When you walk into Walmart, there are a few things you can feel confident in.
First, you’re likely to find a pretty impressive array of products, whether it’s potatoes, paper plates, or a last-minute toy for a birthday party you forgot about.
The other thing you can usually count on from Walmart is impressively low prices.
Walmart has structured its business model around affordable products and great deals. When people see the name “Walmart,” they think “value.” And that’s been a winning formula for the big-box giant for many years.
But catering to budget-conscious consumers may no longer be cutting it for Walmart.
Consumers are cutting back on spending pretty heavily these days to cope with higher costs.
In November, the Consumer Price Index rose 2.7%. But that’s coming on the heels of many months of increases without a break.
In early December, Mark Zandi, chief economist for Moody’s, told Fortune that many Americans are “already living on the financial edge.” As such, there’s a limit as to how much money they can spend on items that aren’t absolute necessities.
Because lower-income consumers are being forced to cut back on discretionary purchases, Walmart has been forced to start focusing on a different type of customer. And its efforts seem to be paying off. But that’s not necessarily a good thing.
Affluent customers are increasingly shopping at lower-price retailers like Walmart.
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Walmart is catering to higher-income consumers – and it’s working
Walmart is clearly tired of being seen as a budget retailer. And recently, focusing on higher-income shoppers has been a big part of its success.
Walmart’s most recent quarter exceeded analysts’ expectations. Sales grew 5.9% overall, and adjusted operating income grew even faster at 8%, the company reported.
Related: Costco quietly lowered prices on key items
But Walmart also attributes much of that growth to higher-income shoppers.
“As pocketbooks have been stretched, you’re seeing more consumer dollars go to necessities versus discretionary items,” said John David Rainey, CFO of Walmart U.S., during the company’s last earnings call.
“We’ve done a great job of improving our assortment,” Rainey said, to cater to wealthier customers.
Rainey also doubled down on that strategy during Morgan Stanley’s Global Consumer & Retail Conference in December, pointing out that one of Walmart’s recent top-selling items was AirPods.
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Rainey called the product something “you don’t typically think of as something that you buy at a Walmart” and pointed out that it’s “more attractive to the more affluent customer.”
He also said, “I think it’s indicative of how Walmart is changing and how our customer base is changing. And we continue to grow and gain share with this upper-income demographic.”
Walmart’s new approach could spell trouble for its core customer base
At a time when consumers are nervous to spend money, it’s clear that Walmart needs to pivot.
In November, consumer confidence reached its lowest point since April, according to a recent Conference Board survey. The survey also found that plans for buying big-ticket items over the next six months declined in November.
Related: Home Depot issues dire warning on housing market, economy
If Walmart can’t count on its typical shopper to buy those bigger-ticket items, it’s going to have to introduce pricier products and hope that wealthy consumers come in and buy them. But if Walmart shifts too far away from the low prices it’s known for, it could leave lower-income consumers with one less place to shop.
“It concerns me when I hear that affluent customers are shopping at lower-price retailers like Walmart and TJX because it’s a sign that things are getting expensive all around,” shopping expert Trae Bodge told NBC News.
Walmart’s competitors are targeting wealthier consumers, too
What’s concerning is that it’s not just Walmart that’s been trying to draw in higher-income shoppers with inventory changes. Other budget-friendly retailers are taking a similar approach.
Dollar Tree has been raising prices as part of its strategy to introduce a wider product assortment. The company has seen an uptick in consumers making more than $100,000 a year shopping at its stores.
Related: Sam’s Club quietly made a Costco-like change members will love
Dollar General, too, has seen growth among higher-income shoppers.
But experts like Bodge say an increase in wealthier consumers shopping at budget retailers is a red flag. “Obviously, if you’re more affluent, you can afford to buy the things you need,” Bodge told NBC News.
“But if you’re seeking out lower prices, then where does the lower-cost consumer go?”
Related: Dollar Tree raises prices again, frustrating budget shoppers
