Walmart's entire business model is crumbling

This week, Walmart’s shares crashed after the company reported a disappointing profit outlook.

Profits will fall 6% to 12% next year, the company said.

And the retailer’s situation is likely to get worse rather than better, according to many analysts.

Until now, Walmart has been able to make huge profits by keeping worker wages low and using its size to negotiate cheaper prices than competitors, Brian Sozzi at The Street writes.

But the retail landscape is changing, and Walmart is increasingly irrelevant.

“New guidance reflects that Walmart’s competitive edge — historically largely assortment and price — has faded relative to purveyors of extreme value (warehouse clubs, hard discounters) or extreme convenience (dollar stores, hard discounters), as e-commerce has neutralized the impact of selection,” Goldman Sachs analyst Matthew Fassler wrote in a note to clients.

As competitors like Costco, Aldi, Trader Joe’s, and Family Dollar crowd the space, the idea of visiting a Walmart is less compelling to price-conscious consumers.

The retailer has been pouring billions of dollars into e-commerce in an attempt to play catch-up to Amazon. But this is another measure that is hurting profits, according to Sozzi.

Walmart also can’t continue to offer the low wages that helped it succeed for so long.

The retailer has raised its pay to a minimum of $US9 an hour because it discovered it was cheaper to offer higher wages than train new workers who left for better opportunities.

“Turnover in the retail sector has been steadily rising and now stands 5% a month,” notes Bloomberg. “At that rate, if Walmart’s workforce were to hold to the national average, over a full year it would be losing 60% of its sales staff.”

In addition to being costly, Walmart’s high turnover led to complaints about customer service.

It’s increasingly clear that Walmart’s profit model is unsustainable, according to analysts at Stifel.

“The market is reacting to meaningful evidence that WMT has substantially over-earned,” Stifel analysts wrote on Wednesday. “WMT calls out specifics of wage and price investments — and yes these are discrete actions taken by WMT; but we believe they are just symptoms of where WMT sits in its history.”

Walmart CEO Doug McMillon defended his company’s position in a statement released by the company.

“These are exciting times in retail given the pace and magnitude of change. We have strengths and assets to build on and are making progress to position the company for the future,” McMillon said. “We’re encouraged by recent customer feedback and will continue to get stronger.”

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