Where Walmart, Amazon, Target are spending billions in a slowing economy

A Walmart employee loads a robotic warehouse tool with an empty cart to fill it 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, the classic response for consumer companies is to cut back: slow down hiring, perhaps lay off workers, drastically cut marketing, or even slow the pace of technology investment, delaying projects until business has settled. recovered.

But that’s not at all what America’s beleaguered retail sector is doing this year.

With the S&P Retail Index Up nearly 30% this year, most of the industry is driving double-digit capex investment, including industry leaders walmart Y amazon.com. Among the top level, only the struggling clothing manufacturer Gap and home improvement chain Lowe’s They are cutting back significantly. at the electronics retailer Best Buyfirst-half earnings fell by more than half, but investment rose 37 percent.

“There’s definitely cost concern and awareness, but it’s being prioritized,” said Thomas O’Connor, vice president of consumer and supply chain retail research at consultancy Gartner. “A lesson has been learned from the aftermath of the financial crisis,” O’Connor said.

That lesson? Investments made by big-spending leaders like Walmart, Amazon, and house deposit are likely to result in customers being taken over by weaker rivals next year, when Consumer discretionary cash flow is forecast to recover from a year-long drought in 2022 and revive purchases after spending on goods contracted earlier this year.

After the 2007-2009 recession, 60 companies that Gartner classified as “efficient growth companies” that invested during the crisis doubled their profits between 2009 and 2015, while the profits of other companies were barely changed, according to a 2019 report on 1,200 American and European companies.

Businesses have taken that 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 prevent recent inflation from causing a new recession. Budgets for mergers, environmental sustainability plans and even product innovation are taking a backseat, Gartner data shows.

Today, some retailers are improving the way supply chains work between stores and their suppliers. That’s one approach at Home Depot, for example. Others, like Walmart, are striving to improve store operations so that shelves are restocked 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]software investment in retail increased 123%, compared to a 16% increase in manufacturing.”

At Walmart, the money is being spent on initiatives including VizPick, an augmented reality system linked to workers’ cellphones that allows associates to restock shelves faster. The company boosted capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. Its capital spending budget this year is expected to rise 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 further embrace online channels and in-store pickup options. “It made Walmart and all other retailers improve their supply chains. See more automation, less manual picking [in warehouses] and more robots.

In the past week, amazon announced its latest warehouse robotics acquisition, Belgian firm Cloostermans, which offers technology to help move and stack pallets and heavy goods, as well as package goods together for delivery.

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Home Depot’s campaign to revamp its supply chain has been underway for several years, O’Connor said. Its One Supply Chain effort is actually hurting profits for now, according to company financial disclosures, but it’s critical to both operational efficiency and a key strategic goal: creating deeper ties with professional contractors, who spend a lot of money. more than those who do things for themselves. they have been the bread and butter of Home Depot.

“To serve our professionals, it’s really about removing friction through a multitude of enhanced product offerings and capabilities,” Executive Vice President Hector Padilla told analysts on Home Depot’s second-quarter call. “These new supply chain assets allow us to do it on a different level.”

The store of the future for aging retail brands

Some broad line retailers are more focused on refreshing an aging store brand. A Kohl’sThe highlight of this year’s capex budget is the expansion of the company’s relationship with Sephora, which will add convenience stores within Kohl’s 400 stores this year. The partnership helps the mid-market retailer add an element of style to its boring image, which contributed to its relatively weak sales growth in the first half of the year, said Landon Luxembourg, a retail sales expert at consultancy Third Bridge. . First half investment more than doubled this year at Kohl’s.

About $220 million of Kohl’s increased spending was related to investing in beauty inventory to support the opening of 400 Sephora stores in 2022, CFO Jill Timm said. “We’ll 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 its tally of renovated stores since 2017 to more than half of the chain. It’s also expanding its own beauty partnership, first introduced in 2020, with ultra beautyadding 200 Ulta centers in store on track to have 800.

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And the biggest spender of all is Amazon.com, which had more than $60 billion in capex in 2021. While Amazon’s reported capex figures include its cloud computing division, it spent almost $31 billion in property and equipment in the first half of the year. — up from a 2021 record — even though the investment caused the company’s free cash flow to turn negative.

That’s enough for even Amazon to hit the brakes a bit, with CFO Brian Olsavsky telling investors that Amazon is shifting more of its investment dollars to the cloud computing division. This year, he estimates that about 40% of spending will support storage and transportation capacity, up from a combined 55% last year. It also plans to spend less in stores around the world, “to better align with customer demand,” Olsavksy told analysts after its most recent earnings, which is already a much smaller budget item in percentage terms.

At Gap, which has seen its shares fall nearly 50% this year, executives have defended their capex cuts, saying they need to defend earnings this year and expect to recover in 2023.

“We also believe there is an opportunity to more significantly slow the pace of our investments in technology and digital platforms to better optimize our operating earnings,” Chief Financial Officer Katrina O’Connell told analysts after her most recent earnings.

And Lowe’s deflected an analyst’s question about spending cuts, saying it could continue to take market share from smaller competitors. Lowe’s has outperformed Home Depot in the stock market over the past one-year periods and to date, though both have seen sizeable declines in 2022.

“Home improvement is a $900 billion market,” Lowe’s CEO Marvin Ellison said, without mentioning Home Depot. “And I think it’s easy to focus on just the two biggest players and determine the overall market share gain based on that alone, but this is a really fragmented market.”

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