Walmart Inc. (WMT) Earnings Call Transcript & Summary

Hi, everyone. Thank you for having us. It's an honor and a pleasure to be here. For those of you who don't know me, I'm Linda Lomelino, Senior Director of Product and Product Design at Data Ventures, Walmart. I'm joined by Erich Kahner, who's Director of Competitive Strategy and Insights at dunnhumby. We're really excited today to share with you what we think 2024 has in store for us in retail. What's top of mind for customers, specifically in the context of economic uncertainty, fierce competition and limitless assortment, and how can data and insights really help drive customer centricity in a competitive landscape where loyalty is not only harder to achieve, but even harder to sustain over time. Erich is going to walk us through what we think are 4 critical themes for all of you to consider as you think about your year. And also, I'm then excited to share with you, Walmart Luminate, which is Walmart's proprietary suite of insights, and to illustrate how our ecosystem of data and analytics has really helped one of our biggest suppliers use customer data to drive category growth, again, in a very fierce competitive environment. With that, I'll hand it over to Erich, who will walk us through the big themes for 2024.

Thanks, Linda. As Linda mentioned, we're going to talk about 4 macro themes to keep top of mind as we head into 2024. I'll talk about each of the themes in more detail over the next several minutes, and then Linda will show us Walmart and dunnhumby solution for retailers and suppliers to collaborate together to combine a deep understanding of customer behaviors and beliefs at speed in order to find growth in a highly competitive, crowded and mature market. On this first theme, 2024 will be challenging. It will be just the latest in this long evolution the market has seen toward customer empowerment. For 2024, dunnhumby projects year-over-year food and consumables sales growth in the U.S. of around 1%. And this will be slower than the rate of inflation, which means another challenging year for units. And of course, some product categories and retailers will beat the market, but it's going to take tight alignment with customer needs in order to do that. So in order to understand what tight alignment with customer needs looks like at the 30,000-foot level, dunnhumby conducts its Annual Retailer Preference Index study. In this study, we model performance of the country's 65 largest food and consumables retailers on customer opinion of prices, promotions, quality of the assortment, quality of the digital and brick-and-mortar experience against outcomes retailers want to achieve, for example, better sales growth, stronger customer share of wallet, stronger emotional connection with shoppers. So what this tells us is which of these opinions is most important in driving financial success, and with that knowledge, we can essentially create a weighted brand equity score for the 65 largest retailers in the U.S., and we're able to rank them from the strongest alignment with customer needs to weakest. And the return on aligning on customer needs is high. If we look at 5-year sales CAGR, retailers who are in the first quartile in our ranking have sales growth that's over 2x stronger than retailers in the bottom half of our rankings. And this translates to about $2 billion more in sales over a 5-year period for your typical average regional supermarket chain of about 200 stores. So obviously, this return on customer equity is much higher for national chains. Driving better customer opinion has huge stakes, and we're going to hear more from Walmart today, which is speaking from a position of authority. Walmart's 3 largest banners, Walmart Supercenter, Neighborhood Market and Sam's Club, all ranked in the top quartile in our study. So why is that? Well, when we look at which customer opinions are most associated with financial success, perceptions on levers that save customers' money routinely comes out on top each year we do our study. And in the past 2 years, this is more true than ever. Additionally, the importance of digital touch points has been trending up steadily since 2018. And when we look at Walmart banner strengths, the commonality is saving customers money and a strong digital customer experience. And a quick note by what we mean about digital. There's a few customer opinions that really matter the most there, easy online shopping, strong performance of the app, making a shopping experience easier and having technology that makes the in-store shopping experience easier. And you may notice this last pillar, speed and convenience, that's been declining in importance over the years. And that's largely a brick-and-mortar construct. And it's been decreasing in importance, I think at the same time and because of the increase in retailers' digital capabilities and also, customers, when they're visiting stores, especially the past 2 years, are really taking the time to find savings. Another thing we've noticed in our study, 2023 was the year in which we saw opinions of retailers changed the most out of any year we've done our study. This tells us customers are taking a step back and really scrutinizing retailers. They're asking themselves, is this retailer still best aligned to my needs. This openness to new beliefs presents a big opportunity for retailers, if they make the right moves today and together with their suppliers. When looking ahead, we mentioned 2024 was going to be a competitive year. And as with most things, this will largely be consumer-driven due to the headwinds they'll be facing. Lower savings stores to draw upon than they've had the past few years, rising and still expensive debt, slower disposable income growth, rising unemployment. So with that, I'm going to turn it back over to Linda for the so what and the now what?

