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What’s next for Walmart after solid quarter?

While some US retailers struggled over the holiday period, Walmart notched up respectable sales gains both overall and on a same-stores basis.

Comparable uplifts were higher than any other quarter during this fiscal year. Unfortunately, this performance was not replicated on an international basis where sales slides in both the UK and Brazil helped offset some of the gains made in the US. And the strong US dollar also diluted international performance: on a constant currency basis, total sales grew by 2.9 per cent compared to the 0.8 per cent uplift when exchange rate fluctuations are included.

In the domestic business, a number of things helped Walmart over the holiday quarter. Foremost was the strategic decision to invest in price and to heavily promote this fact to consumers. After a long period in which Walmart has seen some erosion from the one-dimensional pricing tactics of the dollar stores and new low-price entrants like Aldi, Walmart is now back on the front foot of being an Every Day Low Price leader.

Admittedly there is more work to do across this year to sustain that position, but the message played well to holiday shoppers who remained price conscious across most of the season. This was one of the key reasons Walmart managed to increase customer traffic.

If price had been the sole focus of Walmart over the final quarter the results would have been somewhat more subdued than they were. However, Walmart realised that in order to deliver value – and to help differentiate it from low-cost rivals – it also had to emphasise service. From my own store visits, the greater availability of associates was noticeable, and there was far more activity on the shop floor with demos and entertainment helping to improve conversion rates among shoppers.

As simple as these steps might be, they proved to be critical moves in terms of defending and growing share over the holiday season. Walmart always gets the basics of retailing right – and this holiday season is a case in point.

Walmart’s sales success came with a cost attached. Gross margins declined by 8 basis points during the quarter thanks to price sharpening and the impact of its various eCommerce investments. This deterioration is a necessary evil that investors must accept as the result of a more competitive and price focused retail environment. Failure to deliver on the price front could have serious long-term ramifications for the Walmart business.

The need to invest in price comes at a time when Walmart also faces cost pressures from its investments in eCommerce. There is a clear and concerted effort by the business to transform its fortunes online and to do this by acquiring capacity, talent and capability. This first became clear with the acquisition of Jet.com, which has now been joined by the takeover of the ShoeBuy and Moosejaw eCommerce propositions.

These deals are a shortcut to growth in that they give Walmart an immediate boost, in a way that would be difficult to achieve if everything was to be done organically within the traditional Walmart business. There is no denying that Walmart did not flex its eCommerce muscles soon enough, but it is now working at a rapid pace.

It’s encouraging to see the corporate activity in eCommerce is matched by a focus on the customer proposition. This includes the recent announcement of free two-day shipping on orders of $35 or above, and a sharp increase in the number of products available for ordering online. The next step must be to focus on improving the website, mobile and app experience in order to make Walmart one of the go-to online destinations.

All of these steps will take time to deliver and during that time there will be costs. As such, it is reasonable to assume that the investments will act as a drag on near term profitability. This is sensible, and aligned with the way Amazon sacrifices short term profit for long term gains – the difference being that Walmart, even with these investments, remains a much more profitable entity.

As much as positive things are happening in the domestic market, Walmart’s overseas performance is a cause for concern – especially in the UK. It is evident that Walmart must get a firmer grip on this part of its business. Investments in price, simplification of the proposition, and improving store environments and customer service are all necessary steps. But again, necessary steps that come with a cost attached.

Overall, Walmart is a sound business that, despite its size and scale, operates in a very entrepreneurial way.

However, the year ahead, is one of reinvention and investment and not of profit maximisation. This is the right strategy for continued long-term dominance.

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