Walmart's CFO talks tech, advertising, and winning over luxury shoppers

Now, that strategy is paying off: Walmart shares soared after the company reported strong first-quarter results and outlook on May 16, buoyed by a growing consumer focus on value and increased business from more affluent customers.

But the quarter also highlighted successes outside Walmart's core retail business, from the expansion of high-margin advertising to the efficiencies of its automated supply chain.

“Last year wasn't without its problems, but we'd rather trade our problems for someone else's,” Rainey said. Barons “Our problems are within our control and, to a large extent, we can overcome them,” he said in a May 1 interview. “We have tailwinds, not headwinds, in our business.”

The company's technology transformation is emblematic of Walmart's evolution and Rainey's vision for the future. In a previous interview, Rainey said that with all the improvements happening at the company, taking over as CFO is a generational opportunity. It's no exaggeration to say that the next generation of Walmart has arrived.

Yet even companies that are “operating at full speed” must keep their foot on the gas. Barons I spoke with Rainey this month at Walmart's global headquarters in Bentonville, Arkansas, to talk about how the company can build on that advantage despite continued pressures on consumers and questions about the trajectory of the economy.

Read excerpts from that conversation.

Barons: We've talked a lot last year about the transformative power of technology, and now it's becoming a reality. Let's start with artificial intelligence.

John David RaineySearch is not the only example of how AI can be used, but it's probably the best. Let's say you want to host a football game party. Instead of searching for potato chips or hot wings, you can just say in your browser, “Give me everything I need to host an amazing football party.” And it will show you everything curated to your past preferences. AI removes a lot of friction and simplifies search. We're pretty early on in this space, and frankly, so is everyone. But we're also using AI in our supply chain. Last time, we talked about robots that do automated storage and retrieval, which are constantly learning algorithms.

Q: Walmart's acquisition of Vizio hasn't closed yet, but it speaks to the growth of the company's advertising business.

The headline for me is that over 20% of our operating income this year will come from advertising and memberships. These are two new services that didn't exist five years ago. They're both high margin businesses, and we have a high margin advertising business for both first and third party products. And we're still in the early stages. If you look at the ad revenue to gross merchandise volume (GMV) ratios of our competitors from a scale of business perspective, we could potentially double or even triple the amount of advertising that we have, depending on the direction of GMV. This line of business is growing over 20% annually versus our core retail business, which is growing at the pace of gross domestic product, so margins will increase overall.

What about membership?

Members who use Walmart+ exclusively spend twice as much. That's really what we want, to have the #1 wallet share among customers. Vizio gives us another channel to show ads that are customized and specific to the customer. In the future, you may also consider combining this with something like Walmart+. TV today has very low margins, and the revenue is in the operating system itself. We thought, “What if we go into this space that we can monetize and leverage that data to better advertise to our customers?”

All of this makes shopping at Walmart more seamless, giving consumers less reason not to complete a transaction.

We measure ourselves in online transactions on something we call the “Perfect Score.” Did you find the product you were looking for? Did you find it without any issues? Did they deliver the product in the size, quantity, and time frame you specified, without substitutions? In other words, the Perfect Score is doing everything right, and this quarter we're improving that score by 850 basis points.

Walmart is launching its own private label luxury grocery line and selling Apple's MacBook Air for the first time — can it hold onto high-income shoppers?

At the end of last year, two-thirds of our market share came from households earning more than $100,000 a year. That shows that our brand resonates with a much broader demographic than previously thought. We now sell what may be the most powerful laptops on the market, and we want to do more of that. Our suppliers, like our consumers, know that we have a different demographic of shoppers who shop with us, and they want to offer that assortment to us as we grow our share. If you're an advertiser or a supplier, you want to put your message and your products in a place where shoppers can see them. So why not at Walmart? It all creates a virtuous cycle, and the longer we can do this, the more customers, the more affluent customers, want to come to us, and the more profitable advertising dollars we can attract.

How do you feel about consumer trends?

Consumers are resilient but still selective in what they buy. Private labels are growing faster than national brands due to their value proposition. General merchandise inflation is down 2% to 4%, depending on what you're talking about, while food is inflating more slowly. There are items like grapes and avocados that are inflating for idiosyncratic reasons. We have worked hard to work with our suppliers to bring prices down and we have been successful. But consumers are turning their purse strings more towards food than general merchandise. Shopping baskets are smaller and shopping frequency is higher (though we believe some of that frequency is due to us gaining market share). But we remain cautious for the rest of the year given the unpredictable times.

What's next?

Now I'm less seasick and the strategy is clear. The next question is: How do we contribute to the execution of the business? There are big things happening in the business, specifically in finance, with AI, better use of data and tools, ad optimization, improving e-commerce, focusing on delivery and financial services. Now I'm rolling up my sleeves and working on other areas. As a company, we are very focused on decisions that may be more difficult but will deliver better results. One of those is selling, general and administrative expenses. We've been working for several years to bring that down to a level that we think will be most competitive in the long term.

thank you.