(Bloomberg Opinion) -- Walmart Inc., one of the few big winners during the coronavirus crisis, just had a blowout quarter. The knock-on positive effects may last beyond the pandemic.
Bulk buying of toilet paper, bleach and hand sanitizer helped the world’s biggest retailer increase U.S. same-store sales (excluding fuel) by a better-than-expected 10% in the three months ended May 1. That marked the best performance in almost two decades. Going forward, sales may not jump to the extent they did during the recent nationwide lockdowns, but Walmart should still benefit from some permanent changes to shopping behavior.
The big-box giant had two distinct advantages during the Covid-19 restrictions that forced a quarter of a million shops to close, inflicting devastation across much of American retail. First, as an essential retailer, it was able to stay open. That meant Walmart shoppers could pick up supplies of electronics and fabric that they couldn’t get at other stores alongside their grocery items.
Secondly, Walmart has been investing heavily in its online business to protect itself from the threat posed by Amazon.com Inc. That paid off. The retailer’s efforts to bolster home delivery and turn its supermarkets into a bridgehead against the online behemoth with click-and-collect pickup services at more than 3,000 stores helped it to navigate the spike in demand, as U.S. e-commerce sales soared by 74% in the first quarter.
It wasn’t unalloyed good news. Despite the strong quarter, Walmart — like many other corporations — withdrew its full-year forecast made just three months ago. And the retailer incurred an extra $900 million of costs, owing to enhanced wages and benefits for staff and increased safety and sanitation in stores.
Fulfilling digital sales also entails higher expenses, as the retailer must do many of the things that the customer would have done in the past. As online demand rises, so do these costs, and this will be an ongoing challenge as sales migrate to the click of a mouse or tap of a smartphone. Meanwhile, in the early stages of the crisis, there was more demand for food, whose margins can be as thin as a slice of ham, as opposed to more profitable categories such as clothing. Consequently, Walmart’s U.S. operating profit didn’t increase as strongly as same-store sales in the quarter, and its gross profit margin narrowed by 1.1 percentage points.
There are other challenges as well. Bulk buying of soup, pasta and hair dye is unlikely to be repeated, as consumers use up what they bought, particularly if they are managing their budgets, too. More frugal shoppers could play into Walmart’s everyday-low-price hands. But they may also be tempted to turn to other discounters, such as the European no-frills supermarkets Aldi and Lidl, which are expanding across the U.S. It was during the recession that these cheap chic grocers got a leg up in Europe and America. Walmart needs to keep its focus on the competitive pricing to stop hard-pressed customers defecting to them this time around, too.
But even with these potential drawbacks, Walmart is one of the clear winners from the pandemic purchasing habits, alongside Amazon, which has been able to take advantage of consumers’ need for convenience and rivals’ reluctance or inability to deliver. Target Corp., which has also been investing in online and reports later this week, will likely show a similar boost in demand.
It’s likely, for instance, that some of those who tried out food shopping via the internet during the pandemic will continue with this way of purchasing. Digital sales accounted for 4.8% of U.S. total grocery spending in 2019, according to GlobalData. This could increase to 5.9% in 2020, a huge jump in just one year.
Walmart still needs to generate a profit at its internet division — it also said on Tuesday that it would discontinue Jet.com — while grappling with higher virus-related costs and a possibly moderating level of demand over coming months. But as other retailers such as department store J.C. Penney fail partly because they lacked digital scale, just having the online prowess to be able to stand up to Amazon is probably good enough right now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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