When the world’s biggest retailer surprises markets with a significant downgrade, it demands attention — including from monetary policymakers.
Walmart’s after-hours downgrade, spanning the three months to June and for the rest of 2022, rattled markets: according to Walmart its gross margin would be “negatively impacted”, with higher inflation identified as the key concern. The statement will echo in retailing across the globe because of the impact of high inflation on everyday products, especially food.
Paradoxically, Walmart said comparable store sales will be up around 6% in the quarter (which is better than the 5.5% peak forecast in May) — but that’s due to higher prices, not volumes.
This increase “is higher than previously expected with a heavier mix of food and consumables, which is negatively affecting gross margin rate”, Walmart CEO Doug McMillon said in the release. “Food inflation is double digits and higher than at the end of Q1. This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel.”
The downgrade may make the US Federal Reserve think twice about another 0.75% rate hike in coming days. Rate rises won’t affect weather-related inflation (drought in parts of the US) and energy prices driven higher by geopolitics. With the US economy heading into a technical recession (two quarters of successive negative growth), in the first estimate of June quarter GDP to be released Thursday (market forecasts are for a contraction of more than an annual rate of 1%), the size of the Fed’s rate rise earlier that day is now crucial.
In Australia, for food inflation we can blame the continuing La Niña event on the east coast and heavy rain, transport problems, lower and poorer quality yields as well as higher energy and fertiliser costs. None are particularly amenable to interest rate rises either.
It’s why Bega Cheese — the country’s biggest food company with big investments in dairy, fresh food, fruit juices and other drinks as well as Vegemite, peanut butter and other spreads — has warned 2021-22 profits will be weak and there will be no improvement in 2022-23.
It’s harder for consumers to cut spending on food essentials. They’ve already cut petrol consumption (as Viva Energy, owner of the Shell brand in Australia, revealed in a trading update), but there aren’t many substitutes for kitchen basics. For low-income earners, cutting discretionary spending becomes crucial.
Retail sales data for June is out on Thursday and will confirm that the rapid price growth here is boosting sales dollars but not volumes — that was clear from the Australian Bureau of Statistics retail sales figures for April and May.
If central banks ignore the message from retail, they risk rate increases that will push economies into a sharp slowdown and a sudden collapse in the jobs market.
Discretionary retail will be the first to feel the impacts of high food price inflation and interest rate rises — and retail is our second-biggest employment sector (and a big one for low-income earners). Our current jobs boom can collapse every bit as easily as the housing and stockmarket booms if the weight of monetary policy (and fiscal policy contraction) proves too much.
The forecasters at Walmart are likely more on the ball than the beancounters at the Federal Reserve.
Possibly something to do with operating in the real world instead of being economists?
Boy howdy where am I gonna git ma assault rifles now?
I hope the likes of Bega aren’t looking for more handouts. After decades of massive profits and largesse from the LNP, they should just weather the storm and put up like the rest of us.