It’s an enviable position to be in at Walmart, as the retail giant continues to widen the gap between it and its grocery competitors.
But, as any grocer well knows, it’s a low-margin business, and Walmart on Thursday—despite a generally positive first-quarter earnings report and boosted financial forecast—made clear that it’s feeling the sting of a grocery-dominated balance sheet.
Walmart’s gross margins declined 41 basis points, blamed on “ongoing pressure” from category mix shifts. Walmart said it expects that pressure to continue for the balance of the 2024 fiscal year. For the first quarter, Walmart’s U.S. general merchandise sales fell in the mid-single digits, while food and consumables sales grew in the low-double digits.
To put it in even more perspective: Walmart said it saw a nearly 360-basis point sales mix shift from general merchandise to grocery, health and wellness during the first quarter. That’s more than the 330-basis point mix shift the retailer reported during all of last year. And Walmart implied that that mix shift may grow even wider as the year goes on.
“While we make attractive margins in food and consumables, they have a lower margin than general merchandise,” CFO John David Rainey told analysts, to the surprise of … probably no one.
An interesting tangent: Walmart (like Target the day before) said it is also seeing its sales mix shift to health and wellness, in addition to food. But that’s not necessarily a boost to the bottom line either.
“The thing I that I will say that’s different this year is it’s not just a shift to food and consumables, we’ve also seen in the first quarter a shift to health and wellness more,” Rainey said. “And part of that is related to these GLP-1 drugs that are to treat diabetes. We’re certainly seeing an uptick in that. For us, that comes at a lower margin, and so that has some impact on our business as well.”
It’s a problem that likely won’t ease until inflation does.
Even as Walmart continues to see growth in higher-income shoppers, many of the retailer’s core consumers remain pressed by inflation that has now been squeezing their wallets for multiple years.
“As a customer, particularly if it’s a customer living paycheck to paycheck, they now have a 2-year stack that’s a problem and eventually becomes a 3-year stack that’s a problem,” Walmart CEO Doug McMillion said. “So, working with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can would help them drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods.”
Beyond the tactic of lowering food prices so shoppers have more money to spend on the fun stuff, Walmart said it’s working to grow sales of higher-margin apparel and home goods through updated merchandising and an expanded e-commerce marketplace offering.
Remodeled Supercenters better showcase general merchandise through brand shops, digital displays, wider aisles and updated fixtures, the company said. Three hundred Walmart stores are slated for makeover this year.
With broader economic conditions, though, influencing what—and how much—shoppers can buy, it’s not yet clear how much influence Walmart can exert on its current sales mix.