May 23rd, 2022: Walmart’s profitability miss, REI’s circular commerce efforts, Klarna’s virtual shopping feature, and Target’s Q1 earnings
It’s May 23, 2022 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Walmart Quarterly Profitability Miss Confirms Economic Slowdown
REI Circular Commerce Efforts Show Great Progress
Klarna’s New Virtual Shopping Feature Makes Me Worry For Buy Now Pay Later
Target Q1 2022 Earnings Highlight Short-Term Profit Challenges, But Long-Term Outlook Still Strong
- and finally, The Investor Minute, which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
==
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
==
[PAUSE]
BUT FIRST in our shopping cart full of news….
Walmart Quarterly Profitability Miss Confirms Economic Slowdown
Walmart announced Q1 2022 Earnings this last week. Here are a few callouts:
- eCommerce growth was essentially flat at 1% year over year growth. (In contrast, Amazon's net sales increased 7% year over year). We’ll talk more about this.
- Walmart is gaining share in the US grocery market. Basket size is up while units per basket are down.
- Wages, inventory levels, and supply chain fuel costs are the big reasons for the profitability miss.
- The company’s global advertising business grew 30% year over year.
- Walmart lost a big fulfillment center due to a fire, thus volume spread to stores.
- Walmart is gaining share in grocery due to its elevated pricing and value position.
- Regarding Walmart GoLocal, there are now 1,600 delivery points available in the US (about one-third of stores - which seems like good progress).
The US category mix moved more to food and consumables, away from discretionary.
Some thoughts on the results:
* I would have liked to hear more utilization or customer updates for GoLocal.
* Walmart's recovery from the huge fulfillment center fire speaks to the value of the company’s distributed fulfillment strategy.
* Inflation effects can be seen by basket sizes going up with units per basket going down.
In this type of economy, the learnings are a little bit harder to come by because:
- Each quarter is a little different (lumpy progress and results).
- Focus on free cash flow is generally the biggest lesson. This makes me worry about upcoming Amazon quarters due to heavy infrastructure build-out in the last two years.
I would like to talk a little bit about Walmart’s eCommerce results and what I feel they are missing.
First, it seems like Walmart+ is not going anywhere fast. Amazon Prime is the king in this market and with the recent NFL Thursday Night sponsorship, it is holding strong for the foreseeable future.
It's harder than you think to take Amazon customers away; Amazon has a huge defensible moat.
In the current climate, my feeling is that growth in the enterprise retail segment is zero-sum, meaning if one retailer wins then the other loses.
Additionally, if you go back to previous quarters, the things that Walmart was highlighting were mostly supply-related –how many sellers and SKUs it was adding.
How much GMV did those sellers and SKUs produce? Not very much.
Finally, Walmart is learning that supply is not the most important lever. The company is adding lots of international supply. Problem is, the shopper is not following.
It's actually the shopper that's important.
What I think you see in Walmart eCommerce is a poor copy of Amazon's business model. It's like what Amazon would be if there was no Prime. A big website, but not nearly the juggernaut that it has become.
Until Walmart learns that, I expect it will be a difficult road.
[References:]
https://corporate.walmart.com/press-center/walmart-releases-q1-fy23-earnings
https://www.cnbc.com/2022/05/17/walmart-wmt-earnings-q1-2023.html
[PAUSE]
Our Second Story
REI Circular Commerce Efforts Show Great Progress
A recent article in Modern Retail reported on continued progress from retailer REI in its circular commerce efforts.
Over the past few years, the retailer has invested heavily in resale to drive growth. I wanted to highlight a few things about REI’s efforts because I think they are unique in the industry:
The ultimate goal is for the company to have a very well-developed omnichannel used gear business allowing both resale and trade-in both in-store and online.
In 2018, the company launched year-round used gear sales.
In late 2020, the company not only launched two stores dedicated to used gear, it also launched a trade-in program online and did a pilot in select stores.
Now, REI is expanding this pilot to all of its stores.
Ultimately, I think REI is showing that not only is this resale opportunity real for those with high-end products that retain their value. This growth can be accelerated when it matches your overall brand message.
This is proven by the fact that its resale business outpaced REI’s overall revenue growth.
[References:]
Our Third Story
Klarna’s New Virtual Shopping Feature Makes Me Worry For Buy Now Pay Later
Klarna, a payments company best known for its Buy Now Pay Later business as well as its advertising network, is moving into virtual shopping, and I don’t think it’s a good look. Here are the basics of what it’s are doing:
The company is launching a feature which allows shoppers to connect with sales associates through chat and video calls in order to help them through the purchase experience.
