How Wal-Mart and Macy’s explain the economy

November 14, 2013
Not low enough! (Jae C. Hong / AP)
Not low enough! (Jae C. Hong/AP)

When assessing how Americans are feeling about their economic well-being, there are a couple indicators to consider: Macy's and Wal-Mart.

While lots of other companies represent pieces of the economic picture, those two retailers encompass a broad variety household goods, for two ends of the market. Upper-income folks spend more money at Macy's — which also owns the tonier Bloomingdales — while Wal-Mart depends on the lower and middle classes. Right now, they're telling us something that's been apparent for a while, but is growing clearer month by month: While the wealthy in America seem to be doing all right, everybody else remains very, very cautious.

Take a look at Macy's most recent earnings report. The department store, whose stock has been on a steady upward trend since bottoming out in the recession, increased sales by 31 percent over last year in the third quarter and issued a rosy projection for the holiday season. Its sales in October were the best of all, government shutdown notwithstanding.

Wal-Mart, however, is a different story. The mega-retailer released earnings this morning, and while overall sales grew slightly in the last quarter, the closely watched metric of comp sales — that is, revenue from established stores compared to a year ago — posted its third straight decline, especially in groceries and electronic entertainment. The new, urban Neighborhood Market stores did better; most of the weakness came in the giant rural superstores. And despite aggressive plans for deep discounts on Black Friday and an earlier-than-ever opening time on Thanksgiving, it decreased its earnings projections for the holiday season, citing the poor financial state of its core demographic.

“Lack of clarity about what personal health-care cost would be is another concern,” said Wal-Mart U.S. President Bill Simon, whose division makes up 58 percent of the company's revenue. “Our customers’ number one concern is still around jobs and employment. Their income is going down and food is not. Gas is still eating up their budget despite abating. We aren't going to see a rebound in consumer spending. The continued noise and angst with the government is still not good for consumer confidence.”

The other factor: a massive cut in food stamp spending that kicked in at the beginning of this month, and is expected to hit Wal-Mart harder than any other retailer, since it ultimately receives 18 percent of the program's disbursements (and will impact how much recipients spend on other items as they stretch to make up for the loss in benefits).

Now, Wal-Mart doesn't always do badly in times of economic stress. It didn't do too badly during the recession, since the "always low prices" mantra is what people on a budget want to hear. These days, though, it seems that even the discretionary spending of people without much cash to throw around is continuing to contract — or be sucked up by dollar stores, which have been doing great in recent years.

Macy's, on the other hand, took a much steeper dive after the financial crash and recovered much more quickly. Its customers respond to values of assets like stocks and real estate, which have been increasing, rather than metrics like long-term unemployment and wages, which disproportionately impact low-income people. It's been recovering nicely since the recession:


That's a manifestation of the retail industry's big buzzword of the past few years: "bifurcation," which can describe anything from luxury goods and their knockoffs to the types of salad dressings that sell well.

Wal-Mart's other problem is that some of its competitors, like Kohl's, Target, Kmart  and J.C. Penney, are even more eager to get people in the door. Beset by similar earnings troubles, they're planning deep discounts this holiday season, in what becomes a promotional arms race.

"They're really focusing on taking leadership of price," says Jeff Clapper, who runs a consultancy in Bentonville, Ark., that advises Wal-Mart suppliers. "And with some other very desperate retailers out there, I think they're projecting their numbers even lower than before, because they realize basically what's ahead."

All of which makes Wal-Mart's move toward smaller urban formats even more important — if it can diversify into higher-income ranges, it won't be as dependent on a class of folks without much to give.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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Dylan Matthews | November 14, 2013