Walmart (NYSE: WMT) has a big problem. Tariffs of what could be 10% on some Chinese goods imported to the US will increase Walmart’s overall expenses substantially. The king of low priced retail may struggle to keep the title.
About three quarters of Walmart’s suppliers are located in China. The world’s largest retailer counts on low cost manufacturing in China to allow it to offer its low retail prices while retaining good margins. Walmart has an expensive problem if tariffs bite. If it raises its merchandise prices customers may cut back spending, or shop elsewhere.
Walmart has started to attack the tariff problem, although there is no certainty its plans will allow it to keep merchandise prices at current levels. According to Bloomberg, Walmart may be able to overcome a portions of the challenges. “Some suppliers, including producers of kitchenware and clothing, have been asked to lower their prices by as much as 10% per round of tariffs, essentially shouldering the full cost of Trump’s duties…”, the news service reports. However, another point is that Walmart’s China’s suppliers are already operating on razor thin margins. Walmart’s request may put China suppliers in the red.
Walmart operates on thin margins already as well. In the most recent quarter, Walmart had revenue of $180.6 billion, and operation income of $7.9 billion. The operation margin is only 4.3%. The US Walmart margin is slightly better. Revenue was $125.3 billion and operating income of $6.5 billion which is 5.3%.
Walmart will not get all of its suppliers to cut prices. That leaves it with a difficult choice. Should it risk charging higher prices and potentially losing customers? Or, should it keep prices the same and risk lower operating margins?
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