Increasing gas prices and commodities are affecting retail in major ways. According to CNN, for every $1 dollar increase in the price of a gallon of gas, consumer spending lowers by $100 million. Charles Grom, analyst at JPMorgan Chase, examined how investors and analysts have become alarmed about rising gas prices and the toll it took on consumer spending in 2011.
Wal-Mart’s U.S. same store sales deterioration
3 reasons Wal-Mart is struggling
- Same store sales deteriorating in the U.S.
- Heightened competition from niche grocers and dollar stores
- Lack of free flow due to international expansions
Grom stated that what he’s been able to tell from the data is that Wal-Mart’s traffic has simply remained elusive and that despite the good outlook for international expansion, Wal-Mart’s U.S. base has been suffering. And because nearly 80 percent of their business comes from the U.S., Grom believed they needed to spend serious time and effort on traffic-driving initiatives.
Wal-Mart continued to invest in capital to grow the business in 2011, but didn’t produce the strongest returns decreasing to $10.9 billion from $14.1 billion. The Wal-Mart team began implementing aggressive plans to try and retain U.S. sales and to offer a broad merchandise assortment more relevant to their consumers and guests. Other plans included expanding multi-channel initiatives, reallocating selling space, and growing through smaller formats in both grocery stores and convenience formats as they continued to keep U.S. sales and growth a main priority.
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Costco Wholesale and cost increases: What it means for consumers
Grom noted in an earnings call with Costco that their fresh foods margins have been down. Grom assumed it was because Costco wasn’t willing to pass the price increases of commodities and food onto customers. Executive Vice President and CEO Richard A. Galanti agreed with Grom’s assumptions adding that he didn’t see any major competitive issues in their fresh foods but overall margins have been quite good.
Galanti and Grom also discussed how gas prices had hurt them in the second quarter. Galanti made reference to some relatively flat numbers, but determined it wasn’t a real big issue.
Costco referenced that throughout 2011 prices of certain commodities including gas and other food products had affected sales and profit margins, but they continued to grow and compete with discount retailers and supercenters seeing increased sales across all departments. Net sales increased 17 percent in 2011 for Costco. The retailer’s growth strategy included expanding business in existing and new markets and a recently announced increase in annual membership fees by $5.
Target’s Canadian entrance to create substantial growth
Target stated that they expected to invest about $2.5 billion – plus or minus $200 million – in capital in the U.S. retail segment in 2011. With their movement in the Canadian market, they expected those stores to help the company exceed $100 billion in sales in the next 6-to-7 years beginning in 2011.
As far as consumer outlook was concerned, Target believed consumer optimism would again increase and anticipated that the 2011-year would compare to first quarter of 2010. The retailer discovered that consumers are still risk-averse concerned about lost jobs and thus have increased coupon use, focused heavily on promotions and have opted for the good option as opposed to the better or best option. Target planned to help their consumers understand features, quality, and value at every price point throughout 2011.
Earnings per share in the third quarter of 2011 increased 10.2 percent to $0.82 from $0.74 in the same period a year ago for Target. Other U.S. results saw increases of 5.4 percent citing the right strategy, strong credit card segment and supporting guests and team members as driving factors for the growth. For Canada, actual expected market entry is slated for 2013. With that said, third quarter 2011 EBIT was $(35) million due to start up expenses and depreciation. Target has started to staff up its operations in anticipation for the first string of openings in March 2013. The retailer expects to have a huge impact on the Canadian retail landscape and within a decade, foresees generating $6 billion a year in sales. All in all, Grom’s goals for Target’s Canadian entrance have potential to come true.
Macy’s see 2011 as another positive year
For Macy’s, 2010 was a great year. The retailer saw a 4.6 percent annual comp increase, which was their best performance in at least 15 years. Looking forward to the 2011-year, Grom noted that the gross profit margin line sounded like Macy’s expected first quarter to be down. Chief Financial Officer and EVP Karen Hoguet expected a 3 percent comparable store sales increase for 2011 and didn’t see a huge deviation from quarter-to-quarter. In reference to commodity price increases, Hoguet said that it has been a challenge Macy’s was taking very seriously adding that it was a lane in which they successfully played prior to the recent recession. She continued on to say that a significant portion of Macy’s business were in categories not impacted by escalation in raw materials prices, but Macy’s has established a pricing team to provide more analysis on pricing decisions.
Same-store sales were up in the first quarter increasing 2.6 percent in January and 5.8 percent in February. However, March saw a mere 0.9 percent increase, which actually exceeded expectations as Macy’s anticipated a negative first quarter. Further along in 2011 in the fourth quarter, same-store sales were up 4.8 percent thanks to a strong Black Friday.
Overall, Macy’s saw positive results in 2011 having launched new lines and brands, announced a $400 million renovation of their New York flagship store, and created new social media initiatives. Macy’s sought stronger sales by differentiating merchandise assortments and tailoring items to local taste also contributing to growth in 2011.
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Rising gas prices and commodities are not going to disappear overnight; they are challenges that retailers will continue to face throughout the next few years. With many options out there for retailers to acclimate to these challenges, the best approach is for companies to implement an automated solution that provides all the right tools to adapt to changing conditions. Quantum Retail’s platform, Q, addresses the rapidly shifting patterns of the changing retail industry providing unprecedented value for retailers.
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Read Grom’s full prediction here»
Please note that the information provided above is sourced from public releases and reports and does not include any undisclosed information from or about the retailers named.
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Stay posted for next week’s review from Matthew Fassler, Goldman Sachs