A Walmart employee loads a robotic warehouse tool with an empty cart to be filled with a customer’s online order at a Walmart micro-fulfillment center in Salem, Massachusetts on January 8, 2020.
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When the economy slows down, the classic response for consumer companies is to cut back: slow hiring, perhaps lay off workers, reduce marketing, or even slow the pace of technology investments, postponing projects until after business recovers.
But that̵[ads1]7;s not at all what America’s troubled retail sector is doing this year.
With the S&P Retail Index down nearly 30% this year, most of the industry is increasing capital spending by double digits, including industry leaders Walmart and Amazon.com. Among the top tier, only the clothing manufacturer Gap is struggling and the home improvement chain Lowe’s is reducing significantly. At the electronics retailer Best Buy, profits in the first half of the year fell by more than half – but investments rose by 37 per cent.
“There’s definitely concern and awareness around cost, but there’s a prioritization that’s happening,” said Thomas O’Connor, vice president of supply chain-consumer retail research at consulting firm Gartner. “A lesson has been learned from the aftermath of the financial crisis,” O’Connor said.
That lesson? Investments made by big-money leaders such as Walmart, Amazon and Home Depot are likely to lead to taking customers from weaker rivals next year, when consumers’ discretionary cash flow is forecast to pick up after a yearlong drought in 2022 and revive shopping after spending on goods actually shrunk early this year.
After the 2007-2009 downturn, 60 companies that Gartner classified as “effective growth companies” that invested through the crisis saw revenue double between 2009 and 2015, while other companies’ profits barely changed, according to a 2019 report on 1,200 US and European firms.
Businesses have taken this data to heart, with a recent Gartner survey of finance executives across industries showing that investments in technology and workforce development are the last expenses companies plan to cut as the economy struggles to keep recent inflation from causing a new recession. Budgets for mergers, environmental sustainability plans and even product innovation are rebounding, the Gartner data shows.
Today, some retailers are improving how supply chains work between stores and their suppliers. For example, there is a focus on Home Depot. Others, such as Walmart, are pushing to improve store operations so that shelves are filled faster and fewer sales are lost.
The trend toward more investment has been building for a decade, but was catalyzed by the Covid pandemic, said Progressive Policy Institute economist Michael Mandel.
“Even before the pandemic, retailers were shifting from investments in structures to active investments in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]increased retail software investment by 123%, compared to a 16% gain in manufacturing.”
At Walmart, money is pouring into initiatives including VizPick, an augmented reality system linked to worker cellphones that allows associates to stock shelves faster. The company increased capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. The capex budget this year is expected to increase 26 percent to $16.5 billion, CFRA Research analyst Arun Sundaram said.
“The pandemic obviously changed the entire retail environment,” Sundaram said, forcing Walmart and others to be efficient in their back offices and embrace online channels and in-store pickup options even more. “It made Walmart and all the other retailers improve their supply chains. You see more automation, less manual picking [in warehouses] and more robots.”
Last week, Amazon announced its latest warehouse robotics acquisition, Belgian firm Cloostermans, which offers technology to help move and stack heavy pallets and goods, as well as pack products together for delivery.
Home Depot’s campaign to revamp its supply chain has been ongoing for several years, O’Connor said. Its One Supply chain effort is actually hurting profits for now, according to the company’s financial disclosures, but it’s central to both operational efficiency and a key strategic goal — creating deeper ties to professional contractors, who spend far more than the do-it-yourselfers . which has been Home Depot’s bread and butter.
“To serve our pros, it’s really about removing friction through a series of enhanced product offerings and capabilities,” executive vice president Hector Padilla told analysts on Home Depot’s second-quarter call. “These new resources in the supply chain allow us to do that at another level.”
The store of the future for aging retail brands
Some mainline retailers are more focused on refreshing an aging store brand. At Kohl’s, the highlight of this year’s capital budget is an expansion of the company’s relationship with Sephora, which is adding mini-stores within 400 Kohl’s stores this year. The partnership helps the mid-market retailer add an element of style to its otherwise tough image, which contributed to relatively weak sales growth in the first half, said Landon Luxembourg, a retail expert at consulting firm Third Bridge. Investments in the first half of the year more than doubled this year at Kohl’s.
About $220 million of the increase in Kohl’s spending was related to investments in beauty inventory to support the 400 Sephora stores opening in 2022, according to CFO Jill Timm. “We will continue that into next year. …We look forward to working with Sephora on that solution for all of our stores,” she told analysts on the company’s most recent earnings call in mid-August.
Target is spending $5 billion this year as it adds 30 stores and upgrades another 200, bringing the number of stores renovated since 2017 to more than half the chain. It’s also expanding its own beauty partnership first unveiled in 2020 with Ulta Beauty, adding 200 in-store Ulta centers on its way to 800.
And the biggest spender of all is Amazon.com, which had over $60 billion in capital spending in 2021. While Amazon’s reported capital spending includes its cloud computing division, it spent nearly $31 billion on property and equipment in the first half of the year — up from an already record-breaking 2021 — even though the investment made the company’s free cash flow negative.
It’s enough to make even Amazon hit the brakes a bit, with CFO Brian Olsavsky telling investors that Amazon is shifting more of its investment dollars to its cloud computing division. This year, it estimates that roughly 40% of spending will support warehouse and transportation capacity, down from last year’s combined 55%. It also plans to spend less on worldwide stores — “to better adapt to customer demand,” Olsavksy told analysts after its latest earnings — already a much smaller budget item on a percentage basis.
At Gap — which has seen its shares fall nearly 50% this year — executives defended their capital spending cuts, saying they need to defend profits this year and hope to bounce back in 2023.
“We also believe there is an opportunity to more meaningfully slow the pace of our technology and digital platform investments to better optimize operating results,” Chief Financial Officer Katrina O’Connell told analysts after its most recent earnings call.
And Lowe’s dismissed an analyst’s question about cost-cutting, saying it could continue to take market share from smaller rivals. Lowe’s has been the best stock market performer compared to Home Depot over the past one year and year-to-date, though both have seen significant declines in 2022.
“Home improvement is a $900 billion marketplace,” said Lowe’s CEO Marvin Ellison, without mentioning Home Depot. “And I think it’s easy to just focus on the two biggest players and determine the overall market share increase just based on that, but this is a very fragmented marketplace.”