The (Modern Day) Walmart Effect

I read The Walmart Effect about 15 years ago and was fascinated by the impact the world's biggest retailer had on products, global supply chains and consumer activity. On the first page, Charles Fisherman describes how Walmart forced suppliers to reduce packaging for deodorants, to increase shelf space for other products.

From its first store in Arkansas in 1962, founder Sam Walton focused on discounting, efficiency and serving the customer. He was unafraid to learn from competitors.

Today, the retail giant has over 11,000 stores and clubs, generating ~$700 billion in revenues annually.

If you've not visited one of the ~4600 Walmart's in the US, the scale is difficult to describe. The Supercentres often have hundreds of thousands of products (nothing is off limits!), with advanced inventory systems, underpinned by data, which help to forecast demand and reduce waste. The spaces are vast and accessible, with Walmart claiming that 90% of Americans live within 10 miles of a store.

Last week, the company delivered the largest average ticket size increases in over a year and the highest growth in food units in several years, in its quarterly results.

In fact, Walmart's customer's are showing resilient behaviour that is consistent and improving over 4-6 quarters.  This differs to many competitors and peers. We note Target's share price move during the week, as an example.

Walmart is benefitting from customers "trading down" in a more challenging macro environment, as 75% of market share gains came from households earning more than $100k.

However we believe, the improving results and share gains are reflective of a seismic shift about how consumers engage and what they want, which Walmart is capitalising on. This is unlikely to be a one off.

More specifically, it was the "non-core" businesses which stand out.

These segments include advertising revenues, which grew 28% in Q3, with 50% growth in the international segment (led by Flipkart in India). Membership fees also delivered strong growth, with a 22%+ increase. Walmart is attracting wallets and eyeballs.

During the Q3 earnings call, Kath McLay, the President & CEO of Walmart International highlighted that "it's largely those ancillary businesses that are higher margin that are driving the result."

The increasingly digitised offering enables the company to offer ~700 million SKUs to US customers, alone. Merchants are attracted and competing to advertise and promote their products.

The eCommerce segment, which is modest compared to Amazon, grew 27% globally. Walmart has now automated 50% of fulfilment centres (2x y-y), is seeing a 40% reduction in US net delivery cost per order and cutting delivery times.

Customers want products quickly and are paying for the service. The addressable market is growing.

We do not think this behavioural tendency will change, irrespective of where GDP growth heads.

Walmart is seeing growth in traffic and conversion, both in the US and internationally. Technology is making this possible. This has not been overnight success.

Walmart has been investing in automation and AI for years. We note comments in the Annual Reports from 2018 about several AI investments and other projects starting in 2016.

Despite this, the eCommerce segment is losing money globally. EBIT margins are negative, yet losses are narrowing. We think, in time, Walmart eCommerce could deliver high single digit margins (comparable to Amazon's North America retail business), whilst benefitting the traditional brick & mortar offering.

For competitors who have not invested or dismissed AI, it will be challenging to catch up, let alone compete, at scale.

We note in Q2, Walmart mentioned that is enhancing its product catalogue through Generative AI, which management believes would have taken 100x the equivalent man hours. Like this quarter, the company beat guidance. AI is adding (substantial) value today.

We believe this is the tip of the iceberg.

The personal shopping assistant, which is in testing, will make it easier, faster and (likely) cheaper, for customers to get the products they need.

Imagine typing in what event you are hosting, and items being prepopulated for your review and approval in seconds? And then to receive a delivery within one hour.

There will be implications for product placement and which brands get preferred treatments in an AI world. More on this in another note.

The cultural adoption of AI is evolving at Walmart, with 50,000 staff using AI tools to access information, company data and learnings (1.5 million questions have been asked).

This is a large testing program, yet relatively modest given there are ~2.1 million employees. Walmart is the largest private employer in the world.

We would expect significant scope for Revenue Per Employee to grow noticeably, and at a faster rate to peers.

Walmart is an incumbent that is innovating, growing and executing. The consumer sector, where we focus exclusively, offers select opportunities like this for investors, with much less volatility.

The quote from CEO Doug McMillion on last week's call reflects the momentum, speed and execution - "We're racing to improve all the things that people love about shopping and remove or diminish all the things they don't."

Were Sam Walton alive today, we suspect this line would have resonated and been consistent with the values that drove him to start Walmart 62 years ago.

The (modern day) Walmart Effect is happening digitally and impacting consumers worldwide.

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