Where Walmart, Amazon and Target are spending billions in a slowing economy

When the economy slows, the classic consumer business response is to cut spending: slow down hiring, perhaps lay off workers, reduce marketing, or even slow the pace of technology investment, delaying projects until business picks up.

But that’s not at all what the struggling US retail sector is doing this year.

With the S&P Retail Index down nearly 30% this year, most of the industry is increasing its capital expenditure investments by double digits, including industry leaders Walmart and Amazon.com. Among the high end, only struggling clothing maker Gap and DIY chain Lowe’s are cutting spending significantly. At electronics retailer Best Buy, first-half profits fell by more than half, but investments rose 37%.

“There are certainly concerns and cost awareness, but there is prioritization going on,” said Thomas O’Connor, vice president of supply chain and retail research at the consulting firm Gartner. “A lesson has been learned from the aftermath of the financial crisis,” O’Connor said.

This lesson ? Investments by spendthrift leaders like Walmart, Amazon and Home Depot will likely take customers away from weaker rivals next year, as consumer discretionary cash flow is set to rebound from a year-long drought in 2022. and reinvigorate purchases after spending on goods actually declined earlier this year.

After the 2007-2009 downturn, 60 companies classified by Gartner as “efficient growth companies” that invested during the crisis saw their profits double between 2009 and 2015, while the profits of other companies barely changed, according to a 2019 report of 1,200 US and European companies.

Companies have taken this data to heart, with a recent Gartner survey of finance executives across industries showing that investments in technology and workforce development are the latest spending companies plan to cut as they go. as the economy struggles to prevent recent inflation from causing another recession. Budgets for mergers, environmental sustainability plans and even product innovation are taking a back seat, according to Gartner data.

Today, some retailers are improving the functioning of supply chains between stores and their suppliers. It’s a priority at Home Depot, for example. Others, like Walmart, are working to improve in-store operations so shelves are restocked faster and fewer sales are lost.

The trend for more investment has been building for a decade but was catalyzed by the Covid pandemic, said Progressive Policy Institute economist Michael Mandel.

“Even before the pandemic, retailers were moving from investing in structures to actively investing in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]software investment in the retail sector increased by 123%, compared to a gain of 16% in the manufacturing sector. »

At Walmart, money is flowing into initiatives like VizPick, an augmented reality system tied to workers’ cellphones that allows associates to restock shelves faster. The company increased capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. Its capital spending budget this year is expected to rise 26% to $16.5 billion, said CFRA Research analyst Arun Sundaram.

“The pandemic has obviously changed the whole retail environment,” Sundaram said, forcing Walmart and others to be efficient in their back offices and to embrace online channels and payment options even more. withdrawal in store. “It’s allowed Walmart and every other retailer to improve their supply chains. You see more automation, less manual picking [in warehouses] and more robots.”

Last week, Amazon announced its latest warehouse robotics acquisition, Belgian company Cloostermans, which offers technology to move and stack pallets and heavy goods, as well as pack products together for delivery. .

Home Depot’s campaign to revamp its supply chain has been ongoing for several years, O’Connor said. Its one-supply-chain effort is actually hurting profits at the moment, according to the company’s financials, but it’s critical to both operational efficiency and a key strategic goal – to create stronger connections. close with professional contractors, who spend much more than do-it-yourselfers. which have been the bread and butter of Home Depot.

“Serving our pros is really about removing friction through a host of enhanced product offerings and capabilities,” Executive Vice President Hector Padilla told analysts during the Home call. Deposit in the second quarter. “These new supply chain assets allow us to do that on a different level.”

Some general retailers are more focused on renewing an aging store brand. At Kohl’s, the highlight of this year’s capital expenditure budget is the expansion of the company’s relationship with Sephora, which is adding mini-stores to all 400 Kohl’s stores this year. The partnership helps the mid-market retailer add an element of style to its otherwise bland image, which contributed to its relatively weak first-half sales growth, said Landon Luxembourg, a retail expert at the consultancy. Third Bridge. First-half investments more than doubled this year at Kohl’s.

About $220 million of Kohl’s increased spending was related to investing in beauty inventory to support the opening of 400 Sephora stores in 2022, according to chief financial officer Jill Timm. “We will continue this into next year. … We look forward to working with Sephora on this solution for all of our stores,” she told analysts during the company’s last earnings call in mid-August.

Target is spending $5 billion this year to add 30 stores and upgrade another 200, bringing its number of stores renovated since 2017 to more than half of the chain. It is also expanding its own beauty partnership first unveiled in 2020, with Ulta Beauty, adding 200 in-store Ulta Centers on its way to 800.

And the biggest spender of them all is Amazon.com, which spent more than $60 billion on capital expenditures in 2021. While Amazon’s reported capital expenditure figures include its cloud computing division, it spent nearly $31 billion. billion in goods and equipment in the first half of the year. – up from an already record year 2021 – even though the investment made the company’s free cash flow negative.

That’s enough to cause even Amazon to put the brakes on a bit, as CFO Brian Olsavsky told investors that Amazon was shifting more of its investments to the cloud computing division. This year, he estimates that around 40% of spending will support warehouses and transportation capacity, down from a combined 55% last year. It also plans to spend less in stores around the world — “to better align with customer demand,” Olsavksy told analysts after his latest revenue — already a much smaller percentage budget item.

At Gap – which has seen its shares fall nearly 50% this year – executives have defended their capital spending cuts, saying they must defend earnings this year and hope to rebound in 2023.

“We also believe there is an opportunity to more significantly slow the pace of our technology and digital platform investments to better optimize our operating profits,” said Chief Financial Officer Katrina O’Connell. to analysts after its latest results.

And Lowe’s deflected an analyst’s question about spending cuts, saying it could continue to take market share from smaller rivals. Lowe’s has been the better stock market relative to Home Depot over the past year and year-to-date periods, although both saw significant declines in 2022.

“Home improvement is a $900 billion market,” Lowe CEO Marvin Ellison said, without mentioning Home Depot. “And I think it’s easy to just focus on the two biggest players and determine overall market share gain based on that alone, but it’s a really fragmented market.”