The new feature is rolling out in 18 markets, including the United States, United Kingdom, Sweden, and Australia.
The backdrop here is that Buy Now Pay Later seems to be faltering as a business model as these companies are finally realizing that there is an actual business reason for credit scores after all.
While I admire the pivots to new markets, the big question I have is, what does this say about the core business?
Does Buy Now Pay Later have a future? Is it anything more than a model that just takes advantage of consumers, or is there real social utility there?
I’m not saying I know the answers to these questions, Watsonians, but the answer to the social utility question in particular holds the future to the industry.
[References:]
[PAUSE]
And Our Last Story
Target Q1 2022 Earnings Highlight Short-Term Profit Challenges, But Long-Term Outlook Still Strong
Anyone who wants to learn eCommerce and retail could do much worse than go back and listen to Target earnings calls for the past eight years, highlighted by:
* Consistent strategy
* Real data with explanations
* Steady and experienced leadership
Here are a few callouts from today's Q1 2022 earnings call.
Overall:
* 2022 margin guidance is approximately 6% as opposed to the 8%+ normal target. This has been driven by a shift in inventory, supply chain issues and mix.
* Q1 comparable sales show 3.3% growth, on top of 23% growth a year ago.
* Mid-teen growth in store pickup was reported.
* Digital same-day was half of digital Q1 sales. And half of same-day was drive-up (rather than pick-up). This is an unbelievable multi-year deliberate strategic story here.
>Supply Chain Woes Will Persist Into 2023
* The supply chain challenges will yield more than $1 billion in extra expenses in 2022 due to freight availability and costs. There will be hundreds of millions in unexpected costs in Q1 due toth e use of spot rates – inventory has arrived both sooner and later, particularly bulky items.
* It is difficult to move inventory where/when Target needs to.
* Unfortunately, there is no relief from supply chain challenges until 2023. Help is not on the way.
>Category Mix Shifted in Past 2 Months Faster Than Expected
* There were small declines in apparel, hard lines, home in same store comparables. There was a big slowdown in electronics, appliances, TVs, and outdoor furniture.
* The low double-digital growth in food & beverage was led by owned brands.
* There was growth in beauty, sunscreens, color cosmetics, toys, fashion-forward apparel, and travel as baskets shifted to experiences, going out, and seasonal/holiday.
>Expansion Plans Largely Unchanged
* New stores are still opening and six new local/metro sortation centers opened with three more planned by the end of the year.
* Three current sort centers handled 4.5 million packages in Q1.
[References:]
https://www.cnbc.com/2022/05/18/target-tgt-q1-2022-earnings.html
https://corporate.target.com/article/2022/05/q1-2022-earnings
[PAUSE]
It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
eCommerce marketplace startup Body404 raised money at a $50 million valuation in order to bring Chinese independent brands to the world.
I browsed the website and it looks something like a Shein clone, except that it’s a marketplace model rather than a fast-fashion model. It will be interesting to see if the US consumers respond to the difference.
https://techcrunch.com/2022/05/13/body404-valuation-50-million-china-indie-fashion/
Second
Financing platform Wayflyer just raised $300 million in debt from JP Morgan in order to fund inventory and marketing spend for growing direct to consumer brands.
In a challenging economy, this suddenly looks like a quaint little pandemic business. I wish them a lot of luck because JP Morgan will come calling for these funds…. and unlike those Buy Now Pay Later businesses, JP Morgan is more of a “Pay Now”-type company.
Third
Resale platform for brands Recurate raised $14 million to grow its peer-to-peer resale business.
The idea is that rather than ceding control of your brand to Thredup, Poshmark and eBay, you can take control of your brand and own the complete resale experience yourself as a high-end brand.
Fourth
Austrian-based headless content management system Storyblok just raised $47 million in order to bring simple web pages and updates to marketers.
This caps a recent set of fundraising in the headless market with Amplience raising $100 million as well.
And Finally
Warehouse robotics firm Grey Orange raised $110 million in debt and equity.
The company was formed in India in 2015 and the funding will go towards hiring and ramping up the production of its warehouse automation solutions.
Link:
[PAUSE]
That’s all for this week! Till next time, Watsonians.....
[PAUSE]
Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our show is produced by Citizen Racecar. Alex Brower is the producer and also wrote our theme music. The Executive Producer is David Hoffman.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.