Aside from the big box bloodbath of 2022, when an abrupt halt in buying left Walmart Inc. sitting on too many sweatpants and patio sets, the world’s biggest retailer has been one of the beneficiaries from inflation.
As prices for many essentials skyrocketed, not only did Walmart’s core low-income customers seek out its competitive prices, but it also attracted a fresh wave of shoppers: middle and higher-earning families who weren’t immune from soaring costs. Walmart’s share of households with incomes of $100,000 or over increased by 2.26 percentage points between the first quarter of 2021 and the first quarter of 2024, retail research company GlobalData estimates. Given Walmart’s scale, that’s a big uplift in terms of both customers and sales.
The question now is whether Walmart will hold on to those wealthier shoppers — and ideally to attract even more of them. So far the signs are promising. The company said on Thursday that US same-store sales rose by a better-than-expected 3.8% in its first quarter, helped by gaining more upper-income households. It also upgraded its forecast of full-year sales and earnings per share.
Food — the ultimate essential — was one of the biggest draws for the new cohort of Walmart customers (grocery including household staples, beauty and personal care accounts for almost 60% of the company’s US sales, according to GlobalData). But now that food price inflation is moderating, Walmart needs to move quickly to keep these higher-income shoppers happy— without alienating its traditional consumer base.
In the grocery aisles, that means stocking products that span the gamut of tastes. A new range of chi-chi private-label foods, known as Bettergoods — an effort to take on popular store brands from Trader Joe’s and Amazon.com Inc.’s Whole Foods — is a good start. The 300 or so products include plant-based and gluten-free foods, as well as more adventurous flavors.
But such innovations can’t exist in isolation. Consistently good fresh produce, as well as clean stores, with strong product availability and attentive staff, would encourage those trading down from more upmarket supermarkets to keep coming back.
Raising store managers’ remuneration with higher pay and bonuses and stock options should help here, as should plans to open new supermarkets and refurbish others. The decision to close Walmart’s 51 health centers, and cut corporate overhead, should mean more resources for the core retail business.
This is needed, because Walmart is increasingly up against the masters of catering to the cash-strapped middle classes: European discounters Aldi and Lidl. Without losing their focus on price, these supermarket chains have been able to capture more of the grocery cart by tempting affluent Europeans with fancy wines and cereals. And Aldi in particular is doing the same in the US.
Aldi already has a slightly higher penetration of middle-income US shoppers — those earning between $40,000 and $125,000 a year — than Walmart, and is on a par when it comes to those with incomes above $125,000, according to data provider Numerator.
Walmart can’t afford to let that gap widen, particularly as Aldi is expanding its US store base. To hold its ground, Walmart should fully utilize its advantages over the hard discounters. For example, Aldi and Lidl offer limited ranges, made up primarily of their private labels. As the biggest US grocer, Walmart can employ its scale to compel its consumer goods providers to supply it with their most innovative products, at the best prices.
The company also needs to encourage affluent customers to spend on more than groceries. Food margins, typically around 3%, are as thin as a slice of ham. Selling more profitable items, such as clothing and home furnishings, bolsters the bottom line.
Rival Target, which over-indexes in higher-income customers according to Numerator, provides high-fashion collaborations and a broader assortment of apparel that is stylish yet affordable. But there is scope to encroach onto its territory. Walmart said wealthier shoppers were already buying more general merchandise; now is the time to do more to tempt them by, for example, injecting more fashion flair into its basics.
Premium beauty is another opportunity, although it comes with risks: Cosmetics, being small and valuable, are vulnerable to shoplifting. Still, if Walmart can manage this challenge, more shoppers could find their affordable indulgences in its vast aisles. The retailer already has about 275 locations with dedicated beauty areas in partnership with British retailer Space NK. There’s an opportunity to expand this, and to augment its selection with more cutting-edge brands, particularly in skincare.
And there’s another way that Walmart can retain its more affluent shoppers: through its Walmart Plus membership program which, for $98 a year or $12.95 a month, brings a suite of benefits, including free delivery.
Jennifer Bartashus, an analyst at Bloomberg Intelligence, says this is an important way to lure customers from Amazon and other food retailers, such as Kroger Co. Crucially, she notes that even if a customer already subscribes to Amazon Prime, there’s an argument to also join Walmart Plus. What’s more, the extra data from Walmart Plus can help the retailer target these affluent customers even more accurately. But Walmart must stay one step ahead. Amazon recently introduced a $9.99 a month unlimited grocery-delivery subscription for Prime members to more directly compete with Walmart’s service.
Of course, Walmart’s challenge is to accomplish all this without neglecting its traditional value-seeking shoppers. But stocking plenty of entry-level products and eye-catching special offers should do the job. With inflation proving stickier than hoped (notwithstanding better news on Wednesday), some consumer stalwarts, including McDonalds Corp. and Coca-Cola Co, have pointed to lower-income shoppers cutting back.
Shares in Walmart are up about 14% this year to Wednesday’s close, and trade at about a 50% premium to Target on a price-to-earnings basis. Navigating its divergent demographics would help the company hold onto those stock gains, too.
America may be more divided than ever. But consumers are united in their need for — or love of — a bargain. That’s where Walmart can keep winning.
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