Walmart Hits The Wall

If you got up this morning you probably already know that retail giant Walmart is feeling the pain. For years everyone has despised their dirty business practices; under-cutting prices so low with the buying power to dominate the market and force many manufacturers to operate at a loss, dramatically underpaying their workers and devoting a team to encourage the use of government welfare services, and everyone is familiar of the worst customer service experiences that can possibly be imagined which is only second to the Department of Motor Vehicles.

Well, this morning I have had the privilege to read several articles that detail the beginning of a downturn for the retail behemoth. Walmart will be closing 154 stores across the US in addition to stores overseas. Let’s examine this for a second before I continue my tirade on the retail giant. I consider this a big win primarily because I am a Walmart hater, although I feel this reports broader implications for the economy as a whole.

Traditionally I have considered Apple (AAPL) a good indicator for the performance of the overall economy and it makes sense if people have extra money they are usually going to put it into the newest hippest next best thing all their friends have that they don’t need like that new iPad or fancy iPhone 6S.

While these companies are both in different sectors it really is an excellent comparison and maybe you could make a few assumptions regarding the data before looking at the charts. Firstly, Apple (AAPL) focuses on consumer products specifically high-end electronics and WMT has a broader base that includes grocery items, clothing, automotive equipment, household goods, and more. Items that are sold at WMT are essential everyday items, the prices are considerably low and typically the consumer will purchase the lowest priced object to fit their needs. Conversely, the products at AAPL while high quality could be considered expensive and are not a necessity for daily living.

Keeping those factors in mind, you could draw the conclusion that the performance of the largest retailer in the US would, at least, remain fairly constant, while the performance of one of the most popular electronics brands would ebb and flow with the expendable money that people have on hand. This is not so true; look at the chart below: the blue line represents the performance of WMT over the past year while the red line represents the performance of AAPL over the past year. Now we are not concerned with the stock price or market cap, just the trend in the market.

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You have to note that for both organizations you can notice the overall fluctuations in the market, but it is clear that for the period Walmart consistently operates below expectations. This is perplexing because most products and services that Walmart provides are not luxury items, but necessities and are also priced at significantly low prices.

Now that we have established that Walmart's recent performance is very unusual for an organization as previously successful as they have been in the past, in the business of what Walmart does; we can talk a little more about retail, jobs, and maybe the economy as well.

Good old fashioned retail is getting hard. More and more companies are opting to operate online. The costs for e-commerce are just so low. One reason Walmart is struggling so much is that Amazon is beginning to overtake them online; that is not to say that Walmart has ever had much of a web presence.

It’s not just Walmart that’s feeling the pain according to the National Retail Association sales for big box retailers in this last years’ holiday season only went up 3% while online sales rose a whopping 9%. This represents a dramatic shift in buying patterns for Americans and organizations should take note. This hasn’t been without warning, however. Multitudes of websites have sprung up since 2000 making their predictions about the future of technology and e-commerce; including popular analysis publications such as Forrester Research, Research Gate, and eMarketer. Each one of them concludes that the traditional retail store model, if not gone the way of the dinosaur, has changed dramatically.

Although, there is a more serious issue at stake here. While I am jumping for joy at the fact the Walmart is suffering, and also saddened for the over 10,000 workers who have now lost their jobs and the maintenance people who maintained the buildings and the other surrounding businesses that received traffic from having such a popular store near them, there is a larger question we need to ask.

In Q4 2015 something happened that maybe some people were aware of and some maybe not. Before I get right into that let me give you some background information. Inflation, it’s typically a big scary word; but it’s really not that scary at all. In fact, inflation is a sign that a government's economy is healthy and growing. It means that people are going out and buying all the stuff that the country is producing, and that’s good because it means more need for jobs and more money to hire and pay people.

There is a flipside and too much inflation is a bad thing. That’s where the Federal Reserve, who I guess you could call the ultimate lending authority, comes into play. This is kinda where it gets complicated, but all you really need to know for now is that the Fed sets an Interest Rate and that Interest Rate becomes the basis for all the other Interest Rates when it comes down to borrowing money. So if that Fed Rate goes from 3% to 5% that next credit card you apply for may be 20% instead of 15% or that car loan may have higher qualifications. This is because the money is more expensive to get so it also becomes more difficult to borrow.

Therefore, when money is more scarce and more difficult to borrow people spend less. When people spend less there is more stuff and less money so prices go down lowering inflation until people begin to buy again. And yes it makes no sense, but that’s the way it works.

On December 16, 2015, The Fed decided, after seven years to raise rates .25%. This may have been a good move long term because, well, enough is enough. Big business and small business alike have been taking advantage of cheap money and have been hiring as shown in the employment figures. Also, market performance has improved for the most part. However, I haven’t noticed any inflationary effects prior to the rate hike; have you looked at the gas prices recently? In fact, the CPI reported in November of 2015 hardly any growth at all and the growth in the CPI-W was not substantial enough to warrant the traditional menial increase in benefits to social security recipients. In retrospect, a rate hike, even a small one, in a non-inflationary period is counter productive to the performance of the market and the economy as we have witnessed. I will further add that many populations such as seniors who rely on Social Security and their invested retirement accounts are experiencing significant undue hardships.

So now that I have gone on this big tirade you are asking me what is the big deal? We are watching the future unfold. I’m not a crazy naysayer and I know the world is not going to end, but these 154 Walmart stores aren’t the first and it may not just be Walmart. To be successful in today’s market, you have to be responsive and technologically adept. Adaptability is going to be your greatest skill and stubbornness your biggest nemesis. If you know Walmart, you know those are not their strengths; we’re about to travel through a rough market, don’t give up.

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