Thanks, Erich. So let's click down on the customer a little bit. So customers, as we all know, are increasingly selective about when, where and how they open their wallets. According to SAP, U.S. customer loyalty to brands has declined over 14% in the last year and 59% of Americans surveyed would switch brands for a cheaper option. So you've got a very discerning customer. We ran our own survey at Walmart with our own customers and those findings echoed SAP's findings as well. 58% of our customers spend more time seeking values, deals and discounts. 54% of them are willing to switch at any given time if they can find a better value out there. 53% of our customers compare prices across retailers before they make a purchase. So you've got a very intelligent discerning consumer out there. And so given this discerning behavior, it's become even more crucial than before to make data-driven decisions that will help brands and retailers like ourselves continue to stand out. At Walmart, we obviously have a very distinct advantage when it comes to understanding not only the Walmart shopper, but the U.S. customer and the retail landscape. We have over 4,000 physical locations across the U.S., accessible to 90% of the U.S. population with over 5 billion transactions a year. Those are not items. Those are baskets. And we have a growing online assortment. And so we possess a very detailed view of the American customer, including preferences, behaviors, attitudes, loyalties, switching behavior, et cetera, which is why we decided 2 years ago to launch Walmart Luminate, a unique suite of data and insights products that makes our users smarter in their decision-making process. They can make better, faster, smarter decisions, always with the customer in mind. Our merchants and our suppliers are leveraging Walmart Luminate to gain a competitive edge and drive growth in these uncertain times, and I'm super excited to share one of those case studies today. Suppliers and merchants like Mondelez are becoming more customer-centric by leveraging insights from Walmart Luminate to drive their overall strategies, not only how they think about their operations, but also how they think about their customer. You guys are all familiar with Ritz. It's a very popular cracker brand, and it's extremely successful in the market today. But Mondelez was not going to settle for success. It wanted to explore additional opportunities and decided to find category growth in a category that's already highly competitive and highly crowded. Given the competitive nature of the cracker category, think about an aisle crowded with brands, crowded with options, you've got numerous flavors, value propositions, Mondelez decided to analyze shopper data to gain a deeper understanding of the Ritz shopper and the Walmart shopper and what they wanted to do with crackers. This becomes a critical assessment to do when you think about shelf space becoming more and more limited and shopper preferences continuously changing. So you have to be able to access data nearly in real-time to be able to make smarter decisions. And this analysis that they did leveraging the Walmart Luminate ecosystem, allowed them to not only evaluate different forms, flavors and sizes at Walmart, but it also helped the Mondelez company uncover the role of the Ritz brand within the portfolio of crackers and help the merchants better understand their customer. So Mondelez used Walmart Luminate to analyze customer preferences across the entire cracker category. They have access to category data, not just their own data. They found that 50.6% of their shoppers buy carrier crackers such as Ritz, which complements other snacks within the box. This led to increased interaction in other subcategories like saltines, cheese crackers and other comfort foods as well. Each subcategory, we learned through the data, fulfills a very specific job to be done, ranging from entertainment and charcuterie boards to snacking, to feeding kids and even comfort food. Furthermore, because of the large increase in both -- sorry growth in both pickup and delivery, 80% of the shoppers of this category were also loyal Walmart customers. After gaining a solid understanding of the entire category, the category of crackers, Mondelez then decided to double-click on their own brand, Ritz. It became apparent through the data provided within Walmart Luminate that the Ritz shopper is not only loyal to specific flavors, but also that there are different purposes for different pack sizes. When they were armed with this knowledge, Mondelez was able to address questions also coming from the merchant about whether or not it was valuable to provide all of these distinct flavors, all of these distinct pack sizes. And in fact, there was. So this discovery was significant as it allowed Mondelez to effectively communicate to the Walmart merchant how each pack type caters to a specific shopper, a specific customer need and a specific journey. And so it emphasized the role of all of these different flavors and varieties. But Mondelez didn't stop there. They continued their efforts to better understand the Walmart shopper and the cracker category. So they used one of the products within Walmart Luminate called Customer Perception and this leverages our proprietary community of Walmart customers to gain insights about the category. So they targeted customers who had bought the category using our hyper targeting capabilities, and asked them about their brand preferences, their brand associations and their awareness of this entire variety of SKUs. It turns out that Ritz is a signpost for Walmart customers. Walmart shoppers who buy Ritz, are not only aware of the flavors, but report enjoying every single variety. The power of the Ritz brand became super clear through the work that they've done. Ritz not only was cherished by shoppers, but there was a nostalgic flavor to buying Ritz crackers. And the different flavors, as mentioned earlier, were driving very specific needs. So for both Mondelez and for us at Walmart, it was really powerful to be able to quantify the actual value of this entire flavor block that Ritz provides and further solidify the role of Ritz as a category giant and influence a lot of other long-term strategies. Data from Walmart Luminate revealed that Ritz has successfully catered to various need states such as entertaining and serving as an ingredient in meals. And this allowed Mondelez to adjust some of its long-term plans with the Walmart merchant, prioritizing the customer and building future strategies to ensure that Ritz, again, remains top of choice, especially when it comes to Walmart shoppers. And again, in a competitive landscape, it's about also defending territory with data. The strategies that Mondelez decided to shift include the following: focusing on the omnichannel shopping journey, and they identified a potential growth if they focused on these customers that were doing online grocery and online delivery of over $200 million, using seasonal moments like Thanksgiving and Christmas and the upcoming holidays to really work on a purposeful connection with customers about being able to succeed in entertaining, hosting the holidays overall, and then worked with our sister team, Walmart Connect, which is our advertising arm, to drive very exclusive deals online as a way of activating customers and driving a lot of traffic. So the overall success of using Walmart Luminate's data and insights portfolio to drive deeper, better understanding of the category and the customer is now also leading to new work for Mondelez, leveraging Walmart Luminate in the category of cookies as a great example, where they have brands like Oreo and Chips Ahoy! So looking ahead at 2024, it's clear that it's going to be a highly competitive year and a fast-moving one as well. Customers are smarter. They're reevaluating their preferences and are more open to switching products and exploring different retailers, different brands, different flavors. Additionally, they're becoming increasingly more selective about when, where and how they shop. They've got a lot of different options out there. So in response to these changing consumer behaviors, consumer attitudes, it's really critical for businesses like ourselves and our suppliers to make sure that we're always making customer-driven decisions and that they're based on real data. So by staying attuned to these customer preferences, shifting landscapes, surprising trends that are viral and take us by storm, we can position ourselves for success in the upcoming year. So in the retail environment that's marked by a lot of economic uncertainty, strong competition, shifting customer preferences and a more discerning customer, a deep understanding of our customers is not only advantageous, but it's now become mandatory for success. Thank you.

