Here's What Walmart Should Do About Its Food-Driven, Low-Margin Growth

Chief Executive Doug McMillon knows shareholders aren't going to sit idly by and applaud deteriorating profitability.


James Brumley, The Motley Fool

Nov 23, 2019


The half-apologetic admission Walmart (NYSE:WMT) CEO Doug McMillon offered along with the retailer's Q3 numbers last week has arguably steered investors to the wrong conclusion.


Up as much as 3.6% on Thursday following the release of third-quarter numbers, Walmart shares fell back into the red the very same day and have lost even more ground since. Investors, with time to think about it, are indeed concerned about the expansion of the company's e-commerce effort. They're also concerned about the expanding role food plays in its growth. Groceries may be a reliable business to be in, but the highly competitive food market keeps profit margins to a minimum. Ditto within the online marketplace of non-food goods.


Growing grocery sales and more e-commerce aren't necessarily margin-gouging liabilities though, if the organization responds the right way. A handful of tasks should be on McMillon's must-do list.


Growth, but at a cost


Most U.S. consumers -- or investors, for that matter -- may not realize food now makes up more than half of the organization's total U.S. revenue, accounting for 56% of its nationwide sales. It's an even bigger share than at industry icon Kroger.


Meanwhile, the retailer's e-commerce arm grew another 41% last quarter, extending a multi-quarter streak of double-digit growth.


The shift hasn't been matched by income growth though. Sales improved 2.5% during the third quarter, but the cost of sales grew 3%. For the first nine months of the year, worldwide revenue is up 1.8%, while the cost of sales is up 2.3%. Its cost of sales, in fact, has been measurably outpacing revenue growth for over a year -- a trend that arguably started to take shape in earnest a couple of years ago.


It's difficult to determine how much of that disparity is attributable to the shift toward more groceries and more online sales. But, inasmuch as three-fourths the company's sales are generated within the United States, coming to such a conclusion isn't a stretch. Underscoring such a conclusion is the calculated comment from McMillon accompanying last quarter's results: "Our strength is being driven by food, which is good, but we need even more progress on with general merchandise. We're mixing the business out better to achieve better margin rates, but there is more work to do."


A handful of retail experts have identified some specific actions the retailer would be wise to consider.


Expert advice ...


A long-term project ...  


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