Walmart Pushes Supply-Chain Strategy

"Walmart is going all in on its supply chain.

The retailer, in its two-day investment community meeting that concluded Wednesday, reiterated its target to increase sales by about 4% annually over the next three to five years and to expand operating income by more than that. Chief Financial Officer John Rainey said on Wednesday that the company sees a path for operating-income growth to be markedly higher than revenue growth. The bullish message seems to have gotten through to investors: Walmart shares gained about 1.7% after the company's presentation.

Walmart has outlined several different levers it can pull to get there, including selling more categories of higher-margin general merchandise. 

But what will truly move the needle is its investment in supply chain and technology, which Walmart thinks will reduce costs and result in better delivery speed and accuracy. Ultimately, the goal seems to be to retain and expand its e-commerce customer base, which is central to increasing higher-margin profit streams such as advertising.

Walmart is certainly putting its money where its mouth is: While the retailer increased its capital expenditures on U.S. stores by 72% last year compared with 2017, it more than doubled its spending on supply chain and technology. Its overall capital expenditures have increased as a result to 2.8% of its total revenue last year and are expected to stay elevated over the next few years. Between 2017 and 2021, Walmart devoted 2% of revenue to capital expenditures, on average.

The mention of heavy supply-chain investments could be triggering to investors familiar with Amazon's overbuilt fulfillment network, but Walmart's plans seem focused more on improving how it uses its existing assets. Walmart's built-in advantage is that it already has a vast network of stores that are within 10 miles of 90% of American households. It is cheaper to set aside floor space for e-commerce fulfillment than to build a completely new fulfillment center. In such stores, Walmart has already seen faster picking speeds on online orders and higher weekend store traffic because the sales floor is less crowded with employees.

Eventually, though, Walmart plans to automate most of that picking. It has set a goal of servicing 65% of its stores through automation in three years and moving 55% of fulfillment-center volume through automated facilities. Unit-cost averages could improve by about 20% as a result, the company figures. Because these are improvements behind the scenes, Walmart might need to provide more data going forward such as regular updates on average delivery times and picking speed to help investors appreciate its progress.

Ultimately, Walmart will have to prove that it can lift its returns back to what they were before it began investing heavily in e-commerce. In the past five-years, its return on invested capital was 9.1% on average -- a far cry from the 13% to 15% that Walmart experienced before e-commerce became a significant part of its business.

Walmart's future is looking more tech-driven than ever. Its numbers will have to live up to expectations that come with that word." [1]

1. Walmart Pushes Supply-Chain Strategy
Lee, Jinjoo.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 06 Apr 2023: B.12.