We have a few minutes for questions, if there are any.

[indiscernible]

I think the question was, how do you see [indiscernible] adding to the success of this? We -- actually, we already see some -- so thank you for asking that question. Walmart Connect is our advertising team at Walmart. And we've actually seen some phenomenal work being done as a result of leveraging Walmart Luminate. And so as suppliers better understand their customers and not only understand them broadly, but then understand the different segments within their customer base, they've been able to be very intentional about their media planning strategies, and they can focus on very specific use cases like bringing back lapsed customers or activating against switching behaviors. And so we've seen some fantastic work. And as part of our road map, we're going to continue to scale that work with Walmart Connect.

[indiscernible]

This is a follow-up question about the annual study we do. Just, I guess, what are the key factors in defining which elements of the value proposition matter more for driving retailer success? And I mean, we saw saving customers money being the pillar that's most associated with better market share, stronger growth. And that's, as I mentioned, more true today than ever. But if we look within the levers of what saves customers money, we've seen momentum in the personalized levers such as personalized rewards from a loyalty program, more relevant promotions. There's been momentum in that lever in the past few years. And that's come at the same time as this increase in importance of digital elements of the experience. And if you think about it, it makes sense. Those elements of the digital experience enable more personalized ways of saving for customers. So I would say if we're looking for some momentum in those levers, too, that's one story that we've seen. And also something that probably the top tier has most in common tends to be a really strong private brand portfolio, and that's because private brand, I think, as you all know, fits on element of saving customers money, but also on addressing the quality side of the equation, too. So there's a lot of momentum behind retailers, and we've seen Target make some improvements too and Walmart as well. I think the largest brand in the U.S. is great value branded products. So strong private brand portfolios lead to success as well.

