Wal-Mart and the paycheck-to-paycheck consumer

Posted by: Ben Steverman on February 18, 2010

Wal-Mart (WMT) has a problem: Its typical shopper appears to be tapped out.

On Feb. 18, the world’s largest retailer reported $112.8 billion in worldwide revenue last quarter, up 4.6% from a year ago. But Wal-Mart (WMT) also said U.S. same-store sales fell 1.6% last quarter, and noted traffic in U.S. stores fell slightly.

That unnerved investors, outweighing plenty of good news in Wal-Mart’s quarterly report. The company has been slashing expenses and inventory, and international sales growth remains strong. Earnings per share last quarter were $1.17, beating Wall Street’s estimate of $1.12.

Still, Wal-Mart shares fell 1.1% on Feb. 18, to close at 53.47.

One explanation for sales weakness is deflation. The company said prices for groceries and consumer electronics continued to fall, causing customers to spend less on each shopping trip.

The tough economy and high U.S. unemployment are also playing a big role. U.S. consumers are still feeling squeezed, Wal-Mart chief financial officer Tom Schoewe told reporters today. “We see the influence of the paycheck cycle as pronounced now as it’s been in the past,” he said, according to Bloomberg News.

In other words, Wal-Mart’s typical customers are living from paycheck to paycheck, just trying to scrape by.

There is a chance that an improving economy could take care of these two problems. Deflation could become inflation, and Wal-Mart customers could buy more if they start finding jobs.

My question: How much does this current economic weakness fall disproportionately on Wal-Mart compared to other retailers?

According to one intriguing statistic in Wal-Mart’s quarterly report, same-store sales at Sam’s Club actually rose 0.7% last quarter, while they fell 2% at the rest of the chain’s U.S. stores. This suggests that Sam’s Club’s higher-end consumers could afford to spend a little more last quarter, while Wal-Mart’s lower-end customers needed to get by with less.

At the beginning of the recession, Wal-Mart and other discounters were seen as the beneficiaries, as consumers “traded down” to cheaper options. It’s possible we’re seeing early signs of the opposite trend. Earnings reports from Target (TGT), on Feb. 23, and Costco (COST), on March 3, could reveal if their consumers are behaving differently from Wal-Mart shoppers.

In the meantime, Wal-Mart faces a tough challenge. Wall Street is no longer giving the company credit for impressive efforts to cut costs and boost profits. Instead, the chain — and its shareholders — must wait for economic fundamentals to turn around for its core customers. That could take a while.

Reader Comments

Strategery

February 18, 2010 8:59 PM

The irony is, Wal-Mart has caused job losses and reduced wages. The most obvious is Wal-Mart's low wages and part-time hours, which makes their 'associates' eligible for public benefits. Wal-Mart's drive for efficiency means they need less employees compared to other retailers. Because Wal-Mart sets trends in retailing, competitors (if they survive) are pressured to reduce wages. Finally, Wal-Mart has driven outsourcing; often requiring their suppliers to move manufacturing overseas or risk losing a contract. The result is less US manufacturing jobs from bicycles to bath towels.

Jim

February 18, 2010 10:11 PM

Walmart needs to look inward for the sources of its falling same store sales. Reductions in inventory have taken away a lot of the choice that used to exist for Walmart customers, and the products being kept are not always the ones the people buy. I was in a Walmart in Aurora, CO yesterday. The choice for paper towels was a 16 roll package of Bounty's lowest end offering or a 2 roll pack of Viva. This was not due to unstocked shelves--the positioning of the items indicated that these were the choices this store offered. Next to the 2 choices for paper towels, were 15 different choices for toilet paper. Of course, the store was a stereotypical Walmart--dirty, understaffed...............

steve quantro

February 19, 2010 1:12 PM

The marketplace and government intervention in the marketplace, is responsible for job losses and lower wages at Wal-Mart. Consumers seek lower prices. In response to consumer demand for lower prices, Wal-Mart seeks to lower their costs of doing business. Also, when considering the true value of the wages paid by Wal-Mart don't neglect to factor in the value of 'public benefits' paid to their workers. These should also be considered in the sum total of income received by their employees. Public programs, like W.I.C., earned income credit, foodstamps, unemployment insurance, Medicaid and c.h.i.p. plans boost the income of workers. Wal-Marts' relentless drive to cut costs is responsible for outsourcing production to lower cost areas! If American manufacturers would compete THERE WOULD BE NO OUTSOURCING by Wal-Mart, or anyone else, for that matter! Don't blame Wal-Mart for pushing some of their labor costs on government. They are only doing what any good company would do, which is to maximize the return for their investors!

g

February 19, 2010 2:24 PM

the last time i shopped at walmart they had made in america signs draped everywhere. once those signs went down and made in china was the norm, i haven't been back since.

jabril

February 19, 2010 2:33 PM

they're living paycheck to paycheck because of outsourcing and nothing else. americans are paying a steep price to save a couple dollars on a pair of tube socks or a dvd player, hope it's worth it

Econguy

February 19, 2010 2:33 PM

This is a good example of the data not getting you to the real answer. This small percentage sales drop probably falls disproportionately on Hispanics, who also figure large in that other Wal-Mart statistic of the percentage of its customers who do not have a bank account.

DF

February 19, 2010 3:28 PM

On the outsourcing topic, I think I've seen more made in America stuff at Wal-Mart than I have at Target and a lot of other stores.

BIGWEEDS

February 27, 2010 8:55 PM

Folks,
I believe that I have the answer to most of the USA economic problems. Back in the 50's in the town that I grew up in, when a dollar was spent there was a high probabilty that it stayed in our town where someone else would spend it. Over the years it has become normal that when a dollar is spent it first leaves our town and heads to a big city and then a high percentage of the dollars head overseas where very few are used to buy American made products which would send the dollars back to us. If the USA could turn the big ship slowly around and help people get into businesses where they could help keep the dollars at home I believe that we would start seeing a much improved economy. If this does not happen then my guess is that we will become a third world country never to know prosperity again.
Regards

ireneg

March 1, 2010 2:01 AM

WalMart Article

Clyde

March 3, 2010 9:09 PM

I do not buy the thinking that Walmart is the only place you can find products made outside the U.S. Its is not just Walmart, it is everywhere you shop. Our country has changed, even cars with American names are not made here, Jap and Korean names are actually now made here. GM shut down its plant with Toyota on the West coast, and is thinking of now operating plants in China. America needs to wakeup, we cannot blame is all on Walmart, they are only the messenger. There are no simple answers to keep American Dollars in America.

Anonsan

March 9, 2010 3:50 PM

Deflation has been persistent in Japan for two decades due to very low unemployment rate in Japan for the very low GDP growth rate. If GDP growth rate decreases, unemployment rate should be increased since average annual household income can be maintained in that way. But Japan did not do that. Instead Japan maintained low unemployment rate compared to othere developed countries. Therefore, annual Japanese household income has been decraseing for two decades. The solution of the Japanese persistent defaltion is to give much more flexibility in the labor market.

this one guy

March 22, 2010 1:08 PM

i love wal-mart :D

Craig McKinney

April 2, 2010 8:35 PM

My son was laid off at Walmart six weeks ago, and it has been challenging his receiving unemployment or qualifying for it. The next thing he can do is ask for a hearing. He said that four other guys were laid off at his store, and they, too, cannot get unemployment as theirs is being challege also by Walmart.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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