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Walmart and Target clash with investors over low-price strategy


WalmartAnd TargetWall Street was not expecting strong results for the third quarter. This week’s performance beat Wall Street’s expectations. But the investors’ response was quick: A severe sell-off.

Target shares were downAbout 5% Wednesday Walmart closed down nearly 3% on TuesdayIts earnings report. The shares continued to fall Wednesday, wiping out all gains from the year.

They disagree about the strategy that Target and Walmart have to absorb rising shipping costs, labor and material costs rather than passing these on to their customers. Target CEO Brian Cornell, and Walmart CEO Doug McMillon both have drawn clear lines. Their strategy: Keep prices low in a bid for customer loyalty — even if it means a hit to profits.

They are hearing the following argument: Should shoppers be charged more for their purchases? Americans are known for their fervent appetites for shopping. During the pandemic, they socked away money. the holiday forecastsAll things are good.

McMillon said Walmart must uphold its reputation for value — or risk scaring away customers who feel sticker shock. McMillon cited the founder of big-box retailer Walmart in his remarks. an interviewCNBC’s CNBC “Attachment” will air Tuesday, February 13, at 8:15 p.m.Squawk on the Street.”

He said, “We help people save money and live better lives.” “Those were the words that came out from [Walmart founder]Sam Walton’s mouth. He loved fighting inflation. So do we.”

Cornell claimed Target plays the long game too even though it involves taking on extra cost.

He stated that prices are being protected during a conference call with reporters. It’s just as crucial to our guests as it was during the pandemic. 

The strategy was defended by him and his team of executive, even when they were questioned on Wednesday morning earnings calls.

Market share is everything

Target and Walmart experienced significant sales growth during the pandemic. Consumers avoided the supermarkets, purchased more groceries, and searched for products at home, from puzzles to loungewear.

Target has had eye-popping results that can be hard to compare. Company’s 2020 sales grew by more than $15 billion — greater than its total sales growth over the prior 11 years. Even after Wednesday’s closing, the stock has risen more than 43%. This puts its market value at over $123 billion.

Target often boasts about its market share growth on calls to investors. Based on third-party research and Target’s own data, it gained $9 billion market share during the fiscal year that ended January 30. According to the company, it also gained $1 billion market share during the first three months this fiscal year.

Both retailers now face new challenges. Customers are now faced with additional expenses such as commutes to work, travel and eating out. These people are using the additional cash they’ve saved or received as stimulus funds to pay for their extra expenses. They are also seeing an increase in the cost of gas, groceries and other necessities. At the same time, the retailers are deciding to spend more on transportation — going so far as to charter their own ships, to make sure shelves are well stocked — and they have had to raise wages and sweeten benefits to ensure warehouses and stores are staffed and running smoothly.

Steph Wissink (a Jefferies retail analyst) said, after Target and Walmart made huge gains in the last year, that “giving up momentum is hard.”

“Price is the one lever that they have to continue honoring their customer promises, and to aggressively defend themselves,” she stated.

According to Wissink, the unusual setting has caused mixed signals regarding consumers’ behavior and mindsets.

She stated that the U.S.’s hyperinflation was not something they regularly deal with so she didn’t have any precedent, experience, or muscle memories to use. While we can look at other countries’ economies as proxy markets, the U.S. is a consumer-driven economy.

Target and Walmart are indicating that they fear losing customers, and possibly sales, by keeping prices low. Wissink stated that retailers have “strategically put their margins on the line in order to continue consumer growth.”

Brian Yarbrough is a retail analyst at Edward Jones. He said that it would take some time for us to determine if Target and Walmart are making smart decisions or terrible mistakes.

He stated, “It is all about market shares, marketshare, and marketshare.” Market share can often be at the cost of profitability when it’s all about market share.

At a 3-decade-high, inflation

Inflation hit a three-decade high in OctoberThe Labor Department reports that it was 6.2%. This index measures a variety of goods, including gasoline and food care as well as groceries and rents. The 6.2% increase in the consumer price index is the largest since December 1990.

Some categories have seen a bigger jump than others. In October, the price of fuel rose 12.3%. For October, used vehicles prices increased by 2.5%. And food prices grew by 0.9% — with meat, poultry, fish and eggs collectively increasing 1.7%.

Target and Walmart both have a large food section. Walmart is the nation’s largest grocery store by revenues. Target used its grocery business to drive traffic.

Target’s Cornell stated that growth in the food and beverage categories was one of the most important success stories of Target’s business during its Wednesday earnings call. According to Cornell, pantry stocking trips encourage customers to add a wide range of merchandise to their carts. This has led to higher online sales and curbside pickups of a gallon milk which have resulted in increased customer purchases.

McMillon and Cornell said that they don’t see any signs of price sensitive customers trading to lower packs or brands.

Katie Thomas, the Kearney Consumer Institute’s lead, stated that there are some costs that can be easily passed onto shoppers. A price increase in food is dangerous, said Thomas.

She said that grocery is going to be more difficult because the consumers will feel it every day. We all felt that prices had already risen even during the pandemic because we were purchasing more, but taking less. [store] trips. “People are aware.”

Retailers can raise prices for certain categories of products, she stated. She said that the trick is to determine where customers will be willing to pay more and how they might react.

She stated that even during a recession, or in inflation, consumers would make trade-offs between certain products and trade ups all over the board. For instance, she said, some people are willing to buy off-brand grocery bags or ketchup — but are unwilling to buy a lower quality steak or skip a trip to the hair salon.