Deep Dive
Shownotes Transcript
At PGM, our global perspective today unlocks investment opportunities tomorrow. Our 1,400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify opportunities and achieve your long-term goals. PGM, our investments shape tomorrow, today.
Pushkin. Shares in Walmart are up 47% in the last year, despite inflation and tariffs and everything else. Today on the show is what is good for Walmart, good for America. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong. I'm
Coming to you from Unhedged World Headquarters in beautiful and sunny New York City. And I am joined today by Greg Meyer, who is the FT's, is it retail correspondent? What do we call you? U.S. Consumer Editor. U.S. Consumer. That's very grand. Very. I strive for grandness. So why is Walmart doing so well today?
Greg, and what can we kind of learn from that about the state of the American consumer? Superlatives really are necessary to discuss Walmart. Yeah. Walmart is the largest U.S. retailer. They're the world's largest retailer. They're the world's largest company by revenue. I was looking at that number this morning, and it's like one company, $680-odd billion of sales every year.
It's just staggering. Well, last year. Yeah, yeah, yeah. And it's growing by 4% or 5% a year. But 4% or 5% for Walmart is like more than the total revenue of most of their competitors. Yeah. They're the largest private sector employer in America with 1.6 million employees here, 2.1 million employees worldwide. They account for 25% of groceries sold in the U.S. And if you live...
Here in New York City, it's maybe easy to miss the fact that they're really everywhere. But you don't have to go far. They don't have to go far. Three miles outside the Lincoln Tunnel, there's a Walmart in Secaucus, New Jersey, right next to a Sam's Club, which was their membership warehouse. And tell me this.
Will Walmart deliver to me? I don't know the answer to that question. I'm going to try that when I get home. I'm almost certain you can. Whether you can get groceries delivered at home, I'm not sure. Yeah, correct. And one of the things that we can talk about is one of the successes is they can bundle together your broccoli with your flat screen TV and deliver it to your house. Yes. But your question was, why has Walmart been doing so well in the past year?
They've been growing revenues as we discussed. They have been growing profits faster than the revenues, but about twice as fast.
There are a few reasons. One is since 2021-ish, you saw this wave of severe inflation wash over America, the strongest inflation since your and my childhood. Yes. And they were able to win in that environment. They were. One of their mottos, one of their key values is what they call the everyday low price.
They don't go for promotions. They don't put ads in the Sunday, what used to be the Sunday circular saying, we're discounting these by, come in today and come after the discount. They instead-
They have a massive merchandising operation in Bentonville, Arkansas that is able to consistently negotiate the best prices through their scale from suppliers and give customers some faith that what they're getting is going to be on average the lowest price. But this brings us to a very timely point. And I think we mentioned this on the show before that in their last conference call, the CEO said, "Look, tariffs, prices are going to have to go up a little bit. That's only realistic."
And as we were discussing before the show, this is a company that makes a 4% operating margin. So there's not a ton of wiggle room in their model to absorb the tariffs. But it was interesting to me that there was a limit to how far they're going to go to have the lowest prices.
when an exogenous factor like tariffs comes along? What did you make of that decision? Yeah. I mean, the CEO, Doug McMillan, said on that earnings call on May 15th, he discussed the tariffs as they stood at that time. As you know, the US tariff levels in the countries that have been the trading partners that are affected by them seem to change every hour and a half. Mm-hmm.
But he said as they stood at the time, there's only so much margin they can absorb and that they feel they have multiple constituencies, one being their customer, but the other being Wall Street. And the third being what they call their associates, their 2.1 million employees. Only so far you can push. Only so far you can push. So as you know, a day or two later, President Trump put out a social media message. Eat the tariffs. Yeah.
Yes. And in the subsequent earnings calls from other retailers, you heard, in my view, much more opaque, inscrutable discussions of pricing. Absolutely. This term, when Home Depot and everybody come out, they kept using this phrase, portfolio pricing, which means some prices go up, some prices go down. We're not really going to comment on what the net effect on pricing is. Mm-hmm.
That's the old hide under the table approach to pricing when the president is concerned about inflation and tariffs. But still, different retailers are affected by tariffs in different ways. Walmart is massive, but their U.S. business, in their U.S. business, only a third of the goods they sell are actually imported. Because it's mostly groceries. Most people go to Walmart for cheap groceries. 60% of their U.S. sales at Walmart U.S. is groceries. Yeah, and a lot of that's...
You know, foods that are grown and processed in the US. I would guess though that the other 40% is more profitable than the food. Sure. I mean, the margin on a sweater is going to be higher than the margin on bananas. Bananas, which are imported actually, obviously. Yeah, yeah. Or on flour or corn or peanut butter, which will come from the United States. Yeah, yeah, yeah.
