“Csentimental, criticalDoug McMillon, Wal-Mart’s boss, described the American consumer as “thoughtful” when he presented the retail giant’s quarterly results on Feb. 21. Maybe so. They are not, at least in general, frugal. Consumer spending soared last year even as real disposable income fell by more than 6%. The U.S. spent January on a profligate way through a mild winter, buoyed by 517,000 new jobs and a surge in inflation-linked Social Security checks. Retail sales rose 3% month-on-month and consumer confidence reached its highest level in more than a year. Those looking for evidence of a “soft landing” found solace in U.S. consumers that the economy avoided recession despite tighter monetary policy.
On the surface, Walmart looks like Exhibit A for optimists. Its U.S. comparable sales rose 8.3% year-over-year. On closer inspection, though, the results are rife with warning signs. A big reason for its increased share of the grocery market is that cash-strapped consumers, including higher-income consumers, buy from premium supermarkets. Its higher-margin discretionary segment — toys, apparel, home goods, and more — underperformed, even as pent-up inventory was heavily discounted due to post-pandemic miscalculations of demand for certain items. Worst of all, Walmart forecast sales growth of 2.5-3% for the current fiscal year, below analysts’ expectations.
Other retailers told similar stories, but more pointedly. On the same day, Home Depot reported its seventh straight year of year-over-year declines in transaction volume — the first time last quarter that this was not offset by an increase in average transaction size. Shares of the home improvement company fell more than 7% on the day. As the housing market wobbles, shoppers’ baskets are likely to get lighter: The more property asking prices fall, the less consumers spend on average at Home Depot, according to bank Barclays.
There’s always the possibility that retailers’ profit margins will shrink after a blowout in the covid era. While the worst labor shortages have receded, wages remain high. In January, Walmart announced a raise, raising its average hourly wage to more than $17.50 an hour. UBSSuch moves would cost the company about $1 billion a year, one bank estimated. Home Depot said it would spend an additional $1 billion to boost hourly wages for workers.
A bigger concern is a potential drop in demand. The tailwind from strong household balance sheets, supported by COVID-19-induced savings and government handouts, won’t blow forever. Households have already spent a third of their excess savings and will spend another third by the end of 2023, according to another bank, Goldman Sachs. Companies like Home Depot and Walmart, which flaunted their pricing power last year, are now more careful not to scare off shoppers with pricier items. Last week, food giant Kraft Heinz said it was essentially done raising prices this year. As Walmart’s success with them shows, even the wealthy buyers who are driving the retailer’s sales growth in 2022 are feeling the pinch. It’s easy to imagine Mr Macmillan’s fussy shoppers turning into frustrated shoppers. ■
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