A Walmart employee loads a robotic warehouse tool with an empty cart to be filled with a customer’s online order at Walmart’s microfill center in Salem, Massachusetts, on January 8, 2020.
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When the economy slows, the classic response of consumer firms is to cut back: slow hiring, perhaps layoffs, slow marketing or even slow the pace of technology investment, delay projects until business picks up again.
But that is not what the troubled American retail sector is doing at all this year.
with S&P Retail Index down nearly 30% this year, with most industries increasing capital spending by double digits, including industry leaders Walmart and Amazon.com. Between the highest layers only fighting cloth Gap and a home improvement chain Lowe’s significantly limit. At an electronics dealer Best buyprofits fell by more than half in the first half – but investment rose by 37 percent.
“There’s certainly concern and awareness about costs, but there’s a prioritization going on,” said Thomas O’Connor, vice president of retail supply chain and consumer research at the consultancy Gartner. “We learned from the aftermath of the financial crisis,” O’Connor said.
The lesson? Investments from big spend leaders like Walmart, Amazon and Home Depot likely to lead to customers being taken away from weaker rivals next year when Consumer cash flow is expected to rebound from a year-long drought in 2022 and a pick-up in purchases after spending on goods actually eased earlier this year.
After a decline in 2007-2009, the 60 companies Gartner classified as “effective growth companies” that invested through the crisis saw profits double between 2009 and 2015, while other companies’ profits rose, according to a 2019 report on 1,200 US and European firms they hardly changed.
Companies have taken this data to heart, and a recent Gartner survey of CFOs across industries found 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 another recession. Gartner data shows that budgets for mergers, environmental sustainability plans and even product innovation are taking a back seat.
Some retailers today are improving the functioning of supply chains between stores and their suppliers. This is what Home Depot is focusing on, for example. Others, such as Walmart, are working to improve store operations to replenish shelves faster and avoid lost sales.
The trend toward greater 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 moving from infrastructure investments to active investments in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]software investment in the retail sector increased by 123% compared to a 16% increase in manufacturing.”
At Walmart, money is pouring into initiatives including VizPick, an augmented reality system linked to workers’ cellphones that allows employees to restock shelves more quickly. The company increased capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. The capital spending budget is expected to rise 26 percent to $16.5 billion this year, CFRA Research analyst Arun Sundaram said.
“The pandemic has obviously changed the entire retail landscape,” Sundaram said, forcing Walmart and others to be efficient in their back offices and make even more use of online channels and in-store pickup options. “Walmart and all other retailers have improved their supply chains because of it. You see more automation, less manual picking [in warehouses] and more robots.”
Last week, Amazon announced its latest warehouse robot acquisition, Belgian firm Cloostermans, which offers technology to help move and stack heavy pallets and goods, as well as pack products for delivery.
Home Depot’s campaign to overhaul its supply chain has been going on for several years, O’Connor said. Its one-supply-chain efforts are actually hurting profits for now, according to the company’s financials, but they’re critical to both operational efficiency and a key strategic goal — forging deeper ties with professional suppliers who spend far more than do-it-yourselfers. who were the bread and butter of Home Depot.
“To serve our professionals, it’s really about removing friction through a number of enhanced product offerings and capabilities,” executive vice president Hector Padilla told analysts in Home Depot’s second quarter. “These new supply chain assets allow us to do that on another level.”
Some retailers are more focused on refreshing aging store brands. IN Kohl’s, the highlight of this year’s capital spending budget is expanding the company’s relationship with Sephora, which is adding mini-stores within 400 Kohl’s stores this year. The partnership helps the mid-market retailer add an element of flair to its otherwise lackluster image, which contributed to its relatively weak sales growth in the first half of the year, said Landon Luxembourg, a retail expert at consultancy Third Bridge. Investments in the first half of the year have more than doubled at Kohl’s this year.
About $220 million of the increase in Kohl’s spending was related to investments in beauty inventory to support 400 Sephora stores opening in 2022, Chief Financial Officer Jill Timm said. “We will continue to do this next year. … We look forward to working with Sephora on this solution for all of our stores,” she told analysts on the company’s most recent earnings call in mid-August.
Target will spend $5 billion this year as it adds 30 stores and upgrades another 200, bringing the number of stores renovated since 2017 to more than half the chain. It is also expanding its own cosmetics partnership, which was first introduced in 2020, with Ulta beautyadding 200 Ulta in-store centers on its way to 800.
And the biggest spender of all is Amazon.com, which had over $60 billion in capital expenditures in 2021. While Amazon’s capital spending figures include its cloud computing division, it spent nearly $31 billion on property and equipment in the first half of the year. — up from an already record-breaking 2021 — even though the investment caused the company’s free cash flow to turn negative.
That’s enough to put even Amazon on the brakes a bit, with CFO Brian Olsavsky telling investors that Amazon is shifting more of its investment dollars to its cloud computing division. This year, he estimates roughly 40% of spending will support warehouse and shipping capacity, down from last year’s combined 55%. It also plans to spend less at stores around the world — “to better match customer demand,” Olsavksy told analysts after its latest earnings — which is already a much smaller budget item on a percentage basis.
At Gap — which has seen its shares drop nearly 50% this year — executives have defended their capital spending cuts, saying they need to defend profits this year and hope for a rebound in 2023.
“We also believe there is an opportunity to more meaningfully slow the pace of our investments in technology and digital platforms to better optimize our operating profits,” Chief Financial Officer Katrina O’Connell told analysts after the latest results.
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 in recent years and year-to-date, although both have seen significant declines in 2022.
“Home improvement is a $900 billion market,” said Lowe’s CEO Marvin Ellison, without mentioning Home Depot. “And I think it’s easy to just focus on the two biggest players and determine the overall market share gain based on that alone, but this is a really fragmented market.”