[indiscernible]

dunnhumby is one of our partners for Walmart Luminate, but we also have proprietary technology that we couple with a lot of the dunnhumby analytics. So it's a combination.

[indiscernible].

Yes, absolutely. So the question was, as our suppliers are starting to leverage Walmart Luminate, are they finding meaningful difference regionally? Yes. The answer is yes. And what this allows them to do is a much more tailored strategy. They have access to data they've never had access to before. Even if you think about different data providers that they may have gotten data from in the past and probably still do, it has never been at the granular level that we're providing. And so they can really shape their strategies and tailor them not only on regional differences, but do we have a more price-sensitive customer? What does your best customer look like? Are they shifting to a different brand within your category? Are you losing customers or gaining customers? Are you growing at the same rate that Walmart is growing, right? And so there's fantastic analytics that we provide within Walmart Luminate that's allowed them to do a lot more of a tailored strategy. Great question.

[indiscernible].

For Ritz?

Yes.

So the Ritz work that we presented today was more of an in-depth understanding of the customer. Now they're putting into action a lot of what they learned. But the beauty of it was really understanding that there was a purpose to every pack size and a purpose to every flavor. Sometimes when you have a large assortment, you're trying to better understand what drives that category? Is it determined by brand or pack size? And that's one of the fantastic insights that you can get from Walmart Luminate is better understanding the customer decision tree, but then also the role that every flavor, pack size or whatever drives your category, what role does it play for the customer.

[indiscernible].

Yes. And I think that's one of the most exciting -- so sorry, the question was how do you drive execution with this many suppliers, this many -- and it's a great question. So what I think is most fantastic about the Walmart Luminate ecosystem is before, you would have suppliers bringing data to Walmart and Walmart having its own data. We're talking now about a shared one truth, right? And so you're essentially looking at the same problem together, meaning I think it actually removes barriers to execution because you can design strategies collectively. So we've heard fantastic feedback from our merchants that they're leveraging our platform, and then also from our suppliers, who're able to walk up to their merchant and say, hey, let's do something about X, Y and Z, right? And so I think the execution piece is fantastic. And then certainly, the connection point to Walmart Connect, right, being able to activate -- because really insights for the sake of insights is meaningless. But what we've seen as similar to the Mondelez strategy is they're really starting to tailor their strategies based on the data that they have and the folks that are doing it are being very successful.

One other question from the crowd. Do you share category benchmarking information with your merchants like Mondelez? And if so, how granular do you get?

So we show category transparency within one of our Walmart Luminate products, Shopper Behavior, which is done in partnership with dunnhumby. And the beauty of that is it actually drives extremely healthy competition. And I think principle to Walmart is always putting the customer at the center of the decision-making process. So it's less about who's right and it's more about what does the customer want and need. We've seen a lot of successful suppliers say, hey, I noticed that maybe if I delist a few items, I can drive even increased category growth or maybe there's a product that's not really fulfilling a specific need. And so we provide category transparency for that very reason. I think that's it. Thank you so much.

