WHEN: Today, Wednesday, December 6, 202
WHERE: CNBC’s “Squawk on the Street”
Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with Walmart CEO Doug McMillon on CNBC’s “Squawk on the Street” (M-F, 9AM-12PM ET) today, Wednesday, December 6. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2023/12/06/short-walmart-ceo-on-holiday-trends-and-consumer-demand.html.
All references must be sourced to CNBC.
PART ONE:
DOUG MCMILLON: We’re an omni retailer, so we’ve got things going on ecommerce-wise, stores-wise, marketing-wise. And we just had a chance to walk around and show you a little bit about what’s happening with our remodels here. We’ve got quite a few stores that have been refreshed, and that’s exciting as we head into this Christmas season.
SARA EISEN: How is it going so far? How was the Black Friday, Cyber Monday, Thanksgiving period?
DOUG MCMILLON: Yeah, we released our third quarter results early in November, and we talked about the fact that we saw some softness at the end of October, but that November started off well. What we said at that time is that we expect that Black Friday will go well and that things may be a little soft until you get closer to Christmas. Because customers, generally speaking, are really price sensitive right now. They’re prioritizing their orders. And they know that there’s a chance that prices might be lower right before Christmas or right after Christmas with clearance. And so that’s what we expect to happen.
SARA EISEN: What are you seeing in terms of traffic around this important holiday period?
DOUG MCMILLON: Yeah, we’re continuing to see traffic growth in store, plus even more transaction growth for pickup, curbside and delivery. As a company our in store business is continuing to grow, but we expect that this trend of faster growth for curbside delivery will continue. And we’re happy to serve people however they wanna be served. Customers these days shop in kind of an all-of-the-above way. They use stores, they use pick up, they use delivery. It’s fun to come in here and pick up what you needed for Thanksgiving, and also look at what was available for Black Friday. And that’s the behavior we’re seeing.
SARA EISEN: What about by income level? Because it does feel like it’s been bifurcated.
DOUG MCMILLON: Everybody’s price sensitive. You know, we went through this period of inflation which has now changed. We’re starting to see some deflation, which we’re happy to see. But as that price sensitivity went up everybody was looking for value and we did really well and continue to with higher-income cohorts.
SARA EISEN: Higher income trading down. Is that still happening?
DOUG MCMILLON: We don’t like to think of it as trading down to come shop at Walmart. It would be more like people looking for value. But as we’ve shown you, like in our apparel category, we’ve got better brands. We’ve got some great values, even though they’re at higher price points than what we might’ve had in the past. So Walmart has appealed to everybody for some categories forever. Like, we sell a lot of bicycles and flat panel televisions. But these days we’re focused on offering customers what they want in apparel and home and some other categories that have more of a fashion component so that we can serve everybody better. And then bring along services like Walmart+ so that you can get free delivery and hopefully retain those customers that have been coming to us in recent times.
SARA EISEN: You mentioned some of the general merchandise categories, which have been weaker compared to staples like food. Is that reversing?
DOUG MCMILLON: Not in dollars, but in units we’re seeing GM start to come back. And we’ve done well in GM through the year. Back to school was pretty good. Things were better in the second quarter than the first quarter. It’s gonna be interesting to watch what happens in the general merchandise categories in the year ahead because prices are so much lower. We’re down in pricing in the general merchandise categories, meaning non-food categories, by about 5% now. And we’re seeing the food categories basically about where they were a year ago. So today, if you’re a customer shopping our app or walking through the store, you see a lot of rollbacks, prices that were lower than before. Our toy department’s got 25 items below $25. And they’re items that are easy to find there under kids–
SARA EISEN: Which you couldn’t do last year.
DOUG MCMILLON: Couldn’t do as many of those items last year. You know, Hot Wheels –
SARA EISEN: So it is leading to increased sales?
DOUG MCMILLON: — are still selling at $1.18. you know, Barbie’s hot, but under $25 is an important price point. Sorry.
SARA EISEN: Is that helping sales of those items?
DOUG MCMILLON: It helps unit sales. But you gotta sell 6% more to have $1 increase in retail. But we’d rather have lower prices than higher prices.
SARA EISEN: Well, you got a lot of attention for using the deflation word.
DOUG MCMILLON: Yeah.
SARA EISEN: Because it still feels like an inflationary environment for a lot of people out there.
