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Why Mass Merchandisers’ Margins Could Take a Hit

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Investments in growth to hurt margins

As stated in the second part of this series, margins of mass merchandisers are taking a hit from increased investments in their growth initiatives. Walmart (WMT), Target (TGT), and Costco (COST), three of the nation’s largest mass merchandisers, saw pressure on their margins due to their continued investments to strengthen their digital business and increased costs associated with digital fulfillment. Meanwhile, to fend off competition from Amazon (AMZN) and other deep discounters, these companies are investing in price to drive shoppers to their stores and online platforms, which is affecting their margins.

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How margins fared

The graph above shows that gross margins for all three companies contracted during their last reported quarter. Target’s gross margin contracted by ten basis points as benefits from improved sales were more than offset by increased price investments and higher digital fulfillment charges. Meanwhile, the company’s operating margin fell 120 basis points.

As for Walmart, the retail giant’s gross margin contracted by 29 basis points, while its operating margin contracted 50 basis points, reflecting increased investments in growth initiatives and lower pricing. Also, Costco’s gross margin contracted 15 basis points due to value pricing and higher business investments. However, the company’s operating margins improved slightly, driven by lower SG&A expenses and cost-savings from its shift to the Citi Visa co-branded card program.

Going forward, the margins of these companies are expected to remain muted given the prolonged price war among retailers and the growing threat from Amazon.

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