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Tags: walmart | target | fuel costs | consumer demand | energy prices | inflation

Costly Fuel Hurts Walmart & Target - But Not Equally

Costly Fuel Hurts Walmart & Target - But Not Equally

Friday, 03 June 2022 06:10 AM EDT

For Walmart and Target, location matters – especially when it comes to transportation costs.

An analysis by Reuters shows that Walmart Inc. gets a break – and Target Corp. is getting hurt – by where their stores are clustered. High oil prices - $117 for a barrel of benchmark U.S. crude on Thursday - impose extra costs everywhere, but the impact varies wildly by state. The per-gallon price for diesel fuel that powers highway transport was 29% more expensive in the priciest state than the lowest-cost state, according to AAA data on May 20.

Walmart stores are concentrated in states where gas and diesel prices are below the national average, like Texas and Florida, while Target stores skew toward high-cost states like California and New York.

Gasoline and diesel prices are higher in some states than others because of factors ranging from local taxes to proximity to oil refineries and pipelines.

The geographical groupings of Walmart and Target stores reflect the distinct strategy of each company for going after a certain type of customer.

"Walmart has found its success with lower-income customers and those that can drive to its stores, versus Target who wants the affluent customer," said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group.

Walmart, known for having the best logistics operations among major U.S. retailers, shocked investors during its May 17 earnings call when Chief Executive Doug McMillon said the rapid run-up in oil prices resulted in first-quarter fuel costs that were $160 million higher than expected.

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 its transportation and freight cost forecast for 2022. Those costs were "hundreds of millions of dollars" higher in the first quarter than the retailer's "already elevated" expectations, he said.

THRIFTY MINDSET

Walmart has weathered the spike in fuel prices and related shipping costs better than rival chain Target, analysts said, in large part because Walmart's business - from where it puts its stores and distribution centers, to the miles driven by in-house truckers, to the products on its shelves - is designed to keep a lid on costs.

"They're known for scraping pennies off the sidewalk and finding loose change under the cushions," said Clark Williams-Derry, a researcher at the Institute for Energy Economics and Financial Analysis (IEEFA).

The mentality of thrift that underpins Walmart's operations suggests the world's biggest retailer is in a better position to thrive when inflation erodes shoppers' discretionary spending. Walmart shares have largely recovered since the company's CEO flagged the surprise fuel cost hit, while Target shares are still down more than 25%.

Walmart and Target declined to comment on the Reuters analysis of the fuel costs. The price analysis covered all 50 states but not the District of Columbia.

Walmart has 63.5% of its stores in U.S. states where both regular and diesel prices are below the national average as tracked by AAA, according to the Reuters analysis. (graphic: 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 that, at 19%.

California, Target's No. 1 market with 16% of its 1,921 stores, had the nation's highest average per-gallon fuel prices as of May 20. California's stricter environmental rules and high taxes on motor fuel are among the drivers of its above-average prices.

Per-gallon fuel prices are sharply lower in Texas, Walmart's top market. Of Walmart's 5,300 locations - including Sam's Club operations - in U.S. states, more than 11% are in Texas.

'EFFICIENCY MATTERS'

Walmart supplies stores from 46 regional distribution centers against only 29 for Target, said Marc Wulfraat, president of logistics consultancy MWPVL International. As a result, the average distance a truck drives to the stores is less for Walmart.

"Efficiency matters more when prices are high," said IEEFA's Williams-Derry.

While Target outsources trucking, Walmart has roughly 11,000 in-house big rig drivers moving a large proportion of the nonperishable goods it sells. Because of that, "we think Walmart has an advantage over Target when it comes to controlling overall freight costs," CFRA Research analyst Arun Sundaram said.

Fuel costs matter to consumers too, and Walmart's focus on food and other consumables gives it a leg up over Target's more discretionary bent, said Scott Mushkin, CEO of retail consulting firm R5 Capital.

Pandemic-weary consumers are already cutting spending on goods like flat-screen televisions and furniture as they shift dollars toward travel and entertainment.

The U.S. Bureau of Economic Analysis estimated the higher price of fuel in March relative to January would shift $96 billion in consumer spending to gasoline this year, if volume remains the same. Retail gas prices tracked by AAA, on average, are up another 5% since that forecast was issued.

When shoppers shed masks earlier this year, Target got stuck with unsold TVs and small kitchen appliances. Now, it is cutting prices on those items - a move that makes it harder to offset higher transport and freight costs, analysts said.

Walmart is the nation's biggest seller of groceries. That makes it easier to pass higher transport costs for fresh produce, meat and other food to consumers, Mushkin said.

"People gotta eat," he said.

© 2022 Thomson/Reuters. All rights reserved.


StreetTalk
For Walmart and Target, location matters - especially when it comes to transportation costs.An analysis by Reuters shows that Walmart Inc. gets a break - and Target Corp. is getting hurt - by where their stores are clustered.
walmart, target, fuel costs, consumer demand, energy prices, inflation
883
2022-10-03
Friday, 03 June 2022 06:10 AM
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