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

When the economy slows, the classic response for consumer firms is to scale back: slow hiring, perhaps layoffs, cut marketing, or even slow the pace of technology investment, delaying projects until after business picks up again.

But that’s not all the turbulent retail sector in America is doing this year.

With the S&P Retail Index down nearly 30% this year, most of the industry is boosting investment in capital spending in double digits, including industry leaders Walmart and Amazon.com. Among the upper echelon, only struggling Gap and Lowe’s home improvement chain are the ones that cut back significantly. At electronics retailer Best Buy, first-half profit more than halved — but investment is up 37%.

“There is certainly anxiety and awareness about costs, but there is prioritization going on,” said Thomas O’Connor, vice president of supply chain and retail consumer research at consultancy Gartner. “A lesson has been taken from the fallout from the financial crisis,” O’Connor said.

This lesson? Investments by big spending leaders like Walmart, Amazon and Home Depot are likely to take customers away from weaker competitors next year, when consumer discretionary cash flow is expected to rebound from the 2022 drought and revive shopping after spending on goods shrank in Actually earlier this year.

After the 2007-2009 economic downturn, 60 firms classified as “effective growth firms” that invested during the crisis saw their profits double between 2009 and 2015, while the profits of the other firms barely changed, according to a 2019 report on 1,200 US and European companies.

Companies are taking this data seriously, as a recent Gartner survey of financial executives across industries shows that investments in technology and workforce development are the last expenses companies plan to cut as the economy struggles to prevent recent inflation from causing a new recession. Gartner data shows that budgets for mergers, environmental sustainability plans, and even product innovation are falling.

Today, some retailers are improving how supply chains work between stores and their suppliers. That’s the focus at Home Depot, for example. Others, like Walmart, are improving in-store operations so that shelves are restocked more quickly and fewer sales are lost.

Michael Mandel, an economist at the Institute for Progressive Policy, said the trend toward more investment has been growing for a decade, but the spur of the Covid pandemic has been.

“Even before the pandemic, retailers were switching from investments in structures to active investments in equipment, technology and software,” Mandel said. “[Between 2010 and 2020]In the retail sector, software investment rose 123%, versus a 16% increase in manufacturing.

At Walmart, money is pouring into initiatives including VizPick, an augmented reality system linked to employees’ mobile phones that allows employees to restock shelves faster. The company boosted capital spending 50% to $7.5 billion in the first half of the fiscal year that ends in January. This year’s capital spending budget is expected to rise 26 percent to $16.5 billion, said Arun Sundaram, an analyst at CFRA Research.

“It is clear that the pandemic has changed the entire retail environment,” Sundaram said, forcing Walmart and others to be more efficient in their back offices and to embrace online channels and in-store pickup options more. “You’ve 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 robots, Belgian company Cloostermans, which offers technology to help move and stack pallets and heavy goods, as well as bundle products together for delivery.

O’Connor said Home Depot’s drive to revamp its supply chain has been underway for several years. The supply chain effort is actually hurting profits right now, according to the company’s financial disclosures, but it’s central to both operating efficiency and a key strategic objective — creating deeper relationships with professional contractors, who spend significantly more than their employers. Who were the Home Depot’s bread and butter.

“To serve our professionals, it’s really about removing friction with our many improved product offerings and capabilities,” Executive Vice President Hector Padilla told analysts on Home Depot’s second-quarter call. “These new supply chain assets allow us to do this on a different level.”

Some large scale retailers focus more on updating an old store brand. At Kohl’s, the highlight of this year’s capital spending budget is the expansion of the company’s relationship with Sephora, which is adding convenience stores within 400 Kohl’s stores this year. Landon Luxemburg, a retail expert at consultancy Third Bridge, said the partnership helps the mid-market retailer add an element of flair to its precarious image, which contributed to its relatively weak sales growth in the first half of the year. First-half investment has more than doubled this year in Kohl’s.

Chief Financial Officer Jill Timm said nearly $220 million of the increase in Kohl’s spending was related to investing in cosmetics inventory to support 400 Sephora stores that opened in 2022. “We’ll continue that until 2022,” she told analysts in the company’s latest earnings call in mid-August. Next year… we look forward to working with Sephora on this solution for all of our stores.”

Target is spending $5 billion this year adding 30 stores and upgrading another 200, bringing the number of stores renovated since 2017 to more than half the chain. It’s also expanding its beauty partnership first revealed in 2020, with Ulta Beauty, adding 200 Ulta centers in-store on its way to 800 centers.

The largest spender of all time is Amazon.com, which generated more than $60 billion in capital expenditures in 2021. While Amazon’s reported capital spending numbers include its cloud computing division, it spent nearly $31 billion on property and equipment in The first half of the year — up from a record already in 2021 — though the investment made the company’s free cash flow negative.

That’s enough to get Amazon to squeeze the brakes a bit, with CFO Brian Olsavsky telling investors that Amazon is shifting more of its investment dollars to its cloud computing division. This year, it estimates that about 40% of spending will support warehouse and transportation capacity, down from 55% last year combined. It also plans to spend less on stores around the world – “to better align with customer demand,” Olsavcci told analysts after his recent earnings – which is already a much smaller budget line item on a percentage basis.

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

“We also believe there is an opportunity to more meaningfully slow the pace of our investments in technology and digital platforms to better improve our operating profit,” CFO Katrina O’Connell told analysts after her latest earnings.

Lowe walked away from an analyst’s question about spending cuts, saying it could continue to take market share from smaller competitors. Lowe’s has been a better performer in the stock market than Home Depot over the past year and year-to-date periods, although both saw significant declines in 2022.

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