Being essential during a pandemic can change your world overnight. That’s what happened to Walmart when this once-in-a-lifetime event forced it to meet new consumer needs and shopping behaviors, which accelerated its nascent innovation plans. And now, years later, Walmart is solidifying its perception among American consumers in all economic groups as fashion and tech-savvy. Having deep pockets certainly helps Walmart AI-driven retail drive a new consumer and investor perception of its neck-and-neck role with Amazon as a retail and logistics behemoth.
Inflationary pricing pressures and increased pricing transparency are the backdrop for the growing success of Walmart as a fashion destination. The last few years of rapid price increases across most consumer products have created a more skeptical consumer seeking value, not merely brand names.
New Persona
In January 2024, anyone who has been watching Walmart for some time saw a new Walmart persona emerge. We witnessed a seemingly newfound confidence in its role as the world’s leading retailer, spreading its story at CES, NRF, ICR, and ISI Evercore. With topics spanning AI, heart and minds, CX, automated baskets, the Walmart app and more, Walmart took on new cultural relevancy.
Beyond online and in-store retail, Walmart’s retail ecosystem spans marketplaces, advertising, and artificial intelligence, with each facet driving incremental revenue, profitability, and customer satisfaction. Its flywheel results in a business model that supports profit growth exceeding revenue growth.
Truth be told, this has been years in the making and is a confluence of multiple efforts across its self-proclaimed people-led, tech-powered omnichannel operations dedicated to serving customers. We see it in Walmart’s Fashion Group led by Denise Incandela, where private label offerings took center stage during NYFW with editorial callouts at Business of Fashion and Rolling Stone. The recent Style Tour visiting 40 cities introduces the refreshed Walmart fashion and style perspective to new customers and repositions the retail brand.
We also see it in its sustainability commitments where, in tandem with HSBC, Walmart is working to reduce financing costs with those vendors that are compliant with Walmart’s sustainability targets. It also plucked top retail equity analyst Stef Wissink to run Investor Relations in the fall of 2022, which has resulted in streamlined communications of this increasingly complex organization with its Store of the Future strategy and acceleration of strategic investments in the marketplace, retail media with Walmart Connect and artificial intelligence.
Walmart at the Top
Back in January as retailers assessed the 2024 landscape of inflationary pressures, relatively high interest rates, a constrained consumer and a softening economy, Walmart announced wage increases in the same week that another leading retailer, Macy’s announced layoffs (~3.5% of its workforce) and store closures. Soon after, Walmart announced plans to split its common shares 3 for 1 to increase the opportunity for Walmart workers to buy shares—and have ownership and participate in Walmart’s success. Year-to-date, through September 6, WMT shares rose 44 percent, beating the S&P 500’s 13 percent handily and one of the best-performing retailers this year.
Walmart is at the head of the retail pack this year. The department store sector continues to consolidate (the HBC/Saks Fifth Avenue offer to purchase Neiman Marcus), contract (Macy’s) and privatize (Nordstrom). Plus, retail in general, is dealing with a choice-driven, discriminating customer seeking value (in its multiple nuances, from private label and enduring fashion to pricing). Even dollar stores are hitting speed bumps (Big Lots’ bankruptcy and Dollar Tree is shuttering ~1000 doors), but Walmart is capturing share, growing sales and expanding margins.
Sales and operating income for the most recent six-month period ended July 31st rose 5 percent and 9 percent respectively; 2nd quarter ecommerce sales rose 21 percent, and comps were up 4.2 percent on top of a 6.4 percent year ago comp. Ecommerce sales rose 21 percent. Management lifted FY 2025 guidance during an earnings period when most consumer discretionary companies saw profits drop. According to FactSet, excluding Amazon’s outsize earnings gain, the consumer discretionary sector year-over-year earnings comparison was a 2.6 percent decline.
