As retail gets choppy, Walmart flexes its grocery muscle, deep pockets and huge reach

As shoppers get thrifty, Walmart is flexing its muscles.

Like other retailers, the company faces slowing sales as the boom of pandemic-fueled spending fades and inflation hits shoppers’ wallets.

Yet, unlike many competitors, Walmart has a few key factors that could work in its favor: Most of its sales come from food, a category that shoppers need in any economy. It has built its reputation on offering low prices. And its huge reach allows Walmart to make money in other ways, including selling ads, offering delivery services and fulfilling online orders for third-party sellers.

Walmart CEO Doug McMillon acknowledged the challenging retail backdrop on the company’s earnings call in February. Yet he said its business is “naturally hedged.”

“If customers want more of something and less of something else, we shift our inventory,” he said. “If the economy is strong, our customers have more money and that’s great. If things are tougher, they come to us for value.”

The retailer’s top leaders will share the company’s strategy for the year Tuesday and Wednesday at an investor event in Tampa, Florida.

Here’s a closer look at some key themes for Walmart that could emerge at the investor event:

As the nation’s largest retailer, Walmart is a bellwether. Investors are hungry for any fresh clues about the health of the sector and the U.S. economy

“You always start a Walmart meeting by asking how the consumer is doing because they really have the best pulse on what is going on with the American consumer and how they are spending,” said David Silverman, a retail analyst at Fitch Ratings.

Walmart has already noticed changes in buying patterns. In the past few quarters, Chief Financial Officer John David Rainey told CNBC that its shoppers have bought more private-label products and opted for cheaper proteins like peanut butter and hot dogs. Plus, he said as customers spend more on groceries and other essentials, they are buying less general merchandise — a shift that’s shaking up Walmart’s sales mix and hitting sales at other retailers, including Target.

Walmart shared a cautious outlook for the year, factoring in economic uncertainty and shoppers’ more discerning approach. It said it expects same-store sales for Walmart U.S. will increase between 2% and 2.5% excluding fuel, in the fiscal year ahead. The company projects that adjusted earnings per share for the fiscal year will range from $5.90 to $6.05, excluding fuel.

That would be a decline from the past fiscal year, when same-store sales grew 6.6% for Walmart U.S. and adjusted earnings per share were $6.29, excluding fuel.

Advertising. Delivery services. Picking and packing items for third-party sellers.

Walmart has taken a page from its chief rival, Amazon, as it sells services and technology, along with socks and gallons of milk. It is expected to provide a progress report at the investor event.

The company has a growing number of side hustles, including Walmart Connect, its advertising business; Walmart Luminate, its data and analytics tool; Walmart+, its membership program and answer to Amazon Prime; GoLocal, its delivery service for other retailers; and Walmart Fulfillment Services, its picking, packing and shipping service for sellers in its third-party marketplace.

The aggressive push has gained importance over the past year, as Walmart’s profit margins are under pressure. Like other companies, the big-box retailer is coping with higher labor, supply chain and material costs. All of its newer businesses, such as advertising, have higher profit margins than its bread-and-butter retail business.

Walmart has been flashier in spreading the word about its new businesses, too. Two years ago, it tapped Seth Dallaire, an Amazon veteran and former Instacart chief revenue officer, to oversee the newer businesses as Walmart’s chief revenue officer.

At industry conferences, it has thrown parties, handed out tote bags and other branded swag, and paid for large showroom booths. It has reversed roles with suppliers, too, as it knocks on doors to try to sell to them.

One part of the investor event’s agenda? Offering a glimpse of Walmart’s e-commerce future.

The retailer will likely showcase how it is growing online sales and trying to make them profitable.

Thanks to a push from the Covid pandemic, e-commerce has become a larger part of Walmart’s business. Online sales accounted for about $53.4 billion — or nearly 13% — of Walmart U.S.′ total net sales in the past fiscal year, which ended in late January, according to company filings. That’s a jump from $15.7 billion, or roughly 5% of Walmart U.S.′ total net sales, in 2019.

Walmart has leaned into e-commerce in other ways, too. Just this week, the retailer rolled out a new look for its website and app. Some of the key perks of Walmart+, its membership program, are free shipping and free home deliveries of online orders.

The ease of online shopping coupled with lower-priced popular products has given Walmart a way to outmatch regional grocers and smaller stores, said Silverman of Fitch Ratings.

“”Historically, there was a tradeoff,” he said. “You paid less at Walmart, but you got a weaker customer experience.”

Yet when shopping online, he added, customers ultimately get the same brand of ketchup, laundry detergent or paper towels in a similar brown box. And from Walmart, it is often cheaper.

“The value focus can resonate more with Walmart,” he said. “You are giving up less in terms of the customer experience over time.”

For Walmart, a pandemic-related migration to the suburbs and sticker shock from inflation have created an opportunity: attracting customers with larger salaries and more disposable income.

Wealthier shoppers are increasingly turning to to Walmart for groceries, CFO Rainey told CNBC. He said about 75% of its market share gains in food came from households that make more than $100,000 a year in both the second fiscal quarter and third fiscal quarter.

About half of the market share gains came from high-income consumers in the quarter that ended in late January, he said at a conference in March.

Investors want to hear how Walmart not only plans to attract those more financially insulated customers, but also keep them. Doing that could help the retailer, particularly as food stamp benefits shrink and tax refunds come in light.

The company has tinkered with in-store elements that could appeal to more upscale shoppers. For instance, it has rolled out new store designs in some parts of the country that play up trendier offerings, such as more fashion-forward exclusive apparel and home decor brands.

It has also expanded convenient online options, including curbside pickup, faster home delivery and its direct-to-fridge InHome delivery service.

As inflation cools, Walmart may have to fight some affluent shoppers’ tendency to go to other websites and stores, according to Rick Watson, CEO of e-commerce consulting firm RMW Commerce Consulting.

But, he said, grocery habits formed due to inflation could stick around, too, “If prices are good, why would you go back?”