By (Reuters) – Walmart (WMT.N) is thriving while consumers cut back on pricier options like Starbucks (SBUX.O) and McDonald’s (MCD.N). As buyers scale down their spending on luxury items, they are increasingly turning to Walmart for a wider range of goods, including higher-priced items like furniture and clothing.
Changing Consumer Behavior
Amid inflation, many retailers have raised prices, but conscientious merchants like Walmart continue to benefit. During the pandemic, companies like Starbucks, McDonald’s, and Diageo (DGE.L) saw significant sales growth. However, inflation has now eroded much of the savings that Americans accumulated, leading to a reduction in spending on affordable treats. Starbucks recently cut its sales forecast for the coming year as consumers shunned $5 caramel frappuccinos. McDonald’s also missed analyst profit expectations.
Walmart’s Growing Appeal
In contrast, Walmart has reported higher-than-expected sales and operating income for the year. The retailer is attracting wealthier customers looking for bargains, boosting online marketplace sales of sporting goods and furniture, which grew over 20% in the quarter ending April 30.
Greedflation and Consumer Spending
The concept of “greedflation” suggests that some companies have pushed higher costs onto customers to increase profits. Between the end of 2020 and 2023, McDonald’s increased its gross profit margin from 51% to 62%, and Starbucks from 16% to 24%. In comparison, Walmart’s margin remained relatively stable at 24%.
Selective Investor Spending
Investors are becoming more cautious with their spending. The consumer price index increased by nearly 3.5% in the 12 months to April, according to the U.S. Bureau of Labor Statistics, still above the Federal Reserve’s 2% target for economic stability. As costs compound each quarter, consumers are likely to continue cutting back until prices stabilize for an extended period.
Market Valuation
The forward price-to-earnings multiples for Starbucks and McDonald’s are lower than pre-pandemic levels. However, Walmart stands out, being more highly valued than before the Covid-19 pandemic. By offering value to customers, Walmart may avoid a long-term slump in consumer spending.
