The Supply Side: Retailers still spending on tech despite earnings declines

Many retailers have seen net income decline amid shrinking margins in 2022. Still, their capital spending on technology remains a top priority, while they may cut other expenditures if the economy slows in 2023, according to analysts with Telsey Advisory Group.

The analysts also said retailers are spending on store facelifts. They are being infused with more technology to enhance the shopping experience, and this could be beneficial as future market share could be up for grabs if the economy slows in 2023.

One doesn’t have to look far to see the woeful performance of the retail sector in 2022. The S&P Retail Index is down more than 30% this year, but capital spending by the most prominent retailers, Walmart and Amazon, is up by double digits.

In August, Walmart reduced its earnings guidance for the year’s balance but boosted capital spending by 50% to $7.5 billion in the first half of its fiscal year, ending in January. According to analysts, its capital spending budget is expected to rise 26% to $16.5 billion this year.

When Amazon unveiled a first-quarter loss in April of nearly $4 billion – its first quarterly loss since 2015 – the company said it had overestimated the pace of e-commerce growth and overextended its logistics network. It doubled in size during the pandemic with dozens of new fulfillment center projects and 370 million square feet of leased industrial space.

By the second quarter, Amazon had been slashing unneeded warehouse space by postponing ribbon-cuttings at newly built warehouses for up to two years, subleasing up to 30 million square feet and terminating some leases. Amazon also canceled numerous expansion projects for new fulfillment centers on 4,000 acres the company acquired amid the pandemic.

With a hefty $2 billion quarterly loss reported in August, Amazon said it would build more data centers and fewer warehouses by the end of next year. Amazon CFO Brian Olsavsky said the company had slowed plans to expand operations through next year and is shifting the focus of capital expenditures to developing the technology infrastructure. He said more than half of the total capital investments this year would be technology.

Through June, capital expenditures at Amazon had topped $15.7 billion, up from $14.2 billion in the same period last year.

Research analysts with Gartner said retailers are concerned about rising costs, and prioritization is taking place about where to spend. Thomas O’Connor, vice president of supply chain and consumer retail research at consulting firm Gartner, said investments made by big-spending retailers like Walmart and Amazon would likely take customers from weaker rivals next year.

Gartner studied 1,200 companies following the economic recession of 2007-2009 and found 60 companies had “efficient growth” after investing through the crisis. The companies saw earnings double between 2008 and 2015, while other companies struggled to grow income.

Gartner also recently surveyed finance executives across several industries, including retail and found investments in technology and workforce development were the last expenditures companies planned to cut amid other economic struggles. The survey found that budgets for mergers, environmental sustainability plans and product innovation are taking a backseat to technology investments.

Walmart has invested in operational efficiencies with technology applications like VizPick, an augmented-reality system linked to worker cell phones that lets employees restock shelves faster, leading to better on-shelf availability. The acquisition of Zeekit last year has allowed Walmart to recently announce virtual fitting rooms for shoppers who upload photos from their smartphones and then see how the garments look on their specific bodies. The Walmart virtual try-on announcement comes as apparel sales have pulled back in recent months amid rising costs for food and non-discretionary items and services.

Walmart said in August that consumers were becoming more budget-conscious, and the retailer also noted it was drawing in more households with incomes over $100,000. CEO Doug McMillon said Walmart would work to keep opening price points low for those seeking value and also provide a wide assortment of designer fashion options online and in select stores for those with more to spend but also seeking value.

“The pandemic obviously changed the entire retail environment,” said Arun Sundaram, a retail analyst with CRFA Research.

He said Walmart and others have had to become more efficient in their back offices and embrace online shopping and in-store pickup options.

Perhaps that’s why Walmart continues to invest in technology, taking an 11% stake in Artificial Intelligence firm Symbotic in June for an undisclosed amount. The investment came one month after Walmart announced it would add Symbotic’s automation technology to all 42 of its regional distribution centers over the next eight years. The system reduces time-consuming, labor-intensive work like unloading trucks, increases inventory accuracy, and boosts its warehouse capacity to receive and ship products to stores.

In August, Walmart acquired Volt Systems, a technology company that provides suppliers with enhanced on-demand visibility into merchandising resources. The retailer did not disclose the cost of the acquisition but said the technology would help it enhance actionable analytics and shelf intelligence to improve out-of-stocks.

Earlier this month, Amazon announced its latest warehouse robotics acquisition, Belgian firm Cloostermans, which offers technology to help move and stack heavy pallets and goods and package products together for delivery. Cloostermans is seen as an excellent complement to the Proteus robotic technology Amazon developed in-house and unveiled in June.

Target is also spending more amid what has been a tough year. The retailer announced $5 billion in capital expenditures this year to help scale the business, improve digital experiences and enhance pickup areas for the retailer’s growing online business. Much of the $5 billion will be spent on store remodels and 30 new locations. Target said it would continue investing in technology that builds on digital capabilities like Roundel, an internal media platform. Target said Roundel optimizes advertising placements on Target.com to deliver a more relevant, personalized guest experience and create value for partners. Last year, Roundel drove more than $1 billion in value, which Target expects will double in a few years.

Walmart’s investments in its digital advertising firm Walmart Connect generated $2.1 billion in revenue last year. Walmart’s recent foray into the fintech (financial technology) space also made news this month with a Bloomberg report of the retailer’s plans to offer digital banking services in a beta trial to employees and some online customers. That is possible because of the two fintech acquisitions Walmart made in January and the new startup “One” that blends Walmart tech and its recent acquisitions to try and develop digital banking products.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.