The coronavirus pandemic has led to a tragic loss of life worldwide. A lesser secondary consequence has been that it has disrupted supply chains everywhere. Fewer people are willing to work at prevailing wages when a deadly virus is in circulation. Those working sometimes get sent home for over a week during outbreaks of COVID-19 in their workplace.
As a result, the supply of goods and services has decreased. Simultaneously, consumer demand has been resilient as fiscal stimulus has buoyed people's wallets and fueled spending. Walmart (WMT -0.08%) is experiencing both sides of those macroeconomic forces. Spending at stores is increasing, but rising costs are hurting its profit margin. To counter the pressure on margins, Walmart announced on July 5 that it would impose a collect pickup charge on its network of suppliers. Let's consider what that could mean for investors.
Walmart shifts the burden of inflation to suppliers
The surcharge comes after Walmart lowered its full-year profit outlook in its quarterly update on May 17. Previously, the company had forecast earnings per share for its fiscal 2023 would increase by mid-single digits. Walmart lowered that guidance to say earnings per share would decrease by roughly 1% in fiscal 2023. The significant turnaround was a result of the speed of rising inflation.
Walmart is the largest retailer in the world, with operations in several countries. It has seen rising inflation in other parts of the world, but management noted the spike of inflation in the U.S. was unprecedented in terms of speed and magnitude. Indeed, the consumer price index in the U.S., which measures a basket of goods, rose by 8.6% in May. Therefore, it's not surprising to see Walmart exert its negotiating power with suppliers and raise prices.
U.S. Consumer Price Index YoY data by YCharts.
The move, if suppliers don't retaliate by leaving Walmart, could go a long way toward protecting Walmart's profit margin while keeping its low-price commitment to customers. In other words, Walmart wants suppliers to absorb a more significant share of the negative impacts of rising inflation.
Many other retailers have opted to raise prices that customers pay instead, likely in part because they do not carry the negotiation power that Walmart does. In its most recently completed fiscal year, Walmart generated a whopping $572 billion in revenue. Surpassing $500 billion in revenue is something Walmart has achieved in each of its last five fiscal years. That gives the company negotiating clout among suppliers who want to participate in its ability to command large-scale consumer spending.
WMT Revenue (Annual) data by YCharts.
What this could mean for Walmart investors
If successful, this move could remind investors of Walmart's massive scale benefits. While competitors are forced to either absorb higher costs or pass them along to their customers, Walmart has a third choice: to force suppliers to take the hit. That could attract customers to Walmart who are turned off by price increases from competitors. Regardless, investors will want to monitor the impacts of this decision over the next few quarters.
