In college, one of my roommates christened me with the nickname "the eternal snacker." I earned this title due to my eating habits, which primarily consisted of consuming potato chips, nuts, and other treats upon returning from the library late at night.
Now that I have been removed from the classroom for well over a decade and developed healthier eating routines, it's hard not to notice what options other people employ in order to curb appetite cravings. It seems like each night when I watch television, a bombardment of commercials promoting diabetes and weight-loss supplements such as Ozempic play like clockwork. I'll admit that the jingles on these commercials are catchy, but do people actually take these medications?
According to the most recent earnings report from Ozempic-maker Novo Nordisk, the demand for the drug and related treatments such as Wegovy, Saxenda, and Rybelsus is unprecedented. Wall Street has been suspicious that the rising popularity of weight-loss supplements will have a ripple effect throughout other industries, notably food and beverage, restaurants, and brick-and-mortar retail.
Just a few days ago, the largest retailer in the world, Walmart (WMT +0.99%), confirmed these conjectures. Or did it?
Let's explore what the market for Ozempic and similar treatments looks like and take a wide-ranging approach to the impact these drugs may be having on retail. While the high-level assumptions about Ozempic's impact on other businesses might seem obvious, there are a number of conflicting data points floating around that make it challenging to assess if companies such as Walmart are really facing a threat.
How is Ozempic impacting Walmart?
A recent report from Bloomberg covered the impacts Ozempic appears to be having on retailers, and revolved around data insights discovered by Walmart. Similar to CVS and Target, Walmart provides shoppers the option to use the store as a one-stop shop for food, consumer staples products, and fulfilling prescriptions.
Although the exact details of the study are not entirely public, executives at Walmart shed some light on the research. Effectively, given the data Walmart collects from prescriptions and general shopping patterns, Walmart is able to build a cohort analysis that benchmarks those who do not take Ozempic against those who do. At a deeper level, Walmart can see what items these people are buying and compare that to prior shopping behavior.
The result? Walmart's U.S. CEO, John Furner, stated that the data shows a "slight pullback in overall basket" from those who take Ozempic. While this lower-priced average shopping basket may look like a real concern for Walmart, there is a critical nuance in this statement.
Image source: Getty Images.
More than meets the eye
When you first read Furner's declaration, it might look like people on Ozempic are spending less money at Walmart. However, this is a generalization and a conclusion that may not be entirely accurate. Rather, Furner is trying to convey that people who take appetite-suppressing treatments are specifically spending less on food at Walmart. But does that mean they are spending less money overall?
Business Insider recently covered a report issued by Morgan Stanley and its learnings on Ozempic's impact on Walmart. The primary takeaway is that Furner's comments were largely misinterpreted by investors and media outlets alike. As reported by Business Insider, shoppers who take Ozempic have actually increased their overall spend at Walmart; however, it's the product mix that is changing.
Morgan Stanley's research suggests that shoppers on Ozempic are spending money in other categories. To back up Morgan Stanley's claims, I took a deep dive into Walmart's latest financial results. For the quarter ended July 31, Walmart reported the following by revenue category:
| Category ($ in billions) | Q2 2023 | Q2 2022 | % Change |
|---|---|---|---|
| Grocery | $80.6 | $74.9 | 8% |
| General merchandise | $29.1 | $30.1 | (3%) |
| Health and wellness | $14.6 | $12.3 | 18% |
| Fuel, tobacco, and other categories | $3.3 | $4.4 | (24%) |
| Home and apparel | $2.4 | $2.5 | (3%) |
| Technology, office, and entertainment | $0.6 | $0.6 | (11%) |
| International | $27.6 | $24.4 | 13% |
| Membership and other | $3.5 | $3.7 | (6%) |
| Total revenue | $161.6 | $152.9 | 6% |
Data source: Q2 fiscal 2024 financial statements.
There are two things that really stick out to me. First, while some shoppers are buying less food, overall grocery sales are increasing year over year. While this is likely attributed in some part to inflation, I think there is a broader observation. Namely, the cohort of people taking Ozempic and similar medications is not yet offsetting the rest of the customer base when it comes to food shopping. In other words, the shopping behaviors of those who do not take Ozempic outweigh those who use the drug and have shifted food consumption patterns.
Another big takeaway from the financial profile is the boom in health and wellness sales. People who take weight-loss treatments may also be ratcheting up spending in health and wellness subsectors including dieting supplements and athletic gear. It's likely too early to know any of that for sure, but the speculation holds some merit.
Is there a bigger theme here?
When I look at the situation Walmart is in, it's hard not to draw a connection to the budding world of artificial intelligence (AI). For the last several months Wall Street analysts and investors have been obsessing over the latest advancements in generative AI. Big Tech enterprises such as Alphabet, Microsoft, and Amazon are all investing aggressively in proprietary language models and integrating this tech into disruptive areas like cloud computing.
But if you zoom out, the advent of AI can impact far more than software businesses. While it is not known if Walmart is using any specific AI tool, it's safe to say that the company is seriously relying on data to analyze consumer shopping habits. Broadly speaking, I think that AI's impact is currently being discounted as it applies to the retail sector.
NASDAQ: WMT
Key Data Points
It's easy to be drawn into the notion that traditional retailers face an existential threat from e-commerce businesses and gig economy services. However, a contrarian may put forth the idea that large-scale businesses such as Walmart, Target, and Costco are well positioned to benefit from any changes in broader shopping trends given the sheer number of locations each has and the respective brand equity each carries.
As artificial intelligence begins to take shape and play more of a role in digital transformation, it's possible that retailers will be some of the biggest buyers of the technology. Moreover, I personally feel that Walmart's study demonstrates how advanced the company's data capabilities already are, and shines a light on how the overall business can evolve.
Walmart already collects loads of data and leverages its repository to discover insights into consumer behaviors. The company's strong balance sheet and duel presence online and in physical stores provide it with a level of flexibility that most of the competition lacks. For these reasons, I think that investors looking for discounted or under-the-radar AI opportunities could be well served looking at retail -- and for me, Walmart is demonstrating why it's the king.