DOUG MCMILLON: Yeah.
SARA EISEN: So where is the deflation happening?
DOUG MCMILLON: Well, the general merchandise categories, for some number of months now we’ve seen the trend coming down. As I just mentioned, prices are lower than a year ago by 5% or 6%. On the food side, the fresh food categories act like commodities. They go up and down in a more fluid fashion. Beef’s higher right now than a year ago but chicken’s less. That kind of always happens. But the dry grocery and consumables categories, processed foods, had quite a bit of stubborn inflation in it for a period of time. We’re now seeing that change. So what we can see is that on the GM side we’re already below a year ago, and on the food side that’s where the trend is headed. So what we said at the end of the last quarter was there’s a chance that we’ll find ourselves in a deflationary environment in total as we have the months ahead habit.
SARA EISEN: How do you drive growth in that kind of environment?
DOUG MCMILLON: Sell more units. Grow more market share. It’s good for customers. They get lower prices.
SARA EISEN: Do you expect a drop off, though, in 2024 if these sort of deflationary trends continue?
DOUG MCMILLON: We haven’t changed our plan. We still expect to drive a lotta growth. We’re really well-positioned in that we’ve got stores, plus curbside, plus delivery. And we’ve got a lot of upside as it relates to ecommerce delivery, whether it’s deliveries that are happening from stores or it’s deliveries coming from our ecommerce fulfillment centers. And we’ve made a lot of investments in supply chain and automation to be able to have a better ecommerce experience. And so we expect to be able to grow regardless of the environment.
SARA EISEN: Yeah, the ecommerce numbers have been surprisingly good. So is that a continuation from COVID habits? Or something you’re doing specifically to change the appeal? What’s driving it?
DOUG MCMILLON: People love to save time. If they can get a Walmart price on a broad basket of food and consumables and increasingly general merchandise, that’s what they want. So COVID definitely accelerated trends that were happening. But last quarter in Walmart U.S. we were up 24% in ecommerce. That’s driven by pick up at store level, delivery from stores, and also ecommerce fulfillment deliveries, which are either first party owned inventory, or our third party marketplace, which is really growing, which is enabling us to develop more services, have an ad business, have a fulfillment service business, things like that. So–
SARA EISEN: Are you taking share from other ecommerce retailers, like an Amazon, or is it your own customers in store?
DOUG MCMILLON: We’re growing share across categories. And I think part of it is because now you can get the Walmart price in a broad assortment in any way you want it.
SARA EISEN: You describe the consumer as softening. That’s what you’re seeing in terms of the trend. What do you think is causing that? Is it the inflation? There’s also a number of factors hitting right now. We’re seeing fewer, for instance, the food stamp program, the assistance that was happening during COVID running out. Student loan payment resumption. What do you see as a mover?
DOUG MCMILLON: If we had been talking last spring or at the beginning of last year, I expected more softness by this time of the year than we’re actually experiencing. And I think employment and other things have propped that up. So you just listed some things that would be downward pressure. But there’s also some positive – there are positive things happening. So all in all I look at this year and it’s stronger than what I would’ve thought, this year that we’re getting ready to wrap up. Next year’s a different story. And I don’t know what next year’s gonna look like as credit balances go up, the balance sheet of the consumer is not in as good of shape as it was six to 12 months ago or a year ago. But we still may find that, you know, we’re back to growth rates that look like 2018, 2019 in terms of total retail. We just think our opportunity is greater than that. And we can grow faster than whatever the retail market grows.
SARA EISEN: Are you bracing for a recession?
DOUG MCMILLON: No. We always manage our expenses. We wanna play offense. I mean, you saw the inventory in our store today, we are ready to drive sales. And we’ll do that all the way through next year too.
SARA EISEN: You’re well stocked —
DOUG MCMILLON: Inventory levels are in good shape, in stock where we need to be in stock, and aggressive on our futures.
SARA EISEN: You’ve been growing profits faster even than sales. You mentioned automation, and I’m curious how much that’s been a factor toward better profitability in places like fulfillment.