All right. Welcome, everyone. Thank you for joining us this afternoon or late morning. My name is Scott Light. I'm the Vice President of Churchill Systems. Churchill is a software development business based in Southeastern Michigan, where we specialize in providing AI technologies to major retailers here in the U.S. and throughout the world. In addition to machine learning, Churchill also works quite a bit in the areas of expert systems, a number of different AI technologies, exponential smoothing, genetic algorithms, fuzzy logic and so on. Joining me on the stage here this morning, I have 2 of veteran retail experts with me. In no particular order, we've got Randy Salley, former Senior Vice President of Walmart's ISD Division; as well as Mr. Dale Cade, Principal Consultant of the Columbus Consulting Group, also a former Director of Walmart's ISD Division as well as the Fossil Group and The Container Store. Now, as most of you have seen, AI is prevalent just everywhere in retail today. It's really become just in every type from customer service to merchandise planning, supply chain, pricing and promotions, even generative AI and ChatGPT. And what we wanted to do today is take a few minutes and really discuss some of the practical and effective approaches to integrating AI into your existing retail planning systems. So without further ado, let's get practical. Let's talk about some of our experiences that we've had in integrating AI into all sorts of different retailers. So what we're going to do is go through a few different questions that we've come up with from all of our years of experience in the industry and try to talk about where to get started when we're talking about integrating AI into a retail environment, whether you're brand new to some of these more advanced applications or whether you're looking to upgrade from your existing planning systems and looking to provide a little bit more science and technology to the existing environment you have.

So we'll start right off. And Randy, I'll start with you. Where do you see these AI applications really providing the most benefit to some of these retailers in the world today?

Yes. So Scott, as you walked around the floor here today and yesterday, AI is almost in every booth. I mean it has been without a doubt just kind of the hype, if you will, for this last year with ChatGPT getting exposed, et cetera. And I believe there's tremendous value for retailers by using some of the generative AI technologies. But I think the bulk of that will probably be back-office kinds of functions, potentially integrating with your e-commerce search capabilities, et cetera. But for decades, we've come to this conference and other retail conferences, it's always been about getting the right product at the right location, at the right time, at the right price. I mean we've heard that mantra forever.

Sure.

And so when I think about AI within the retail space, I tend to think about those kinds of opportunities, which leads to how do you do your demand forecasting? How do you manage your seasonal profiles? What do you do with price and promotion and the impact upon that against your products? And those types of implementations of it, I think, is where you really see the benefit because that's the challenge that we're all faced with every day is how do we continue to provide that product at the right place, time, quantity, price for the consumer.

So you see it as leveraging the science to those planning systems, supply chain, pricing, merchandise planning to really try and pinpoint where you're going to get the most efficiencies when you're placing product, when you're deciding what pricing to do, what type of discounting to do, the effectiveness of your promotions, that sort of thing?

Well, and truly understand your demand. I mean that sounds like a simple problem, but that's a really hard problem because there are so many components that run into that, whether it be lost sales or weather or promotion in the case -- I mean I grew up at Walmart so we're very promotion-focused, and we were an everyday low-price company. So promotion didn't play a big part of what we did, but being able to understand the impact of a particular promotion on an item and ultimately, what is that going to do to demand?

Very good. Dale, [indiscernible] yourself?

So Randy did a great job talking about situations where retailers need to take a lot of information, channel it to a decision. I think there's another opportunity where you want to expand that out. For example, you're building content for catalog, your PDP, your ELP, marketing where you're taking -- you have information, but then you want to figure out how do I take that and expand that out to a broader world? The generative AI is excellent on that. And then coming back again, once you've taken that marketing approach and you put that information out there, and you've got customers that have done something and you gather that information and you channel back again, and it becomes a new feedback to that replenishment loop. And so you have the ability to do that. The nice thing about generative AI is you can take a little bit of effort, you can create a different view, different perspective and you can quickly cater. You have these huge companies that have tens of thousands of SKUs. I want to get it to a person. I want that person to make a decision, and then I want to see how that person makes that decision. And so on that back end, you have the ability to very quickly cater content to customers. And you can do that with a little bit of effort and there's a lot of great products out there that do that. And even as simple as ChatGPT with prompt engineering, you can do that very, very quickly. So you got that whole -- it really covers the whole gamut of things within retail. Get value from, very quickly.

And certainly, we've gone from one extreme where, for many, many years, we just had no ability to capture data, and we're very limited on that data resources and the ability to use that data for pinpointing promotions, pinpointing exactly where we needed our product to replace to where now, there's almost too much data. There's so much data and now it's saying, okay, what do we do with this wealth of information, and how do we really make some practical decisions based on this enormous wealth of data that we have available today.

And that probably is not going away any time soon.

No, it's not. So we talked about starting an AI initiative. Some people are further along the curve than others. What do you see -- and Dale, I'll start with you. And when we're looking at starting out with an AI initiative, what kind of challenges do you see some of these retailers facing?