Many retailers have seen net income decline amid shrinking margins in 2022. Still, their technology capex remains a top priority, while they may cut other spending if the economy slows in 2023, according to analysts at Telsey Advisory Group.
Analysts also said retailers are spending on store renovations. More technology is being infused into them to enhance the shopping experience, and this could be beneficial as future market share could be at stake if the economy slows in 2023.
You don’t have to look far to see the woeful performance of retail in 2022. The S&P Retail Index is down more than 30% this year, but capital spending by the biggest retailers, Walmart and Amazon, is up twice as much. digits
In August, Walmart lowered its earnings guidance for the balance of the year, but increased capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. According to analysts, its capital spending budget is expected to rise 26% to $16.5 billion this year.
When Amazon reported a first-quarter loss in April of nearly $4 billion, its first quarterly loss since 2015, the company said it had overestimated the pace of e-commerce growth and overextended its logistics network. It doubled in size during the pandemic with dozens of new distribution center projects and 370 million square feet of leased industrial space.
By the second quarter, Amazon had been cutting unnecessary warehouse space by postponing tape cuts in newly built warehouses for up to two years, subletting up to 30 million square feet and terminating some leases. Amazon has also canceled numerous expansion projects for new distribution centers on 4,000 acres that the company acquired amid the pandemic.
With a hefty quarterly loss of $2 billion reported in August, Amazon said it would build more data centers and fewer warehouses by the end of next year. Amazon Chief Financial Officer Brian Olsavsky said the company had delayed plans to expand operations until next year and is shifting focus from capital spending to developing technology infrastructure. He said that more than half of the total capital investments this year would be technology.
Through June, capital expenditures at Amazon had exceeded $15.7 billion, up from $14.2 billion in the same period last year.
Gartner research analysts said retailers are concerned about rising costs and are prioritizing where to spend. Thomas O’Connor, vice president of supply chain and retail consumer research at consultancy Gartner, said investments by big-spending retailers like Walmart and Amazon would likely take customers away from weaker rivals next year.
Gartner studied 1,200 companies after the 2007-2009 economic downturn and found that 60 companies had “efficient growth” after investing during the crisis. Companies saw their profits double between 2008 and 2015, while other companies struggled to increase revenue.
Gartner also recently surveyed financial executives in various industries, including retail, and found that investments in technology and workforce development were the last expenses companies planned to cut amid other economic struggles. The survey found that budgets for mergers, environmental sustainability plans and product innovation are taking a backseat to technology investments.
Walmart has invested in operational efficiencies with technology apps like VizPick, an augmented reality system linked to workers’ cellphones that allows them to restock shelves faster, leading to better shelf availability. The acquisition of Zeekit last year allowed Walmart to recently announce virtual fitting rooms for shoppers who upload photos from their smartphones and then see what garments look like on their specific bodies. Walmart’s virtual try-on announcement comes as clothing sales have receded in recent months amid rising costs for food and non-discretionary items and services.
Walmart said in August that consumers were becoming more budget-conscious, and the retailer also noted that it was attracting more households with incomes above $100,000. CEO Doug McMillon said Walmart would work to keep opening price points low for those looking for value and also provide a wide variety of designer fashion options online and in select stores for those with more to spend but also looking for more. worth.
“The pandemic obviously changed the entire retail environment,” said Arun Sundaram, a retail analyst at CRFA Research.
He said Walmart and others have had to become more efficient in their back offices and embrace online shopping and store pickup options.
Perhaps that’s why Walmart continues to invest in technology, acquiring an 11% stake in AI firm Symbotic in June for an undisclosed amount. The investment came a month after Walmart announced that it would add Symbotic’s automation technology to its 42 regional distribution centers over the next eight years. The system reduces time- and labor-intensive work like unloading trucks, increases inventory accuracy, and increases your warehouse’s capacity to receive and ship products to stores.
In August, Walmart acquired Volt Systems, a technology company that provides suppliers with better, on-demand visibility into merchandising resources. The retailer did not disclose the cost of the acquisition, but said the technology would help it improve actionable analytics and shelf intelligence to improve out-of-stocks.
Earlier this month, Amazon announced its latest warehouse robotics acquisition, Belgian firm Cloostermans, which offers technology to help move and stack pallets and heavy goods and package products together for delivery. Cloostermans is seen as an excellent complement to the Proteus robotics technology that Amazon developed in-house and introduced in June.
Target is also spending more amid what has been a rough year. The retailer announced $5 billion in capital expenditures this year to help scale the business, improve digital experiences and improve pickup areas for the retailer’s growing online business. Much of the $5 billion will be spent on store remodels and 30 new locations. Target said it would continue to invest in technology that builds on digital capabilities like Roundel, an internal media platform. Target said Roundel optimizes advertising placements on Target.com to deliver a more relevant and personalized guest experience and create value for members. Last year, Roundel generated more than $1 billion in value, which Target expects will double in a few years.
Walmart’s investments in its digital advertising firm Walmart Connect generated $2.1 billion in revenue last year. Walmart’s recent foray into the fintech space also made headlines this month with a Bloomberg report on the retailer’s plans to offer digital banking services in a beta test for employees and some online customers. That’s made possible by the two fintech acquisitions Walmart made in January and the new “One” venture combining Walmart technology and its recent acquisitions to test and develop digital banking products.
Publisher’s note: the Supply side section of Talk Business & Politics focuses on the companies, organizations, issues, and individuals that are in the business of providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.