Where Walmart, Amazon, Target are spending billions in a slowing economy

When economic growth slows, the classic response for consumer businesses is to cut: slow hiring, possibly lay off workers, cut marketing, or even slow down the rate of investment. technology investments, delaying projects until business resumes.

But that’s not quite what the troubled US retail industry is doing this year.

With S&P retail index down nearly 30% this year, most industries are stepping up investment with capital spending at double digits, including the top of the industry Walmart and Amazon.com. Among the highest levels, only the clothes are more cramped Distance and home improvement series Lowe’s is being cut down significantly. At an electronic retail store Best buyfirst half profits more than halved – but investment rose 37%.

“There is certainly concern and awareness about costs, but there is an ongoing preference,” said Thomas O’Connor, vice president of retail consumer-supply chain research at consulting firm Gartner. out. “A lesson has been learned in the aftermath of the financial crisis,” says O’Connor.

That lesson? Investments made by major spending leaders like Walmart, Amazon and Home Depot likely to lead to taking customers away from weaker competitors next year, when Consumer discretionary cash flow is forecast to recover from a year-long drought in 2022 and revived shopping after spending on real goods fell earlier this year.

After the 2007-2009 recession, 60 companies classified by Gartner as “performance growth companies” that invested through the crisis doubled their earnings from 2009 to 2015, while the profits of the Other companies were mostly unchanged, according to a 2019 report of 1,200 US and European companies.

Companies have taken that data seriously, with a recent Gartner survey of financial executives across industries showing that investment in technology and workforce development is key. These are the last expenses companies plan to cut as the economy struggles to keep recent inflation from triggering a new recession. Gartner data shows that merger budgets, environmental sustainability plans, and even product innovation are dominating.

Today, some retailers are improving the way the supply chain works between their stores and their suppliers. That’s the focus at Home Depot, for example. Others, like Walmart, are pushing to improve in-store operations so that shelves are replenished faster and sales are lost less.

The trend toward more investment has been building for a decade, but was catalyzed by the Covid pandemic, said economist Michael Mandel of the Progressive Policy Institute.

“Even before the pandemic, retailers were shifting from investing in structure to investing heavily in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]Software investment in the retail sector increased by 123%, compared with a 16% increase in the manufacturing sector. ”

At Walmart, money is pouring into initiatives including VizPick, an augmented reality system that is linked to workers’ mobile phones to allow associates to replenish store shelves faster. The company boosted capital spending from 50% to $7.5 billion in the first half of its fiscal year, which ended in January. CFRA Research analyst Arun Sundaram said this year’s capital expenditure budget is expected to grow 26% to $16.5 billion.

“The pandemic has clearly changed the entire retail environment, forcing Walmart and others to be more efficient in their back offices and adopt online channels and options,” said Sundaram. Choose to receive in-store more. “It makes Walmart and all the other retailers improve their supply chains. You see more automation, less manual picking. [in warehouses] and more robots. ”

Last week, Amazon announced Belgian company Cloostermans acquires its latest warehouse robotics company, providing technology to help move and stack tables and heavy goods, as well as pack products together for delivery.

Home Depot’s supply chain improvement campaign has been going on for several years, says O’Connor. According to the company’s financial disclosure, its One Supply Chain effort is indeed hurting existing profitability, but it is at the heart of both operational efficiency and an important strategic goal – creating Deeper relationships with professional contractors, who spend more than do-it-yourselfers. who were once Home Depot’s bread and butter.

“To serve our professionals, it’s really about eliminating conflict through a multitude of services,” executive vice president Hector Padilla told analysts on Home Depot’s second-quarter call. and enhanced product capabilities. “These new supply chain assets allow us to do that on another level.”

Some wide-street retailers are more focused on renewing an established store brand. In Kohl’sThe highlight of this year’s capital expenditure budget is the expansion of the company’s relationship with Sephora, which is adding mini stores to Kohl’s 400 stores this year. Landon Luxembourg, retail specialist at consultancy Third Bridge, says the partnership helps the mid-market retailer add an element of sophistication to their ugly image. First half investment has more than doubled this year at Kohl’s.

According to chief financial officer Jill Timm, approximately $220 million of Kohl’s spending increase is related to the investment in beauty inventory to support 400 Sephora stores opening by 2022. “We will continue to do so. that next year.… We look forward to working with Sephora on that solution for all of our stores,” she told analysts during the company’s most recent earnings call in Between August.

Target is spending $5 billion this year adding 30 stores and upgrading another 200, bringing the total number of stores renovated since 2017 to more than half the chain. It is also expanding its own beauty partnership, first announced in 2020, with Ulta Beautyan additional 200 in-store Ulta centers are on track to reach 800.

And the biggest spender is Amazon.com, with more than $60 billion in capital spending in 2021. While Amazon’s reported capital spending numbers include its cloud computing division, it spent close to $31 billion in assets and equipment in the first half of the year. – up from the record it broke in 2021 – although the investment did turn the company’s free cash flow negative.

That’s enough to put even Amazon on the brakes a bit, with chief financial officer Brian Olsavsky telling investors that Amazon is moving more investment dollars into the cloud. This year, it estimates about 40% of spending will support warehousing and shipping capacity, down from 55% last year. Olsavksy told analysts after the most recent earnings — there were plans to spend less on stores around the world — “to better align with customer needs,” Olsavksy told analysts. most recent post-earnings analyst – has been a much smaller budget entry on a percentage basis.

At Gap – which has seen its shares fall nearly 50% this year – executives defended capital spending cuts, saying they need to protect profits this year and hope will recover in 2023.

“We also believe there is an opportunity to slow the pace of our investment in technology and digital platforms in a more meaningful way,” CFO Katrina O’Connell told analysts. better optimize our operating margins.”

And Lowe’s deflected analysts’ questions about spending cuts, saying it could continue to take market share away from smaller rivals. Lowe’s has been the better performing stock market than Home Depot over the past year-to-date and year-to-date period, although both have seen significant declines in 2022.

“Home improvement is a $900 billion market,” Lowe CEO Marvin Ellison said, without mentioning Home Depot. “And I think it’s easy to just focus on the two biggest companies and determine overall market share gain based on that alone, but this is a really fragmented market.”