Rising fuel prices are hitting the bottom line. Chaotic supply chains are making it harder and harder to keep the shelves fully stocked. And inflation is pushing up costs at precisely the same time as cash-strapped consumers are cutting back on their spending.
For two of America’s biggest retailers it has been a torrid week, with Target’s share price falling by a quarter, and the mighty Walmart suffering the worst one day collapse in its shares since way back in 1987. Over here, British retailers and grocery chains are facing exactly the same pressures as their rivals on the other side of the Atlantic.
Even worse, over the last year two of the biggest players in the market, Asda and Morrisons, have taken on vast quantities of debt to fund buyouts.
In reality, both Walmart and Target are among the best run retail companies in the world. If they are struggling in a global economy where it is suddenly very hard to make any money, it is a warning to their debt-laden British rivals. Deals that looked appealing in a bidding war a year ago are starting to look very risky right now. It was a dismal set of results for Walmart, the American retail giant, and still the biggest grocery chain in the world.
It missed Wall Street’s profits estimates by a wide margin. Net income fell to just over $2bn for the quarter compared to $2.7bn a year ago, and the share price was hammered, down by 20pc in a couple of trading sessions, its worst performance over the last 40 years. The explanation?
The company blamed the soaring cost of fuel, the rising cost of staff, and chaotic supply chains, for the fact it had made dramatically less money than anyone expected. It is not alone.
Its rival Target, the department store and grocery chain, also disappointed the market. Its earnings came in way under expectations, as it too struggled to cope with shipping and freight costs, while it had to discount heavily to keep stock moving off the shelves. The share price fell by 25pc last Wednesday alone.
Here’s the problem, however. Both Walmart, which used to own the Asda chain in the UK, and Target, are among the smartest retailers in the world.
These are huge companies, brutally efficient, with vast buying power, operating in the largest market in the world, and with management teams that know the industry inside out. If they are struggling in this environment, then so will every chain in the world. And not least in the UK. Rewind a year, and private equity firms were falling over themselves to take a slice of the British grocery and retail market.
Fortress and Clayton, Dubilier & Rice spent four months bidding and counter-bidding for Morrisons before CD&R finally won control for a hefty £7bn.
Earlier in the year the billionaire Issa brothers teamed up with the investment fund TDR Capital for a £6.8bn takeover of Asda.
Sainsbury’s was being stalked by the Czech tycoon Daniel Kretinsky, while there was even speculation that the mighty Tesco might get taken over.
The buyout firms couldn’t get enough of the British chains, and were willing to pay whatever it took to win the bidding wars.
The fact that Asda and Morrisons were the third and fourth placed chains in the British market, with mediocre brands, and operating in a over-crowded market, didn’t seem to bother anyone. It was buy, buy, buy.
In fairness, there was a logic to it at the time. The supermarkets looked like a good bet. They have stable cash flows. They have a lock on their customers.
They had been relatively undervalued by the stock market for years, compared to other industries, and home delivery, robotics and artificial intelligence offered opportunities for innovation and expansion that could significantly increase profits.
It looked like easy money, and, in fairness, some smart accounting and financial engineering has allowed TDR to already make big profits on the Asda deal, at least on paper. The trouble is, the outlook has started to change for the worse, and rapidly so.
Any retail chain involves a lot of logistics, and a grocery chain most of all, and when the price of fuel soars the cost of shipping stuff around soars as well.
Supply chains remain chaotic in the wake of the pandemic, and the lockdowns in China are stretching that out. It is hard to keep stock levels under control when factories are closing down in Asia.
Inflation is cutting real wages by an alarming 4pc to 5pc a year, and that is already starting to trim spending, and it will get a lot worse in the year ahead.
At the same time, shortages of labour mean that not only are wages going up, but sometimes it is hard to even keep stores open. Any of those by themselves would put a dent in the profits of any company. Put them all together and it is not hard to figure out why profits and share prices are crashing. In reality, Walmart and Target are both well run companies. There is nothing wrong with the way they are managed, they have made no major strategic blunders, and nor are there any major competitors cutting into market shares.
Even Amazon is retreating from the grocery industry (and it's always a relief for anyone when you don’t have to worry about Jeff Bezos eating your lunch). If they are struggling, so will every major grocery chain in the word.
The British players are going to be as exposed to that as any rivals, and probably more so. There are already some signs that investors are retreating.
Boots has been on sale for a suspiciously long time, with no sign of anyone actually wanting to write out a cheque. Walmart and Target are a warning sign.
The British retailers and grocery chains are facing a storm of problems as well — and the more debt they have on their books, the worse that is going to be.
About the Author: Matthew Lynn is a financial columnist and author. He writes for WSJ Marketwatch, The Spectator and Money Week as well as The Telegraph, and has worked as a columnist for The Sunday Times and Bloomberg.