The Walmart Inflation Test (Part 2)

In the first post in this series, I shared some of the results from recent CNBC coverage of Walmart suggesting the retail giant is raising prices (.6% across a market basket of goods in recent months), most likely in response to overall inflationary pressures (but potentially the ability to maintain/increase margin as well). The Walmart inflationary trend really should be a litmus test for all companies worried about the potential of inflation, which is even more likely given the current overtime running of the printing presses thanks to QE2. But even before the latest round of quantitative easing, CNBC notes "prices of cotton, silver wheat, soybeans, and corn are all up big this year." Specifically, "cotton futures are up the most, climbing 90 percent so far in 2010. The price of silver is up 63 percent."

Explosive, emerging economies like India and China are seeing the impacts of inflationary price pressure even more than the US and EU at this point. In India, the wholesale price index (WPI) increased to 8.58% in October, topping analyst estimates and rising from the prior month. In China, the consumer price index (CPI) climbed 4.5% in October, beating analyst expectations by nearly 10% and driving past the 3.6% number from September. Yet when it comes to gauging the impact of inflation in the developed world, Walmart presents the ideal economics experiment to put under the microscope given the price sensitivity of the great majority of its shoppers relative to those that frequent more alternative (e.g., warehouse formats) and upscale competitors.

Given this, we urge companies to monitor not just domestic CPI to gauge the expected price increases in commodities as they make their way into and through the supply, but stores like Walmart in particular. And if prices keep passing the Walmart inflation test, procurement organizations should get ready to deal with commodity volatility and prices on a sustained basis, coaching and setting expectations for P&L stakeholders, controllers, treasury and, of course, CFOs alike. Successfully navigating through these volatile commodity waters will involve not only changes in sourcing and working capital management strategies, but also introducing new skills and potential new technologies (which your sourcing and ERP vendors don't have) into the equation as well. Stay tuned as we present a Cliff Notes style version of what some of these items are in the final post in this series.

Jason Busch

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