The coronavirus pandemic has resulted in a tragic loss of life around the world. A lesser side effect was that it disrupted supply chains everywhere. Fewer people are willing to work at prevailing wages when a deadly virus is circulating. Those who work are sometimes sent home for more than a week during workplace COVID-19 outbreaks.
As a result, the supply of goods and services has decreased. At the same time, consumer demand held up as fiscal stimulus bloated people’s wallets and stoked spending. walmart (WMT 0.06%) knows both sides of these macroeconomic forces. Spending in stores is increasing, but rising costs are hurting its profit margin. To counter the pressure on margins, Walmart announced on July 5 that it would impose a freight collect fee on its supplier network. Let’s see what this could mean for investors.
Walmart shifts the burden of inflation to suppliers
The surcharge comes after Walmart lowered its full-year earnings outlook in its May 17 quarterly update. Previously, the company had forecast earnings per share for its fiscal year 2023 to grow by a mid-digit. Walmart lowered that forecast to say earnings per share would decline about 1% in fiscal year 2023. The significant reversal was the result of the speed of rising inflation.
Walmart is the world’s largest retailer, with operations in multiple countries. He has seen inflation rise in other parts of the world, but management noted that the surge in inflation in the United States was unprecedented in terms of speed and magnitude. Indeed, the consumer price index in the United States, which measures a basket of goods, rose 8.6% in May. It is therefore not surprising to see Walmart exercise its bargaining power with suppliers and raise prices.
The move, if suppliers don’t retaliate by leaving Walmart, could go a long way to protecting Walmart’s profit margin while maintaining its low-cost commitment to customers. In other words, Walmart wants suppliers to absorb a larger share of the negative impacts of rising inflation.
Many other retailers have instead chosen to raise the prices customers pay, likely in part because they lack Walmart’s bargaining power. In its last fiscal year, Walmart generated $572 billion in revenue. Surpassing $500 billion in revenue is something Walmart has achieved in each of its last five fiscal years. This gives the company bargaining power with suppliers who want to participate in its ability to command large-scale consumer spending.
What this could mean for Walmart investors
If successful, the move could remind investors of Walmart’s large-scale advantages. While competitors are forced to absorb higher costs or pass them on to their customers, Walmart has a third choice: force suppliers to take the hit. This could attract customers to Walmart who are discouraged by competitors’ price increases. Either way, investors will want to watch the impacts of this decision over the coming quarters.
Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.