandered money during the pandemic and holiday forecasts are rosy.

McMillan said Walmart must maintain its reputation for value — or risk scaring off customers who feel sticker shock. He called out the big-box retailer’s founder in an interview with CNBC’s “Squawk on the Street” on Tuesday.

“We save people money and help them live a better life,” he said. “These are the words that came from [Walmart founder] Sam Walton’s mouth. He loved to fight inflation. so do we.”

Cornell said the goal is to play the long game, even if it means ingesting additional costs.

“We are protecting prices,” he said on a call to reporters. “It’s just as important to our guests this year as it has been to safety during the pandemic.”

He and the company’s team of executives defended that strategy, even as they were beset by questions from analysts on Wednesday’s earnings call early on Wednesday.

‘All about market share’

Target and Walmart have seen significant sales gains during the pandemic, as consumers avoided malls, bought more groceries and sought more time at home, from puzzles to loungewear.

Target, in particular, has seen eye-popping numbers that make for a tough comparison. The company’s 2020 sales increased by more than $15 billion – more than its total sales growth over the past 11 years. And its stock is up more than 43%, even with Wednesday’s sale, giving it a market value of more than $123 billion.

Target has repeatedly mentioned gaining its market share when it calls with investors. It raised about $9 billion in market share in the fiscal year ended January 30, based on company and third-party research. It said it garnered another $1 billion in market share in the first three months of this fiscal year.

Now, both retailers are facing new complications. Consumers are grappling with additional expenses, ranging from commuting to office holidays and dining out at restaurants. They are spending through extra cash that they saved during the first part of the pandemic or received from stimulus checks. And they’re seeing the price of groceries, gas and more boom. At the same time, retailers are deciding to spend more on transportation – to rent their own vessels, to make sure shelves are well stocked – and to transport them to warehouses and stores. Had to take wages and sweet profit to do it. and running smoothly.

“It’s hard to let go of that momentum,” Jefferies retail analyst Steph Wisink said after Target and Walmart’s big gains over the past 18 months.

“Price is a lever they have to continue to honor their customers’ promises and aggressively defend their share,” she said.

According to Visink, the unusual environment has given mixed signals about the mindset and potential behavior of consumers.

“In the US, hyperinflation is not something we regularly navigate, so there is no precedent, recent experience, or muscle memory to tap into,” she said. “We can see other markets in the world behind the scenes but the US economy is distinctly consumer-driven.”

With the move to keep prices low, Target and Walmart have indicated that companies fear losing customers and sales if the cost is passed on, she said. Therefore, retailers “are strategically aligning their own margins to ensure they continue to drive consumerism,” Visink explained.

Brian Yarbrough, a retail analyst at Edwards Jones, said it will take time to see if Walmart and Target are making a smart bet or a terrible mistake.

“It’s all about market share, market share, market share,” he said. “And generally when you focus on market share that can come at the expense of profitability.”

Inflation at three-decade high

Inflation hit a three-decade high in October, according to the Labor Department. The consumer price index, which includes a mix of products ranging from gasoline and health care to groceries and rent, rose 6.2% from a year earlier, the highest since December 1990.

Some categories have seen a bigger jump than others. For example, fuel rose 12.3% in October. Used vehicle prices rose 2.5% for the month. And food prices rose 0.9% – with meat, poultry, fish and eggs up 1.7% collectively.

Food is a big category for Walmart and Target. Walmart is the largest grocer in the country by revenue. Lakshya has used its grocery business as a traffic driver.

On Wednesday’s earnings call, Target Cornell called the growth of its food and beverage category “one of the real success stories within our business over the past few years.” He said pantry-stocking trips have prompted customers to toss a variety of other items into their shopping carts and have driven higher online sales as people get a gallon of milk via curbside pickup.

Cornell and McMillan said they are not seeing signs of price-sensitive customers, such as those trading in smaller packs or for cheaper brands.

Katie Thomas, head of the Kearney Consumer Institute, said it’s easy to pass on some of the cost to shoppers. With food, she said, increasing prices is risky.

“Grocery is more complicated because consumers are going to feel it in their daily lives,” she said. “Even in the pandemic, we all felt like prices were already going up because people were buying more and they were taking less frequently” [store] trips. People are very aware of it.”

As with other categories, she said, retailers could get away with a jump in prices. That said, the difficult part is for retailers to figure out where buyers will pay the premium and what might scare them.

“Even in periods of recession or inflation, consumers are going to trade off trade across the board rather than trade off in certain categories,” she said. For example, she said, some people are willing to buy off-brand grocery bags or ketchup — but not willing to buy a lower-quality steak or skip a trip to the hair salon.

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