Consumer giants are more like Walmart than they think

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Even as the world braces for recession, major consumer groups including Coca-Cola Co., Nestlé SA and Unilever Plc have exceeded expectations and raised their sales forecasts this earnings season. It seems that many buyers were willing to pay more for their products. Yet that optimism ran counter to an earlier warning for the sector: On Monday, Walmart Inc., a bellwether for the US consumer, issued a profit warning.

So what’s going on? The simple answer is that we all still have to buy food, but we can easily get rid of non-essentials like clothes, pillows, and even electronics. That’s hurting Walmart and Best Buy Co., which also cut their sales and earnings outlook on Thursday.

Those who package our coffee and make our dish soap aren’t hurting as much yet, but Walmart’s pain could still spread. It will be difficult to escape a broader consideration of inflation.

Walmart, known for its low prices, could win over grocery shoppers as some wealthier consumers bargain – a phenomenon that’s also seen at McDonalds Corp. and Chipotle Mexican Grill Inc. The retailer actually raised its guidance for the same quarter in the United States. – growth in store sales, excluding fuel, at 6% versus 4% to 5%. But that can’t make up for what it loses in the more profitable general merchandise category.

Just over half of what Walmart sold last year was non-food, according to GlobalData. This includes essential household items, but also more discretionary items such as clothing. As less affluent shoppers have to spend more on food and fuel, they are slashing sweatpants and trainers, which the company had stockpiled amid supply chain hitches late last year. Target Corp. is even more exposed to nice-to-have categories, with just 20% of its sales coming from food last year. Even his most high-end clientele couldn’t spare him two profit warnings.

Other shifts in shopping habits only add to the pressure from retailers.

Higher prices are expected to inflate the value of sales in supermarkets. But shoppers are “knocking inflation” off their carts, switching from expensive protein types to cheaper ones and swapping household names for private labels. With rising meat prices, for example, Americans might ditch the steak and opt for hot dogs and hamburgers instead.

Private labels are more profitable for retailers than branded products, but other types of discount are not as useful: supermarkets still incur the same staff costs for selling a hamburger as for a steak.

It’s also possible that Walmart doesn’t fully pass on its own pricing pressures to customers. After all, he must be aware of losing them to growing German discount retailers Aldi and Lidl, as well as dollar stores.

Even though consumer goods groups are selling essential items, they are grappling with rising raw material costs. These have yet to peak, although there are signs of stabilization in grain and palm oil prices. However, they were able to raise their prices in the first half of the year — almost 10% in North America and almost 5% in Europe in the case of Nestlé. So far, more customers have absorbed the upsides than made them up, hence the wave of sales improvements in the industry.

But it should be noted that although companies such as Coca-Cola, Kraft Heinz Co., Nestlé and Unilever have raised their sales forecasts, in most cases this has not been accompanied by upward revisions to margins. In other words, they may be selling more, but those sales aren’t necessarily more profitable.

More customers may also begin to resist price increases, which are expected to continue into the second half of 2022, though perhaps not quite at the same pace. We’re at a point where shoppers are really starting to feel the frequent, incremental increases in what they pay for everyday items. In the year ending July 10, U.S. private label sales grew 7.5%, compared to 5.5% growth for national brands, according to the data provider. IRI. It’s a similar picture in Western Europe, where the share of private label spending is growing ahead of brand names, according to NielsenIQ.

All major manufacturers are fully aware of the dangers. They are stepping up their marketing to counter the threat, another factor weighing on margins.

Other signals that volumes could weaken include an acceleration of promotions to boost sales volumes. This is exactly what happened the last time prices rose significantly a decade ago, and it’s worth watching this time around.

If shoppers don’t continue to buy so many cans of Coca Cola, packs of Kraft Lunchables and Nespresso coffee capsules, the situation at Walmart could be a preview of what’s to come everywhere else.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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