DOUG MCMILLON: When we look at our multi-year plan there are two levers that will enable us to grow operating income faster than sales. One is automation, the other one is the way the business model’s changing. As ecommerce grows, digital relationships grow, we have membership income, we have marketplace service rates, we have fulfillment services, et cetera, the things that I was talking about earlier – advertising. But as it relates to the automation side, it’s early days. We’ve just really started in the last year or two to put some of these automated storage and retrieval systems into our distribution centers and fulfillment centers. So the upside from that automation will play out over a period of time. You can think of it as being kind of a four or five year time horizon.
SARA EISEN: And you expect that to increase profitability?
DOUG MCMILLON: Yeah. It’ll help us in a number of ways. It’ll help improve customer in stock. It’ll help us with inventory turn. It’ll help us with inventory accuracy generally, which is worth a lot as we try to optimize the supply chain. It’ll also help us with productivity, changing the back room of the store and the receiving process in a way that helps our associates and helps our expense level.
SARA EISEN: What about generative AI? Where does that fit in?
DOUG MCMILLON: Yeah, we’re really excited about how generative AI is already helping us with search and chat. It’s more of a solution approach today to go into our search bar and say, “I wanna prepare for a seven year old’s birthday party.” You get a better answer than what we could’ve done in the past. And I’m excited about how search and chat will be more relevant and personal in the weeks and months to come. And it’s moving really quickly. We can use generative AI to help our associates. Everyone’s got a device, they have an application that helps them learn about their job and know what their next most productive task is to do over time. And then on the supply chain, demand forecasting is one of the big keys to success. The way data and the way more intelligent algorithms, our applications are just getting smarter with our own large language models and those of others. Together with what we’re doing with physical automation, it’s gonna be a different supply chain just in a matter of a few years.
SARA EISEN: Where are you in that process?
DOUG MCMILLON: Yeah, call it a year or two in on about a five year plan. It’s different depending on whether we’re talking about the automation of our perishable distribution centers, our ecommerce fulfillment centers. We had an investor conference earlier this year where we tried to lay out all of those changes. And they have some different timelines, but generally speaking this is about a four or five year journey from here.
SARA EISEN: But do you think investors appreciate what the potential is for generative AI on making a company like Walmart more productive and more profitable?
DOUG MCMILLON: Probably early days in that. We need to show what we can do with it and then communicate it. And that’s what we’re out to do.
SARA EISEN: What about associates? You said that it can help associates.
DOUG MCMILLON: Yeah.
SARA EISEN: Will it lead to fewer associates? I think that’s something people are wondering about.
DOUG MCMILLON: Yeah, probably fewer associates in the back room of the store, and maybe if technology can help us in the way we’d like at the front end of the Supercenter over time. But the sales floor probably gets more people. And what we’re seeing in supply chain is that it’s basically the same number of people with just a whole lot more productivity, but their jobs change. I was in Lancaster, Texas a couple weeks ago visiting with associates there who now work at an automated facility, and their lives are better and they make more money. They’re not walking ten miles a day, they’re walking a lot less. They’re not lifting as much weight, but they’re supervising the automation that’s there and they’re getting rewarded for it. And that’s awesome. That’s what we’d really like, to have people extend their careers and be able, when work is over, to be able to go coach their kids’ soccer teams instead of being tired because they lifted so much weight all day.
SARA EISEN: So fewer back house employees, but more on the – net/net it’s not a job loser?
DOUG MCMILLON: And we’re doing more deliveries with associates over time. So, you know, I think what we’ve seen happen so far is that as we’ve applied technology for the picking process in the store, for example, is that job composition has changed but we have about the same number of people. And I suspect over the long term that’s probably what happens with us. There may be times when you have a bit fewer and times when we have more and there will be some changes, like, by location when the Texas facility becomes automated and it wasn’t. But in general, I bet you that over time, because we come up with new ideas to grow sales, we end up with about the same number of people making more money.
PART TWO:
SARA EISEN: How would you characterize the current labor market, since you say it across your customers, but also a major employer yourself?
DOUG MCMILLON: Yeah, it’s more normalized. The unusual employment market that we saw the last few years has changed. We are able to staff around the country. Our turnover’s down. We’ve got more continuity, which is helping a lot. We had so much turnover 2021, when people went out on COVID leave and we hired new people. We were hiring bartenders and waiters and waitresses because they needed work and they were learning the retail business. But these days, you know, we’ve got more experience and it’s helping.
SARA EISEN: What about holiday hiring versus other years?
