Where Walmart, Amazon and Target spend billions in a slowing economy

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A Walmart employee loads a robotic warehouse tool with an empty cart to be filled with a customer’s online order at a Walmart micro-fulfillment center in Salem, Massachusetts on January 8, 2020.

Boston Globe | Boston Globe | Getty Images

When the economy slows, the classic response for consumer companies is to cut spending: slow hiring, perhaps laying off employees, cutting back on marketing or even slowing the pace of technology investment, delaying projects until after business has recovered.

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

With the S&P Retail Index down nearly 30% this year, most of the industry is increasing double-digit capital spending, including industry leaders Walmart and Amazon.com. Of the top class, only struggling clothing store Gap and home improvement chain Lowe’s are cutting back significantly. At electronics retailer Best Buy, profits fell by more than half in the first half, but investments rose by 37 percent.

“There is certainly concern and awareness about cost, but a priority is taking place,” said Thomas O’Connor, vice president of supply chain consumer retail research at consulting firm Gartner. “There is a lesson learned from the aftermath of the financial crisis,” O’Connor said.

That lesson? Investments from big-spending leaders like Walmart, Amazon and Home Depot are likely to drive customers away from weaker rivals next year, as consumer discretionary cash flow is expected to recover from a years-long drought in 2022 and the shopping will revive after spending on goods actually shrunk early this year.

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

Companies have taken that data to heart, with a recent Gartner survey of financial executives across industries showing investments in technology and workforce development are the last costs companies plan to cut as the economy struggles to avoid the recent inflation triggers another recession. Budgets for mergers, environmental sustainability plans and even product innovation are slipping into the background, Gartner’s data shows.

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Today, some retailers are improving the way supply chains work between the stores and their suppliers. That is, for example, a point of attention at Home Depot. Others, such as Walmart, are striving to improve in-store operations so that shelves are replenished faster and fewer sales are lost.

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

“Even before the pandemic, retailers were moving from investing in structures to active investments in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]retail software investments were up 123%, compared to a 16% gain in manufacturing.”

At Walmart, money is pouring into initiatives including VizPick, an augmented reality system linked to employee cell phones that helps employees restock shelves faster. The company increased capital expenditures by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. The capital expenditure budget this year is expected to rise 26 percent to $16.5 billion, said CFRA Research analyst Arun Sundaram.

“The pandemic has clearly changed the entire retail environment,” Sundaram said, forcing Walmart and others to be efficient in their back offices and embrace even more online channels and in-store pickup options. “It made Walmart and all other retailers improve their supply chains. You see more automation, less manual picking [in warehouses] and more robots.”

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

Home Depot’s campaign to revamp its supply chain has been underway for several years, O’Connor said. According to the company’s financial releases, the One Supply Chain effort is currently hurting profits, but it is central to both operational efficiency and a key strategic goal – creating deeper connections with professional contractors, who spend far more than the DIYers who have been the bread and butter of Home Depot.

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“To serve our pros, it’s really about removing friction through a multitude of enhanced product offerings and capabilities,” executive vice president Hector Padilla told analysts during Home Depot’s second quarter call. “These new supply chain assets allow us to do that on a different level.”

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Some major retailers are more focused on refreshing an aging store brand. At Kohl’s, the pinnacle of this year’s investment budget is an expansion of the company’s relationship with Sephora, which is adding mini-stores to 400 Kohl’s stores this year. The partnership helps the mid-market retailer add a touch of flair to its otherwise stodgy image, contributing to relatively weak sales growth in the first half of the year, said Landon Luxembourg, a retail expert at consultancy Third Bridge. First half investment at Kohl’s has more than doubled this year.

About $220 million of the increase in Kohl’s spending was related to investments in beauty supplies to support the 400 Sephora stores opening in 2022, according to finance director Jill Timm. “We will continue that through next year. … We look forward to working with Sephora on that solution for all of our stores,” she told analysts during the company’s most recent earnings call in mid-August.

Target will spend $5 billion this year adding 30 stores and upgrading another 200, bringing the 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.

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And the biggest spender of them all is Amazon.com, which had more than $60 billion in capital expenditures in 2021. While Amazon’s reported capital expenditures include its cloud computing division, it spent nearly $31 billion on real estate and equipment in the first half of the year — up from an already record-breaking 2021 — though the investment caused the The company’s free cash flow turned negative.

That’s enough to put even Amazon on the brakes a little, with CFO Brian Olsavsky telling investors Amazon is shifting more of its investment dollars into the cloud computing division. This year, it estimates that about 40% of spending will be spent on warehouses and transportation capacity, compared to last year’s combined 55%. It also plans to spend less on stores around the world — “to better align with customer demand,” Olsavksy told analysts after its most recent earnings — already a much smaller budget item on a percentage basis.

At Gap, which has seen its stock fall nearly 50% this year, executives defended their capital spending cuts and said they must defend earnings this year and hope to recover in 2023.

“We also believe there is an opportunity to slow the pace of our investments in technology and digital platforms in a more meaningful way to better optimize our corporate profits,” chief financial officer Katrina O’Connell told analysts after the most recent earnings.

And Lowe dismissed an analyst’s question about austerity, saying it could continue to take market share from smaller competitors. Lowe’s has been the better stock market performer compared to Home Depot in past one-year periods and to date, although both have seen significant declines in 2022.

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