Upper-income customers have now joined the masses to shop where America shops and have pleasantly discovered Walmart. And they have stayed. This influx of new, wealthier shoppers prompted Walmart to expand its offerings. Following Amazon’s playbook, Walmart began offering merchandise from other retailers and brands via its marketplace, with the benefit of the sheer number of visitors to its site. Walmart US Marketplace sales grew 32 percent in the most recent quarter (ended July 31). And Walmart expanded offerings at entry price points, with its Dollar Shop (part of its Store of the Future program).
Appealing to Today’s Consumer—Choice-Driven and Discriminating
Walmart is gaining share of both the higher income consumer and the lower income cohort reflecting lower prices, rollbacks and growth of private label (increased 60 basis points penetration in Q2 in grocery), expanded merchandise assortment as well as investments in services and technology that make shopping easier. Beyond the staples Walmart is known for, they are expanding the range of options to address a wider audience.
“Around the world, our customers and members continue to want four things: They want value, they want a broad assortment of items and services, they want a convenient and enjoyable experience buying them, and they want to do business with a company they trust,” stated CEO Doug McMillon August 15, 2024, Q2 conference call.
A New Look
Walmart says it is investing more than $9 billion over two years to upgrade and modernize more than 1,400 U.S. stores allowing for easier discovery and movement around the store with vignettes in numerous departments that project a more upscale, immersive and inspirational shopping experience. They are investing in people too, increasing in-store services with associates to assist shoppers more easily find products. Omnichannel fulfillment options such as free easy Grocery Pickup, Scan & Go payment for Walmart+ members, and for a high-touch delivery experience, Walmart InHome in a few select markets puts your groceries in your refrigerator.
Suresh Kumar, Global CTO, Chief Development Officer & Executive VP summed up the new Walmart at CES in January saying, “This is adaptive retail, meaning that every engagement is interconnected. It’s frictionless, and it exceeds expectations. We are agile. We are predictive. We are responsive. We are not thinking separately about ecommerce or in-store. We are designing one adaptive, seamless experience for the customer.”
Margin Accretive Initiatives
Walmart is expanding its Walmart+ membership growth, Walmart Connect advertising, and Walmart Marketplace & Fulfillment services. Walmart has taken a page from the Amazon playbook, leveraging the power of their online and offline shoppers to drive incremental revenue with a Prime-like membership with Walmart+. Walmart uses its online presence in 19 countries and 10,000 global physical locations to advertise brands and products/services to its shopper base of ~240 million customers weekly, reaping the benefits of being truly omni-retail and omnipresent.
In the U.S., Amazon is by far the leading retailer in digital advertising, accounting for an estimated 77 percent of the $54.85 billion U.S. retail media market, but it is losing share while Walmart is growing, albeit from a small base of $2 billion+ (up 26 percent in Q2). Other retailers participating in this rapidly growing market are Dick’s Sporting Goods, Macy’s, Nordstroms, Target and Ulta.
Walmart+ members pay $98 yearly for free delivery from the store, free shipping with no minimum order, early access to promotions and events, Mobile Scan & Go in-store, savings on fuel and video streaming with Paramount+. Walmart+ members grew double digits in the most recent quarter and membership income grew 23 percent, beating the consolidated results as members shop more.
The application of AI is even more impressive and augurs well for continued enhancements in customer service and efficiencies across the organization. Specifically, McMillon said on the Q2 call that Walmart is using generative AI to improve its product catalog impacting product discovery and purchase, inventory and delivery. Walmart has used LLMs (large language models) to more accurately create or improve over 850 million pieces of data in the catalog, a task that would have required 100x the current headcount without the use of generative AI.
On a Mission to Democratize Fashion
Inflationary pricing pressures and increased pricing transparency are the backdrop for the growing success of Walmart as a fashion destination. The last few years of rapid price increases across most consumer products have created a more skeptical consumer seeking value, not merely brand names. According to Jim Cramer of Mad Money fame, Walmart is becoming a fashion destination with “high fashion” for $9, which in part could propel Walmart into the trillion-dollar (market capitalization) club where currently only tech companies are members.
Nordstrom’s lead private label executive recently joined Incandela at Walmart to drive a higher fashion perception at a reasonable price. Who knows, perhaps this is a precursor to sponsoring the Met Gala, which Amazon did back in 2012.