But, you know, that one third for a company, and I think Walmart US's sales of that $681 billion, I think their sales are like $460, $465 billion. So a third of that is still just a huge amount of merchandise that is going to be facing, you know, I guess at least a 10% tariff for most of the world. But we do have kind of, we have shaped a kind of answer to the question. Your basic answer to why is Walmart doing so well is...
inflation put the American consumer under a kind of stress, and that works for Walmart's business model because it has the scale and the capability to be the low-cost option. I think that's one part of it, but not the only part. Another is e-commerce. I mean, Walmart has 4,600 stores in the U.S. They have 600 Sam's Club stores in the U.S.,
But their e-commerce business is growing by more than 20% a year, e-commerce sales. Do we know the absolute number? Or do they just tell us the growth rate? No, they do. So for Walmart, U.S. e-commerce sales last year was $79 billion. That's a big number. It's a big number. Yeah, I mean, it's obviously not Amazon scale. I'm glad you mentioned Amazon. They are the kind of gorilla in the room. Yeah, they're the gorilla. And Walmart, of all the retailers who have been, at least were thought to be,
10 plus years ago, sort of existentially threatened by Amazon, just announced this at this investor meeting in April. Their e-commerce business is finally profitable on a worldwide basis. So they're selling $80 billion worth of stuff. In the US. In the US. And they're just breaking even now. Yes. That shows you how hard it is to compete with Amazon, I would say. Right? Yeah.
But it has been, you know, it's growing. You know, the profitability has something to do with, you know, as it grows, the driver can drop off, you know, orders to two houses on the cul-de-sac and not just one. So it's just the cost of that trip or at least the revenue per trip is higher. Yeah, there's a fixed cost element to it. And you start doubling up, you can really make money. Yeah. And then, I mean, also, interestingly,
They're not becoming a virtual operation. They're not just Amazon with the warehouse down the New Jersey Turnpike or out in Allentown, Pennsylvania. They have these 4,600 stores, which they are absolutely committed to. And in fact, they're planning to add 150 more stores. And that's because they see the stores as critical to the home delivery proposition, the fast home delivery proposition. And this was debated at the time. I remember...
A few years ago, there was debates. Can stores be distribution hubs for delivery? And it was not a fait accompli that that model should work. But does Walmart seem to have figured that out? I think they're still figuring it out. And they're still experimenting, for sure. And there are different kind of... Yeah, I mean, they're constantly announcing new...
ways of doing things. And there's sort of partly automated picking operations that are in these annexes attached to stores, including the one in Secaucus, which they're building right now. So they're figuring it out. You mentioned automation there, and I'm glad because you had a terrific article in our newspaper a little while ago that pointed out that for all of Walmart's incredible growth, their number of employees has been flat for
How is that possible? I mean, I assume it's robots are doing something somewhere instead of people. The idea from that article came from just looking at their 10K, their annual report when it landed a couple months ago. And it reported they had 2.1 million employees worldwide, which was the same number rounded as a year ago, I think. It definitely wasn't more. And this was after a year in which they grew their revenue just in a year by something like $33 billion. And I just thought...
How does a company do that? And the point is, there's no $33 billion in sales companies with no employees. Yet Walmart added $33 billion and didn't add any employees. So something incredible happened there in some sense. Part of that, and in the past five years, their total number of employees has actually declined by about 70,000 people, which-
For Walmart, it isn't huge, but still, for most companies, that's a lot of- When you're growing as much as they are, how do they do it? Five years, they grew their revenues by $150 billion. What do we know about the trick that makes this possible? Some of this has, over the past five years, the longer-term trend, it clearly has been inflation. Their revenues have gone up because prices, on average, have gone up for everything. Yeah.
But that's certainly not the only... And part of that, and a little bit of the five-year story has been a couple of divestitures in Argentina and Japan, which cut some employees as those businesses were taken out of the equation. But they're investing very heavily in automation, in particular,
in their warehouses, in their distribution centers and their fulfillment centers, which serve both the stores and serve the e-commerce fulfillment in general. And I should say for e-commerce, not only are they selling their own stuff, but they have a growing third-party e-commerce business like Amazon does where
independent vendors will list their stuff on walmart.com and Walmart will handle the warehousing and the delivery on their behalf. And so in these stores, I mean, I toured a couple of them outside Dallas a couple of months ago. One of them is 700,000 square feet. The other is 1.5 million square feet. So it's roughly the size of like downtown Manhattan. Yeah.
