Inventory rise at Wal-Mart a concern for suppliers

Consumers want more choices and Wal-Mart seeks to deliver with a wide range of products in hopes their customers will fill keep filling those shopping carts, and feeding the retailer’s “cash cow” supercenters.

But some analysts say Wal-Mart’s move to satisfy a broader range of consumers has also pushed inventory levels higher in the past few quarters, which is a slight drag on the retailer’s gross margin returns.

At the end of fiscal 2013, Wal-Mart had $43 billion in unsold inventory, which amounts to 9.3% of the company’s annual sales. This metric edged up from 9.1% in 2012 and 8.6% in 2011. But more recently, fourth quarter inventory spiked 7.4% over the prior-year period.

At the same time, store traffic in the last quarter slipped 0.1% and average tickets (average sale per customer( rose just 1.1%, before inflation – a recipe for tension among buyers and suppliers, according to Leon Nicholas, senior vice president of retail insights for Kantar Retail.

Nicholas is one of four analysts with Kantar who are conducting a three-day workshop for retail suppliers in Bentonville this week.
 
‘BOOK END’ ISSUES
During the back half of 201, Wal-Mart’s inventory investments rose faster than sales, a trend Nicholas says is not sustainable. He said the recent inventory increase is not associated to the reverse of “Project Impact” which took place in 2010.

Nicholas said the inventory glut has more to do with the retailer’s efforts to “book-end” offerings, which essentially means offering “good, better, best” ranges of products that appeal to a wider audience.
 
“This year Wal-Mart has 20 mustard SKUs (product items) on the shelves, up from 17 last year. We counted more than 40 mayonnaise SKUs in a Neighborhood Market in downtown Chicago. How many is too many?” Nicholas said.
 
He described the inventory phenomenon as a “ditch-to-ditch” effort to cover all the bases.
 
The concern for Wal-Mart and ultimately its suppliers is the decline excess inventory has on gross margin returns.

“Make no mistake, returns are extremely important to Wal-Mart,” Nicholas said. “With the Walton family owning just under half of the company, dividends and total return is a high priority.”

‘STORE OF THE COMMUNITY’ RETURN?
Nicholas said the gross margin return on inventory investment peaked in 2010 at 298%, falling 29% over the past two years.

“You can bet this pressure is being felt among buyers on the frontline of the inventory situation,” Nicholas said.

He encouraged suppliers to look at their own score cards to see how they stacked up against Wal-Mart’s lackluster results in this metric. Nicholas also urged suppliers to think about how Wal-Mart may use technology to attack the inventory issues with more sophisticated forecasting tools in the works.
 
But he also warned that immediate inventory excesses would likely be dealt with by reverting to the “store of the community” mindset, which is all about leveraging local. This clustering concept generally means fewer stores for suppliers.

DRIVING TRAFFIC
Analysts agree Wal-Mart is fixated on a couple of words that rings through every executive speech amid major talking points: “leverage and discipline.”

Carol Spieckerman, CEO of New Market Builders, says “leverage” is a major fixation for the mega retailer who is continually looking for ways to use its mammoth scale to drive efficiency and ultimately beef up the bottom the line.

An example of leverage is Wal-Mart attempting to use its supercenters as distribution assets for same-day delivery. The retailer is also shaving 15% of its television marketing budget by producing its own shopping comparison ads which it says are resonating with increased store traffic.


Analysts say increasing supercenter store traffic is the ultimate goal and a concern as the shopping demographic continues to change. Nicholas said the supercenter is the cash cow for the Wal-Mart fleet, comprising 71% of the profits but only 59% of the total revenue.


“The profitability metrics around the supercenter breakdown rather quickly when traffic is down, so look for Wal-Mart to continually find ways to use this real estate asset differently in the next few years,” he said.