Solving the Riddle of Walmart Grocery

As Walmart officials reviewed a strong second quarter driven by stimulus spending on general merchandise and fast-growing online sales with an improving profit profile, they faced questions from some analysts about its grocery business.

While mid-single-digit grocery and high-single-digit fresh sales indicated Walmart’s food business was growing nicely, those figures paled in comparison to some recently reported comp spikes among its conventional supermarket peers, leading to some speculation the chain was losing market share as pandemic-spooked shoppers eschewed Walmart for more convenient—and presumably more expensive—alternatives.

U.S. CEO John Furner said the disparities could be explained at least in part by the chain’s steadfast commitment to its everyday low-price (EDLP) philosophy, which paradoxically widened price gaps vs. competitors riding inflation and a pullback in promotions, but didn’t necessarily draw shoppers at the same rate. Furner also tried to keep things in perspective, noting the significance of its massive scale in collecting sales, even as competitors such as Publix and Ahold Delhaize doubled Walmart’s grocery comps over a similar period.

“We were up high single digits for the quarter, and that equates to sales growth of about $3 billion. And for the year, we’re somewhere around just over $8 billion of sales growth in grocery for the year. So pretty big dollar gains for the year,” Furner said, according to a Sentieo transcript.

“We did keep our prices at the levels they were throughout the entire quarter,” he continued. “So being an everyday low-price retailer, we have seen average unit retails that have resulted in wide price gaps, and even wider price gaps in the second quarter than we saw in the first quarter. So that’s probably an important point determining the differences.”

Walmart encountered some of its own problems in grocery as well, Furner confessed, including stock conditions in some departments early in the quarter that he attributed to pandemic-related supply chain disruption. Another concession to the pandemic—reduced store hours—may have also cost Walmart some grocery rings, Furner said. Most of the supply issues have since dissipated, he added, and its 4,100 units have since pushed closing times back by 90 minutes, from 8:30 p.m. to 10 p.m., which he noted had curtailed sales especially as the summer wore on.

“But if you look at the entire business, the real positive is, in total, we believe Walmart did gain share,” Furner said. “General merchandise was very strong. It looked like the share gains there did make up for anything that could have been lost in food. But the data, it’s a lot to work through, and we'll be reacting to the situation as time goes, and we'll be able to tell a little bit further out how this really turns out.”

Chris Mandeville, an analyst following Walmart for Jefferies, in a note to clients attributed the relative food comp weakness to price insensitivity from consumers who over the course of the pandemic have reeled back pre-COVID habits of shopping around, and rewarded merchants with product in-stock, presumably with the help of federal stimulus funds. “In a situation where stimulus is lower, we would expect this trend to reverse and value to return to top of mind,” he said. “As such, we remain confident that Walmart can grow [long-term] share.”

In other topics covered in the earnings review, officials confirmed widespread speculation that a subscription-based program, expected to be known as Walmart , was on the way but they continued to hold back much detail. CEO Doug McMillon said the membership program would follow in the wake of benefits the company realized from previous initiatives to integrate its online food and general merchandise businesses through app consolidation. The program would build on the $98-per-year Delivery Unlimited program launched late last year.

“Since that launch, we’ve proven to ourselves that we can pick and deliver a broad set of categories across the Supercenter—not just food and consumables, but a wide assortment of general merchandise,” McMillon said. “We think that assortment breadth, and our ability to deliver with speed nationally, combined with a few other benefits for customers, will result in a compelling proposition, so we've been moving toward a new membership launch.”

The fruits of Walmart’s integration were revealed in part through 97% online sales growth during the quarter, Furner added. This is welcome news for Walmart, which has long sought to reduce losses in e-commerce that came with leading with lower-margin grocery. Third-party sellers on Walmart’s online marketplace also saw a strong quarter, which also helped stem losses.