High fuel prices hurt – but not in the same way for Walmart and Target
June 3 (Reuters) – For Walmart and Target, location matters, especially when it comes to transportation costs.
Reuters analysis shows Walmart Inc is getting a break – and Target Corp (TGT.N) is hurt – by where their stores are clustered. High oil prices — benchmark US crude prices of $117 a barrel on Thursday — are imposing additional costs everywhere, but the impact varies wildly from state to state. The price per liter of diesel fuel that powers road transportation was 29% more expensive in the most expensive state than in the least expensive state, according to AAA data on May 20. (Chart : https://tmsnrt.rs/3alAMKh)
Walmart stores are concentrated in states where gas and diesel prices are below the national average, such as Texas and Florida, while Target stores are moving toward high-cost states like California and New York.
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Gasoline and diesel prices are higher in some states than others due to factors ranging from local taxes to proximity to oil refineries and pipelines.
The geographic groupings of Walmart and Target stores reflect each company’s distinct strategy for targeting a certain type of customer.
“Walmart has found success with low-income customers and those who can get to its stores, compared to Target which wants the affluent shopper,” said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.
Walmart, known for having the best logistics operations among major U.S. retailers, shocked investors on its May 17 earnings call when Chief Executive Doug McMillon said rapidly rising oil prices had driven up fuel costs. in the first quarter $160 million higher than forecast. . Read more
The next day, Target chief operating officer John Mulligan gave the market a bigger jolt on the company’s earnings call by adding $1 billion to his forecast for shipping and freight costs for 2022. Those costs were “hundreds of millions of dollars” higher in the first quarter. than the retailer’s “already high” expectations, he said. Read more
Analysts say Walmart has weathered soaring fuel prices and related shipping costs better than rival chain Target, largely because Walmart’s business – from where it locates its stores and distribution, to the kilometers traveled by internal truckers, to the products on its shelves – is designed to contain costs.
“They’ve been known to scrape pennies off the sidewalk and find change under cushions,” said Clark Williams-Derry, a researcher at the Institute for Energy Economics and Financial Analysis (IEEFA).
The savings mentality that underpins Walmart’s operations suggests the world’s largest retailer is better positioned to thrive when inflation erodes shoppers’ discretionary spending.
Walmart shares have largely rallied since the company’s CEO reported the fuel cost surprise, while Target shares are still down more than 25%.
Walmart and Target declined to comment on Reuters analysis of fuel costs. The price analysis covered all 50 states, but not the District of Columbia.
According to Reuters analysis, Walmart has 63.5% of its stores in US states where regular and diesel prices are below the national average, as tracked by AAA. (chart: https://tmsnrt.rs/3z7zhd0)
For Target, that figure is 44%. At the same time, 38% of Target stores are in states with high fuel prices like California and New York. Walmart’s exposure is half of that, at 19%.
California, Target’s No. 1 market with 16% of its 1,921 stores, had the highest average fuel prices per gallon in the nation as of May 20. California’s stricter environmental rules and high fuel taxes are among the drivers of its above-average prices. (chart: https://tmsnrt.rs/3PNiaTB)
Fuel prices per gallon are significantly lower in Texas, Walmart’s biggest market. Of Walmart’s 5,300 locations – including Sam’s Club operations – in US states, more than 11% are in Texas.
Walmart supplies stores from 46 regional fulfillment centers compared to Target’s just 29, said Marc Wulfraat, president of logistics consultancy MWPVL International. Therefore, the average distance a truck travels to stores is less for Walmart.
“Efficiency matters more when prices are high,” said IEEFA’s Williams-Derry.
While Target outsources trucking, Walmart has about 11,000 in-house big-truck drivers who haul much of the non-perishable goods it sells. For this reason, “we believe Walmart has an advantage over Target when it comes to controlling overall transportation costs,” said CFRA Research analyst Arun Sundaram.
Fuel costs also matter to consumers, and Walmart’s focus on food and other consumables gives it an edge over Target’s more discretionary bent, said Scott Mushkin, the company’s CEO. retail consultancy R5 Capital.
Pandemic-weary consumers are already cutting spending on goods like flat-screen TVs and furniture as they redirect dollars toward travel and entertainment.
The US Bureau of Economic Analysis estimated that higher fuel prices in March compared to January would shift $96 billion of consumer spending toward gasoline this year, if the volume remains the same. Retail gas prices tracked by AAA, on average, have risen another 5% since the release of that forecast.
When shoppers lost masks earlier this year, Target found itself stuck with unsold TVs and small kitchen appliances. Now it is slashing prices for those items — a move that makes it harder to offset higher shipping and freight costs, analysts said.
Walmart is the nation’s largest grocery store. This makes it easier to pass on the higher transportation costs of fresh produce, meat and other foods to consumers, Mushkin said.
“People have to eat,” he said.
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Reporting by Lisa Baertlein in Los Angeles and Siddharth Cavale in New York Additional reporting by Tina Bellon in Austin, Texas. Editing by Kevin Krolicki and Matthew Lewis
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