Consumers with higher incomes may create a difficult situation in Walmart.
Even though wealthy shoppers helped drive the retailer’s latest quarterly results, former Walmart US CEO Bill Simon warns they will be hard to retain.
“The Walmart experience is better than before, but it’s still not a premium experience. Walmart is built on convenience, value and selection. Not in service,” he said on CNBC’s Fast Money on Thursday. “As economic troubles subside… service will become more important than convenience and price. And we will see some consumers move back. This is a bubble.”
His warning comes as Walmart shares reached all-time highs back in August 1972, when started trading on the New York Stock Exchange. Shares rose nearly 7% on Thursday after the discount retailer’s fiscal first-quarter adjusted earnings and revenue beat estimates. Walmart said high-income consumers helped boost profits, especially in its grocery business.
“The problem is that the tailwind from food inflation that pushed Walmart forward will eventually reverse,” said Simon, a member of the company’s board of directors. Darden Restaurants And Hanesbrands.
Last October on Fast Money, Simon warned that bargains were losing their magic as consumers began to turn away for the first time in a decade. His appeal at the time was aimed at low-income consumers.
Now Simon argues that the shift of higher-income consumers to Walmart is not good news for the economy as a whole.
“When money is tight, people react—even high-end consumers react,” he said.
Despite the bubble warning, Simon believes Walmart will be a “great investment” for the next 12 months.
“As long as there is inflation and tailwinds from food inflation in particular, Walmart stores will continue to attract more traffic,” Simon said.
But he believes shares could be in trouble in 24 months as inflation eases and higher-end consumers shift away from discount stores.
“When inflation subsides and service becomes more important than price, some of these tailwinds will turn into headwinds,” Simon said.