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Walmart Must Prove Misstep Isn’t a Serious Stumble

Andrea Felsted
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Walmart Must Prove Misstep Isn’t a Serious Stumble

(Bloomberg Opinion) -- Walmart Inc. has been battling to take on Amazon.com Inc., but it was weakness in old-fashioned categories of retailing, not whizzy tech, that undermined its holiday performance and prompted it to come up short of expectations for this year.

And that pressure’s not going away anytime soon, considering the continued onslaught from rivals that excel at back-to-basics shopkeeping, such as European discounters Aldi and Lidl, and the Amazon assault, which shows no sign of a let-up. The world’s biggest retailer needs to show that its impressive turnaround isn’t going off track.

While Walmart’s U.S. grocery business — which the retailer has transformed into a bridgehead against Amazon —  held up, along with online sales, the company suffered the same fate as Target: weakness in toys, clothing and gaming. Consequently, U.S. same-store sales rose by 1.9% in the fourth quarter, compared with expectations of 2.4%.

It’s a rare misstep. As my colleague Sarah Halzack has noted, Walmart has done a good job of leveraging its 4,800 U.S. stores to provide an asset that Amazon can’t match yet.

But the battle isn’t slackening. Although Amazon hasn’t upended fresh food, it’s not giving up. It has signaled its continued intent by dropping the grocery delivery charge for Prime members in the U.S. and planning for a new chain of supermarkets to be introduced soon.

But the behemoth isn’t the only rival Walmart needs to watch. It also faces an increasing threat from German discount retailers Aldi and Lidl, which are expanding aggressively in the U.S. Aldi, which has had an American presence for decades, plans to increase its store count from just less than 2,000 today to 2,500 by the end of 2022.

Although Lidl got off to an uninspiring start when it launched in the U.S. in 2017, it is now opening supermarkets apace, helped by the acquisition of 27 Best Market stores, giving it a valuable foothold in New York and New Jersey.  

Walmart has been responding by improving the quality of its fresh food, developing its private-label brands — a particular strength of the European discounters — and cutting prices, which are now getting closer to Aldi’s, according to analysts at Deutsche Bank. Even so, it can’t let its foot off of the price-cutting pedal. It made this mistake with its U.K. arm Asda, and the discounters undermined its low-price message and picked off its customers.

With the weaker-than-expected holiday season, Walmart must show that it hasn’t run out of steam. It says it is working to address the issues behind the disappointing fourth quarter. It needs to learn lessons, and fast.

And it must do so at the same time as it rebuilds its operating margin, which has been eroded by those price cuts as well as the investments in the future. Progress toward profitability in its e-commerce division will be crucial. Walmart expects U.S. online losses to be flat or down this year.

Investors have tolerated the pressures on profitability from investment — the shares were up about 18% over the 12 months to Friday’s close —  because of the strong top-line gains. They trade on a forward price-to-earnings ratio of 22.5 times, almost a quarter above the average over the past five years of 18.1.

But to maintain this historic premium, Walmart will have to demonstrate that its holiday sales stumble was a blip and that it can keep up its progress against both Amazon and its other, often forgotten foe, the European discounters.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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