Something like that. Yeah. And I should say one of them was a refrigerated warehouse which had a variety of sort of temperature gradations, including one
that was like the deep freeze chamber. Did they give you a special Walmart coat when you go in there? They did give us coats and hats, and thank God they did. I was surprised they did not have assigned waivers to indemnify them against frostbite. I mean, this thing was so... And don't worry, Walmart, I'm fine. It did not get frostbite. But this was unbelievably cold. But the cold storage warehouse had racks 80 feet high, bringing in pallets...
disassembling them without human intervention other than a guy with a joystick, sending them up into racks, and then when time comes, taking them down from the racks by robot, putting them on a conveyor belt, sorting them all through automation, and then ultimately sticking them on pallets so that they're pre-sorted to show up at a store so they can go directly to, in this case,
the freezer aisle, the aisle that has the milk or the eggs and the cheese, say, and if it's from the Ambien warehouse to the aisle that has the cereal or the aisle that has the sweaters, where they don't have to have people in the back room pulling apart the pallet,
They just go straight to the, you know, anyway. So all this means they need fewer people. Walmart says this doesn't mean they're going to be employing fewer people, but they're redeploying them to do other things they say to make customer service better, to have, you know, to serve people in the store. Greg, let us speculate wildly.
10 years in the future, 2035. Where is Walmart and where is American retail? Rob, I'm a reporter and I have the attention span of a gnat. But I will... So it's tough to make predictions. I will say, if you just take pharmacies...
CVS, Walgreens, Rite Aid just went bankrupt again. Drugstore chains are already in trouble for a host of reasons. The worst shopping experience known to man is going into one of those stores in New York City. I don't know what those stores are like elsewhere in the country, but man. You don't know.
You don't like unlocking your toothpaste. It is just a shambles in those places. But Walmart is muscling in on that turf. They are now delivering prescription drugs across the country. I think it's 49 states. So I just think that's one channel where Walmart is continuing to kind of gobble up share. You're seeing them affect the share, at least challenge the share of dollar stores, which have historically catered to lower income consumers with more convenience than Walmart. But Walmart now, they can deliver stuff
to the home of any consumer, whether you're low income or high income. So why walk down to the dollar general? Target has had its struggles lately. Walmart seems to be maybe pulling some of Target's kind of affordable chic aficionado customers as they're making their stores a little bit more dressier. So I think it'll just be interesting to watch the competitive landscape, the market share. Sounds to me like 10 years from today,
We're all going to be buying even more of our stuff from Walmart. Listeners, we'll be right back with Long and Short.
Get actionable strategies and stay ahead of the curve. This is Speaking of Alternatives, a PGM podcast. I think we're keen on adding exposure to opportunities that are supported by tenants in some of the following sectors, markets and strategies that overall we see as defensive and resilient to any type of scenario. So this is a case of semiconductors, healthcare, consumer staples.
Hear the latest episode of Speaking of Alternatives from P. Jim. Welcome back, listeners. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. And I am short online sports gambling companies. And I'll tell you why. Casinos are a great business. They levy a tax on the mathematically disinclined, which is a great way to make money online.
But as my new colleague, Hak-Yung Kim, pointed out in a piece that is in the newsletter today, there's a lot.
that makes the online model harder. First of all, they can't sell hotel rooms, steak dinners, or show tickets at the same time. And second of all, they're just such a natural target for the tax authorities. And I just feel like state, local, and federal governments are going to squeeze these online betting shops until there is a very modest return on capital left in that business. Greg, do you have a long or a short for us?
I'm going to be very provincial and say I am short New Jersey transit. This may not be a short that necessarily resonates to our global listenership, but I'm sure will to those who live in the New York metropolitan area. I'm one of the many long-suffering New Jersey commuters into Manhattan. I live 14 miles from the office, more or less, and it takes an hour and 10 minutes one way, door to door.
We feel your pain, Greg, and we join you in your short. Listeners, we will be back in your feed next Tuesday. And until then, try to stay off the trains in New Jersey.
Unhedged is produced by Jake Harper and edited by Bryant Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.
I'm Rob Armstrong. Thanks for listening.
Donald Trump has already changed the way we think about the US economy. Now he's back in the White House and Bloomberg's Trumponomics podcast is here to help. I'm Stephanie Flanders, head of government and economics at Bloomberg. Whatever the big question of the week is, we'll have something interesting to tell you about it in a lively conversation with the reporters and analysts closest to the action. Listen to new episodes every Wednesday and follow Trumponomics on Apple Podcasts, Spotify or wherever you listen.