DOUG MCMILLON: Our full time ratio is so high relative to other retailers, we just don’t need to hire as many part timers. So it’s hired some but we’re pretty much staffed—
SARA EISEN: Normalize—
DOUG MCMILLON: We’re ready.
SARA EISEN: Normalized hiring environment.
DOUG MCMILLON: Yeah.
SARA EISEN: Normalized wage environment?
DOUG MCMILLON: Our wages are still going up, which is great, and we’ll raise the wages going forward some more into next year. The percentage increase won’t be as much as it was. It’s more normalized as well.
SARA EISEN: On the consumer there’s been a lot of focus on these GLP-1 drugs. And I know you sell them in the, you know, you have people on prescriptions in the pharmacy here. And there’s been a lot of focus from executives at Walmart in discussions about what that’s led to in terms of basket sizes and changing consumer habits. What are you seeing?
DOUG MCMILLON: I still think it’s too early to call it. But, you know, our data is anonymized. And what we can see big picture is that there’s some shifting in categories as people think about losing weight. They buy more fresh foods, for example. So there’s some movement around, but I can’t call what’s gonna happen in the long term. That’s a developing story.
SARA EISEN: Well, I wonder, I think that everyone’s trying to figure out how profound of an effect it’s going to have on things like packaged foods.
DOUG MCMILLON: Yeah, we’ll see.
SARA EISEN: You’re not –
DOUG MCMILLON: Too early to call.
SARA EISEN: On packaged food, what are you seeing in terms of growth? Because they’ve had such enormous pricing power over the last few years. That’s obviously coming down right now. Are they taking too much? Do the manufacturers need to bring prices down?
DOUG MCMILLON: Yeah, there’s, you know, recently more of a shift to wanting to drive tonnage, wanting to drive volume, which is great. It’s gonna help us bring some prices down for customers, and they need it.
SARA EISEN: What about private label? How’s the environment for private label right now?
DOUG MCMILLON: It’s been more consistent. You know, we manage private label pricing as we’ve gone through the last few years to make sure that we’re showing value for customers. And private brand went up as a percent of total for us. We don’t really want that to continue at Walmart. We have great prices and we want people to be able to compare them. So having brand names so that you can look around and see that Coke or Pepsi or some other brand is lower at Walmart is what we would design for. Private brand’s important. We invest in quality. We try to treat them like they really are brands, and not just some private label. But, you know, we wouldn’t wanna see them continue to grow in percent of total too much. We would like for the brands to offer value to customers and have them grow.
SARA EISEN: That’s sort of what I was getting at, but they are growing now in this sort of value-oriented environment, right—
DOUG MCMILLON: Sure, yeah. But —
SARA EISEN: Private label—
DOUG MCMILLON: –brands are growing, but yeah, private brand grew as a percent of total and it’s still growing, but the branded manufacturers are starting to respond on price to get unit tonnage back.
SARA EISEN: Got it. You mentioned advertising a few times. And there’s been growth in that business. It’s still a tiny portion of the overall. How big can it get?
DOUG MCMILLON: Much bigger. It’ll correlate—
SARA EISEN: What are your ambitions then—
DOUG MCMILLON: –it’ll correlate to the ecommerce business. So growing ecommerce in the marketplace is key to being able to attract more advertisers. What we can do that some other people can’t do is we can connect the dot between an ad you may have paid for digitally and a subsequent purchase in a physical store so that you can see the ad actually worked. So it too is an omni business for us.
SARA EISEN: Growing the ad business, growing, what about financial services? That’s a priority for you too—
DOUG MCMILLON: Yeah, we’ve had a pretty big financial service business for a long time, but it’s largely analog and in person. And that continues. But we’d like to digitize it. And some of those financial services show up in our own app. We also have a JB with Ribbit Capital for a product called One Financial. And we’re starting to see that scale, enabling a customer to use it to check out, to pay, eventually be able to have other services that would enable them to have a digital experience just like the one they’ve had here in person.
SARA EISEN: So how big of a portion can overall services be for the world’s biggest retailer?
DOUG MCMILLON: Depends on how you define services. But there is definitely a more B2B aspect of the company today with the marketplace seller relationships, what we’re doing with advertising and some of these other things. So I think that the percentage will definitely go up. And we’ll use the front of the store, our vestibule space, to do things like help take care of your pets and things like that. So services will continue to grow and help us with the income level.
