Where Walmart, Amazon, Target are spending billions to slow down the economy

A Walmart employee loads an empty cart into a robotic warehouse to fill a customer’s online order at Walmart’s micro order fulfillment center in Salem, Massachusetts January 8, 2020.

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When the economy slows down, the classic response for consumer businesses is downsizing: hiring slowly, perhaps laying off workers, cutting back on marketing, or even slowing technology investment, postponing projects until the business picks up again.

But that’s not what America’s troubled retail sector is doing this year.

With the S&P Retail index down nearly 30% this year, much of the industry is increasing capital spending investment by double digits, including industry leaders Walmart and Among the top echelon, only Gap and Lowe’s, a home improvement chain, are cutting costs significantly. Electronics retailer Best Buy’s first-half profit fell by more than half, but investment rose 37 percent.

“Of course there is concern and cost awareness, but there is a prioritization going on,” said Thomas O’Connor, vice president of supply chain and 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-spending leaders like Walmart, Amazon, and Home Depot are likely to lead to customer grabbing from weaker competitors next year, when consumer discretionary cash flow is projected to bounce back from the 2022 annual drought and revive buying after. goods costs. actually declined earlier this year.

According to a 2019 report on 1,200 U.S. and European firms, after the 2007-2009 economic downturn, the earnings of 60 companies classified by Gartner as “growth firms” that invested during the crisis doubled between 2009 and 2015, while earnings other companies remained virtually unchanged.

Companies have taken the data to heart: A recent Gartner survey of financial executives across industries found that investing in technology and workforce development is the latest spending companies plan to cut as the economy struggles to keep recent inflation from another recession. . Gartner data shows that merger budgets, sustainability plans, and even product innovation are taking a back seat.

Today, some retailers are improving supply chains between stores and their suppliers. For example, this is the direction of Home Depot. Others, like Walmart, are looking to improve store operations so that shelves replenish faster and sales decline.

According to Progressive Policy Institute economist Michael Mandel, the upward trend in investment has been building for a decade, but it was catalyzed by the Covid pandemic.

“Even before the pandemic, retailers were moving from investing in structures to actively investing in hardware, technology and software,” Mandel said. “[Between 2010 and 2020]investment in software in the retail sector grew by 123% compared to a 16% increase in manufacturing.”

At Walmart, money is pouring into initiatives including VizPick, an augmented reality system linked to employee mobile phones that allows employees to restock shelves faster. The company increased capital spending by 50% to $7.5 billion in the first half of the fiscal year ending in January. The capex budget is expected to rise 26 percent to $16.5 billion this year, said Arun Sundaram, an analyst at CFRA Research.

“The pandemic has obviously changed the entire retail environment,” Sundaram said, forcing Walmart and other companies to be efficient in their back offices and make even more use of online channels and in-store pickup options. “It has forced Walmart and all other retailers to improve their supply chains. You see more automation, less manual picking. [in warehouses] and more robots.

Last week, Amazon announced its latest acquisition of warehouse robotics, Belgian company Cloostermans, which offers technology to help move and stack heavy pallets and goods, and pack groceries for delivery.

Home Depot’s campaign to revamp its supply chain has been going on for several years, O’Connor said. According to the company’s financial disclosures, its efforts to create a Single Supply chain are hurting profits for now, but this is central to both operational efficiency and a key strategic goal of establishing closer ties with professional contractors, who spend much more more than do-it-yourself. who were Home Depot’s bread and butter.

“To serve our professionals, it’s really about bridging the gap with a plethora of enhanced product offerings and capabilities,” Executive Vice President Hector Padilla told analysts during a Home Depot call in the second quarter. “These new supply chain assets allow us to do this at another level.”

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And the biggest spender is, which had more than $60 billion in capital expenditures in 2021. While Amazon’s reported capital spending figures include its cloud computing division, the company spent nearly $31 billion on real estate and hardware in the first half of the year. — compared to an already record-breaking 2021 — although the investment made the company’s free cash flow negative.

That’s enough to cause even Amazon to slow down a bit, with CFO Brian Olsawski telling investors that Amazon is moving most of its investment dollars into its cloud computing division. It is estimated that approximately 40% of spending this year will go to support warehouses and transportation capacity, up from 55% last year. He also plans to spend less on stores around the world — “to better match consumer demand,” Olsavsky told analysts after his latest earnings — an already much smaller percentage budget item.

At Gap, whose shares have fallen nearly 50% this year, executives have defended their capital spending cuts, saying they need to protect profits this year and hope to rebound in 2023.

“We also believe there is room to more substantially slow down the pace of investment in our technology and digital platforms to better optimize our operating profit,” Chief Financial Officer Katrina O’Connell told analysts after her latest earnings call.

And Lowe’s dismissed the analyst’s cost-cutting question, saying it could continue to take market share from smaller competitors. Lowe’s has outperformed Home Depot in the stock market over the past year and year-to-date, although both companies experienced significant declines in 2022.

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

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