Are Wal-Mart's shoppers disappearing?

Wal-Mart has cut orders to suppliers in the face of poor sales, according to a recent report. Is this a blip for the world’s largest retailer, or a reflection of tough times for Wal-Mart’s base of lower-middle-class customers?

From worker protests to missed earnings targets, 2013 has been a year that Wal-Mart would probably rather forget. The latest bit of bad news: According to a recent report, the world’s largest retailer is scaling back on orders to its suppliers in the face of lackluster sales and overflowing inventory.

An internal e-mail between a Wal-Mart ordering manager and a supplier, obtained by Bloomberg, said that Wal-Mart was looking to reduce its inventory for this quarter and the next. The story also pointed out that inventory at Wal-Mart stores had outpaced sales growth, and that the retailer missed out on some sales because it didn’t have enough employees to keep shelves stocked. (Wal-Mart’s workforce has fallen by 120,000 since 2008, despite adding several hundred locations). The company's same-store sales have dropped for two straight quarters. 

Wal-Mart denied the report, telling CNBC that Bloomberg's story was "misleading" and Wal-Mart spokesman David Tovar told CNBC that the company has hundreds of inventory categories that are being constantly managed based on consumer demand. Still, Wal-Mart shares fell 1.4 percent on the news Thursday, a drop that reverberated throughout the rest of the stock market.

Some of this is as much a general retail problem as a Wal-Mart problem: Consumer spending has tightened up, and the back-to-school sales season was a disappointment. Analysts are expecting that to continue, with the Christmas spending season forecast to be the weakest since 2009. Wal-Mart is the largest company in the world, and its performance is seen as a bellwether for the retail industry at large. “Wal-Mart represents about 11 percent of total US retail sales,” says Howard Davidowitz, a retail consultant based in New York, in a telephone interview. “They are America.”

But one part of it is decidedly a problem for Wal-Mart and mid- to low-priced department stores like it: The typical Wal-Mart customer has been squeezed the hardest by the sluggish recovery, and Wal-Mart may not be doing enough to accommodate the new economic reality. “If you look at this economy, it’s a train wreck for [the bottom] 80 percent of the American people, and Wal-Mart sells to that 80 percent,” Mr. Davidowitz says. And “77 percent of the new jobs created this year were part-time jobs. We have the lowest full-time labor participation rate in 35 years. Consumers’ incomes are not growing. One of six Americans are in poverty, and another one in six are an inch away from poverty.”

Outside financial pressures are playing a role as well. The expiration of the payroll tax cut in January left workers with less take-home pay than they were used to, and many Americans are having to delay some big steps like marriage and buying a home – which means less additional spending on items for that home. Couple that with $1 trillion in student loan debt – and money tied up in monthly payments for those loans – and it means less money for spending on smaller, discretionary items on which a big-box store like Wal-Mart depends.

“These middle- and lower-middle-class households, they have to be careful,” says Chris Christopher, the director of consumer economics for IHS Global Insight, based in Lexington, Mass. “A lot more households are living paycheck to paycheck. Median household income has dropped. And consumer confidence has been spurty, which means that the overall economy takes a bit of a hit.”

Wal-Mart Chief Financial Officer Charles Holley agreed with that assessment in August, calling shoppers “hesitant to spend what they have,” during the company’s second-quarter earnings call with reporters.

Instead, the higher end of the retail market is showing the most growth. The luxury market is booming, with high-end stores like Michael Kors and Tiffany boasting strong same store sales figures this year. Meanwhile, middle to lower-end department stores, like Wal-Mart and Target, have lagged. “The middle tier department stores and department stores overall haven’t been doing very well,” Mr. Christopher says. “The lower end and the upper end are doing better.”

What’s more, Davidowitz argues, Wal-Mart has lost out on its image as a low-price leader to stores like Family Dollar and Aldi, the discount supermarket chain. “These smaller operators are taking Wal-Mart’s business because all [those shoppers] care about is where to get the best deal,” he says, calling recent efforts to upscale the department store’s image and remodel store layouts “crazy.” If that core lower-middle-class Wal-Mart shopper thinks he can get a lower price elsewhere, he will, Davidowitz says.

Of course, Wal-Mart is a long way from disappearing. It’s the single-largest company, and private employer, in the world, with nearly $470 billion in annual revenue and $16.9 billion in profit generated last year, according to Forbes. A missed quarterly sales target just means sales weren’t as gargantuan as Wal-Mart expected them to be.  But if the economy continues to lag for most of Wal-Mart’s customer base, it lags for Wal-Mart as well.