Americans' buying power has been squeezed since the start of 2022 as companies steadily raised prices to restore their profit margins -- deflated by higher costs for freight and labor -- to pre-pandemic levels. Walmart Inc. appears to be saying enough is enough.
Consumer goods companies have been willing to hike prices on core products even if it meant selling fewer units, as long as the end result is more profit. But those price increases have been costing Walmart, too. That's because Walmart earns higher margins on discretionary spending - categories like apparel and home goods - so for the company, household budgets being gobbled up by the basics is bad for business.
Walmart is determined to push back. The chief of Walmart's U.S. operations explained the strategy on the company's recent earnings call, saying that "working with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can would help them drive unit volume" and would "free up cash for customers to use for discretionary goods."
In other words, consumer product companies have been prioritizing price over sales volumes, and now Walmart is saying it wants them to focus on volumes over price.
And Walmart is likely to win this round. With more than $600 billion in annual revenue Walmart is twice the size of Costco and Target combined, giving it an unmatched sway with its suppliers. Plus, there is the whole economic environment of mid-2023.At the end of 2021, when these companies had absorbed a lot of higher costs and hadn't yet passed them on, and consumers still had significant excess savings built up during the pandemic, it made sense that we would be in for a prolonged period of those higher costs.
But that isn't the world we live in today. Excess savings have been run down to a large degree, and consumers have become more cost-conscious after absorbing a lot of inflation. Additionally, while profit margins for consumer-goods companies might not be fully restored in all cases, they have normalized a lot.
A good example of this is Clorox. Prior to the pandemic, Clorox's gross profit margins were stable at around 45%. By the fourth quarter of 2021, consumers had stocked up on all the bleach and wipes they needed for a while, and elevated costs on freight and commodities dropped the company's gross margin to 33%. In the most recent quarter, the number had recovered to 42%. That's not all the way back to where it wants it to be, but if Walmart and other retailers put the squeeze on prices for a while, it can probably manage.
There are also signs of progress on food inflation. In the Consumer Price Index report, the food-at-home category grew by more than 1% a month in the first half of 2022 as companies were aggressively passing cost increases on to consumers. But in the past two months food inflation has been negative.
So there are a lot of reasons inflation in everyday essentials should finally be easing up. The trucking and freight markets have weakened considerably, and energy costs have fallen significantly. That's already lifting pressure on prices for bulky consumer items that are moved around the country in trucks. Profit margins for consumer product companies have normalized to a large degree. Consumers no longer have the financial cushion to absorb double-digit price increases on essentials. And retailers like Walmart, which has mostly put its supply chain and excess inventory problems behind it, see getting inflation under control for household basics as the key to getting its profit back on track.