BATAVIA, Ohio (AdAge.com) -- "This is Walmart time," said the retailer's outgoing CEO, Lee Scott, at an October analyst conference. And he's right, in more ways than one.
Not only are wealthier shoppers trading down to Walmart, but for the first time in decades, Walmart's lower- and middle-income shoppers, whose wages have risen far more slowly than others' for decades, may be getting a slightly better break from the economy -- relatively -- so they're able to spend more at the retail giant.
|Falling gas prices have helped
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Plummeting gasoline prices since mid-September have disproportionately helped Walmart shoppers, in part because the chain is concentrated most heavily in Midwestern and Southern states where prices have fallen the most -- as much as 60% in Arkansas and Missouri, the heart of Walmart country, vs. about 45% in the New York metro area and California, where Walmart has comparatively few stores.
The savings, which can easily top $100 a month for two-car households, also makes a disproportionately bigger difference in the budgets of lower-income shoppers, since 57% of people in households making $50,000 or less say they live paycheck to paycheck, said Candace Corlett, principal of WSL Strategic Retail.
These same consumers were getting squeezed big time only a year ago. But now the shoe is on the other foot: The brunt of the economic turmoil of the past three months is falling on wealthier people who own stocks or mutual funds or work in financial services, and who are less likely to shop at Walmart.
Insulation from recession
By contrast, for the core Walmart lower- and middle-income shopper, "all the turmoil in the stock market doesn't impact them," said Ms. Corlett, "unless they're getting close to retirement or have saved up to put kids through school."
Of course, it's unclear how long relief from gas prices can counteract the pain of job losses for lower-income Americans. Layoffs have hit particularly hard among well-paying financial-services positions, but those still accounted for only 32,000 of last month's 533,000 job losses overall in the U.S. -- the biggest one-month drop in 34 years. The rest cut across a wide swath of the economy, including 92,000 among retailers whose sales, unlike Walmart's, are plummeting.
For now, however, falling gas prices clearly are helping Walmart and may explain why Black Friday sales were up a surprising 3% broadly even as overall November retail sales tanked, said Ms. Corlett. Like Walmart shoppers, Black Friday shoppers broadly appear to skew lower income and be more price focused, she said.
Only 10% of shoppers surveyed in October felt they had more cash in their pockets because of falling gas prices, she said. But that's likely because "the low-income shopper is taking that cash from gas and putting things back on the table that they'd taken off [because of rising prices], like bacon or ice cream," Ms. Corlett said. "I think when Black Friday came around they probably did have more cash in their pockets and stormed the doors at Walmart and Best Buy to get the big-ticket items at terrific bargains."
She doubts, however, that will be enough to save the holiday season for retailers. Explaining its strong 3.4% gain in comparable-store sales last month, Walmart credited lower gas prices along with "investments in price [that] extended Walmart's value proposition."
Unofficial stimulus package
Falling gas prices actually play a disproportionate role for Walmart both on the demand and pricing sides, said Michael J. Mazzeo, professor of management and strategy at Northwestern's Kellogg School of Management.
Falling gas prices act like an economic-stimulus package, with each penny decrease akin to $1 billion in annual savings for consumers, or a total of around $200 billion based on a nationwide average $2 decline in prices at the pump since mid-September.
But that stimulus doesn't fall evenly. Not only have gas prices not dropped as quickly in major metro areas, but even if they had, people there who earn a lower income are far less likely to benefit immediately because they use mass transit more than people in the rest of the country.
"Certainly more than other retailers, Walmart's customers are sensitive to the price of gasoline," he said. "That's easy to see just from the location of their stores, which are not in urban areas."
Lower gas prices may also play a role in Walmart deepening discounts relative to competitors, Mr. Mazzeo said, because it ships products over longer distances than most. And with its razor-thin inventory levels, Walmart also tends to ship products more often. So the decline in gas prices leaves more margin room for Walmart than competitors to roll back prices on the shelf.
To be sure, the list of retailers doing as well or better than Walmart keeps shrinking. Costco, which had been outperforming Walmart in the early stages of the recession, only had a 1% increase in non-gas same-store sales last month. Its clientele is also more upscale (on par income-wise with Nordstrom) and coastal than Walmart's.
BJ's Wholesale Club bettered them both with a 6.1% increase excluding gasoline sales. But Target's November same-store sales plummeted 10%, and retailers excluding Walmart last month reported same-store sales down 7%.
Carl Steidtman, chief economist of Deloitte Research, still believes higher-income consumers trading down are a bigger factor helping discounters than lower-income consumers getting more disposable income from falling gas prices.
But falling gas prices were responsible for about half of a surprising 1% increase in real personal income in October, he said, and may have had a similar impact in November. "It's an offsetting positive," he said, "but not nearly enough to offset all the negatives."