Retailers

Walmart: Cleanup on Aisle ... All of Them?

Out-of-stocks and disheveled shelves point to larger issues for world's largest retailer, analyst says
A Walmart Supercenter in Pennsylvania, March 25, 2021
Photograph courtesy of R5 Capital

In Walmart's annual investors meeting last month, CEO Doug McMillon said that for all that's changed in consumer shopping behaviors in the past year—notably, accelerated adoption of online shopping and declines in store visits but more stocking up per visit—consumers "will still want to shop in compelling stores" post-pandemic.

"Our first priority is to continue to earn [customers'] business when it's time [for] the stock-up trip, to be the best and first place they shop," McMillon told investors and analysts.

Scott Mushkin, CEO of New Canaan, Conn.-based research firm R5 Capital, has a couple of notes for Walmart regarding that last point.

"As you go in, you realize how much is wrong," Mushkin said. 

After observing out-of-stocks in grocery and general merchandise as well as in-aisle clutter at a handful of Walmart stores in the fall, Mushkin sought to survey the scene at a wider range of Walmart supercenters across the country. He visited more than 50 stores from Maryland to Washington State and found, he said, a consistent theme: updated store facades—fresh paint, updated signage, well-stocked produce displays just inside store entrances—but increasing disorganization the farther into a store one goes. 

Earlier this week, Mushkin documented some of his recent observations in a new R5 report on Walmart titled Yes, It's That Bad. The report includes a series of photos Mushkin took at three Walmart supercenters in Pennsylvania on March 25. The images show empty meat cases, piles of unattended cardboard boxes from the back of the store crowding aisles, and an array of mostly empty center-store shelves.

In the report, Mushkin said the photos point to "the execution, service and inventory management issues" observed in-stores since January. "If the problems are left to fester, we see both short- and long-term sales pressure and the potential for a deteriorating brand reputation," the report stated. Mushkin said he has reached out to Walmart about his in-store observations. (Walmart did not respond to a request for comment for this story.)

But for the world's largest retailer—and a company with stores within 10 miles of 90% of Americans—how much of an impact can in-store clutter have? If consumers are doing more of their Walmart shopping online and not entering stores as frequently, and Walmart is still meeting customers' low-price expectations and leading inventory needs, are in-store cosmetic issues just that—cosmetic? Doesn't Walmart have bigger fish to fry?

No, Mushkin said. Stacks of shipping boxes and disheveled shelves indicate problems that automation can't fix in the near term, he said, and addressing the labor shortages and inefficiencies that contribute to in-aisle eyesores is possible—and necessary—but it will be costly.

Adding labor hours "will go a long way in solving the problems, but, in our view, depress earnings," R5's report stated. Walmart is working on building out a stable of microfulfillment centers—mostly in or attached to existing Walmart stores—that are expected to ease labor demands. And in January, the company noted that some stores will add automated drive-thru pickup points where customers will scan a code to have their order retrieved automatically, sans store associate running out with a cart. 

"Our automation plan is now ready to scale," McMillon said in February. But scaling takes time: While Walmart is planning to have "dozens" of stores serve as local fulfillment centers in the year ahead, in the meantime, Mushkin said, the boxes are still piling up.

"It's kind of crazy," he said, noting that he had observed an abandoned cart alongside a seven-shoppers-deep checkout line in one of his Pennsylvania supercenter visits last week.

"I think the challenge that Walmart’s having is a little bit of over-promising on the click-and-collect business," he said. Mushkin said his observations of pickers in-stores suggest that processes and roles aimed at maximizing labor efficiency don't always work as intended. "How many times is that picker stopped by customers?" he said. "Way more often than you would think. How many times is the product … not where it’s supposed to be and the picker is wasting a lot of time trying to find it?"

It can make for a frustrating experience for in-store shoppers trying to find (or get help finding) the items they seek. But of more importance, the extra labor involved with order-picking comes at no extra cost for curbside and BOPIS customers—and that's a huge problem, Mushkin said.

"You are giving the consumer an additional service; they need to pay for it," he said. "You cannot charge the same amount of money [for having an associate] going around and picking your shelves and then bringing it out to the trunk as for someone who goes in the store, picks it out themselves and then goes to the cash register. It just doesn't work."

Mushkin points to Costco's trial of a $10-per-order pickup fee at its New Mexico stores as a model for the industry. "Curbside pickup adds an additional expense to our low-cost business model and limited markup structure," Costco states on its website for New Mexico stores. In addition, there is a $100 order minimum for same-day curbside pickup, which is provided through a partnership with Instacart. "They don’t make any more money on that," Mushkin said. "They’re just charging you for what it costs."

R5 noted that its estimates for Walmart earnings this year are 40 cents below other analysts' estimates. The way for Walmart to cut through clutter, he opines, is to get more labor in-stores in the near term and introduce fee-for-service for the convenience of curbside and BOPIS orders. "What Walmart will need to do is put some sanity into their business model," he said.

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