Wal-Mart Stores (WMT) shocked Wall Street on Wednesday with a warning that revenue won’t grow this fiscal year, contrary to prior forecasts. Worse, the retail giant also told investors to brace for a sharp drop in profits next year, thanks to big investments in its e-commerce and higher salaries for its workers.
The investments are critical to a strategy that seems paradoxical for a retailer that is largely associated with lower-income shoppers: Wal-Mart is going up market with some of its assortment and store presentation in a bid to win more business from the middle and upper middle class.
At the company’s annual investor meeting, CEO Doug McMillon said that in markets where Wal-Mart’s different divisions (including Sam’s Club) operate stores, middle-class households were expected to generate about half the growth in overall retail sales, making them essential to its plans.
“Globally we know that growth will disproportionately come from middle- and upper-middle income households in the years ahead,” McMillon said.
Asked whether Wal-Mart’s efforts were specifically aimed at getting higher-income consumers on board, McMillon said: “That will be the outcome.” He added: “The nature of e-commerce, the nature of the Neighborhood Markets (smaller grocery stores) and other things we’re doing do create an opportunity for us to be even more relevant to customers that are at the higher end of the scale.”
While McMillion was quick to point out that Wal-Mart would continue to focus on what it calls “opening price points” for its lowest-income consumers, he challenged the perception that Walmart (as its chain of stores is known) customers skew to the lower end of the income spectrum, saying its clientele largely mirrors U.S. society.
It’s just a question of getting more out of the customers on the righthand side of chart that Wal-Mart showed investors on Wednesday, all the more since wages for lower-income Americans are stagnating.
(One caveat: Walmart may mirror U.S. society, but its customers are nonetheless on average less affluent than those of Target (TGT): according to 2014 Kantar Retail data, the average Walmart shopper had a household income of $53,125, about $12,000 less than her counterpart at Target.)
The cornerstone of Walmart’s efforts in the U.S. has been a better grocery offering at both its big boxes and Neighborhood Market stores, more organic food, more e-commerce (Walmart is currently testing a service similar to Amazon.com’s (AMZN) Prime free-delivery service, among other efforts) and cleaner stores. And there are some green shoots: Walmart’s internal research found customer service scores have improved dramatically since February.
But on the grocery side, these efforts come as Walmart, the largest U.S. grocer with annual sales of about $160 billion, faces similar efforts from archival Target and everyone from Safeway to Albertson’s (which this week is expected to be listed on the stock market again) to Kroger (KR) is upgrading its offerings, particularly organic food, as they eye the same, more-affluent customer Walmart covets. In addition, Walmart could face pressure from Whole Foods Market’s (WFM) upcoming lower end 365 chain.
By some estimates, the company’s U.S. division gets nearly 20% of its sales from people who rely on food stamps, but Walmart also appeals to a sizable middle-class clientele among the tens of million of Americans who shop there once a week. (Globally, 260 million people shop at its stores every week, though Wal-Mart does not break that out by market.)
Among other efforts designed at least in part to woo the more affluent, Walmart is investing a fortune in its e-commerce ($2 billion in the next two years alone), offering free pick-up service at some stores for grocery orders placed on line, and giving workers raises to ultimately make stores more appealing, improve customer service and address its long-standing out-of-stock problems; all moves aimed at winning over shoppers with more money to spend.
Wal-Mart shares fell 10% on Wednesday, losing more than $20 billion of its stock market value. (Investors didn’t seem to be assuaged by Wal-Mart’s projection that annual sales could rise as much as $60 billion by fiscal 2019.)