“Choiceful, discerning, thoughtful.” That is how Walmart’s boss, Doug McMillon, described consumers on the American retail giant’s quarterly earnings call on February 21st. That may be so. What they are not, at least in aggregate, is careful, thrifty or frugal. Last year consumer spending increased even as real disposable income declined by more than 6%. The splurge continued in January, as America shopped its way through a warm winter, buoyed by 517,000 new jobs and a sizeable inflation-linked bump in social-security payments. Last month retail sales rose by 3% month on month, and consumer sentiment reached its highest level in more than a year. Those looking for evidence of a “soft landing”, where the economy avoids a recession despite tighter monetary policy, found solace in the American consumer.
On the surface, Walmart’s fourth-quarter results look like exhibit A for the optimists. The company’s comparable sales in America grew by a faster-than-expected 8.3%, compared with a year earlier. Look closer, though, and the earnings are full of warning signs. A big reason for Walmart’s market-share gains in groceries was cash-strapped consumers, including high-income families, trading down from fancier supermarkets. Its higher-margin discretionary offering, which includes toys, clothes and homeware, did less well. That was despite heavy discounting of wares in order to clear inventories overstocked as a result of post-pandemic miscalculation about shoppers’ appetite for things like garden furniture. Most troubling, Walmart forecast sales growth of 2.5-3% for the current fiscal year, below analysts’ expectations.
Other retailers tell a similar story, more poignantly. Home Depot, which also reported its results on February 21st, disclosed its seventh successive year-on-year decline in transaction volumes—and this quarter, for the first time, it was not offset by growth in the average size of transactions. The company’s share price fell by more than 7% on the news. Shoppers’ baskets may get lighter still as jitters hit the housing market: according to Barclays, a bank, the more the asking price for properties fall, the less consumers spend on an average trip to Home Depot.
Following a pandemic-era blow-out, investors expect retailers’ margins to narrow. Although the worst labour shortages have subsided, wages remain high. In the case of Walmart and Home Depot, they are rising. In January Walmart announced pay increases which will raise its average hourly wage to more than $17.50. uBS, a bank, estimates that such moves will cost the company around $1bn a year. Home Depot said that it would spend an extra $1bn on higher hourly wages for workers.
A bigger worry is the potential drop-off in consumer demand. The tailwind from strong household balance-sheets, fortified by pandemic-induced saving and government handouts, will not blow for ever. According to Goldman Sachs, another bank, households have spent a third of their excess savings and will have spent another third by the end of 2023. Firms that, like Home Depot and Walmart, were quick to flaunt their pricing power last year are now more careful about further price rises, lest this put shoppers off shopping. Last week Kraft Heinz, a food conglomerate, said it was mostly done raising prices this year. Even well-heeled consumers, who disproportionately drove retailers’ sales growth in 2022, are feeling the heat, as Walmart’s success with them shows. It is all too easy to imagine Mr McMillon’s discerning shoppers turning into dispirited ones. ■
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February 22, 2023 at 04:23AM
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A warning from Walmart about the health of the American consumer - The Economist
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