Modern Retail Rundown: Walmart's urban problem, Amazon's latest vision for Whole Foods & shakeups at Tonal

0:05Hello and welcome to the Modern Retail Rundown. I'm your host, senior reporter Gabby Barco, and this week I'm joined by managing editor Anna Hensel. Anna, welcome back. Thank you. Are you ready to talk about top retail news, Gabby? I am ready. I have been up all morning thinking about it. So every week we break down the biggest headlines in the retail world. Today we'll discuss a few different updates. We have Walmart's urban problem. We have Amazon's outlook on the Whole Foods business. And then we'll be chatting a little bit about C-suite shakeups at Tonal after a couple of volatile years. So first up, let's talk about Walmart.

0:52You know, it's a pretty big news story coming out of Chicago this week, where the company decided to or announced that it's closing four stores, which is about half of the amount of locations that it has in the city. And these are underperforming. But interestingly, they are some of the stores that they had pledged to open following 2020, you know, in sort of underserved areas or food deserts and whatnot. So in the West and the South sides. But I think it's very emblematic of the way Walmart is typically perceived in major cities in general, unlike, like, say, Target, which somehow never gets the same amount of, you know, ridicule or criticism from big cities.

1:41So yeah, Ana, what are what do you think of the fact that they're calling these underperforming, you know, just a couple of years after, you know, making this big pledge? Yeah, so I think what's interesting here is, first of all, that Walmart put out an announcement and a blog post that they were closing these stores. Usually when Walmart closes stores, they just do it. But in this case, they gave a more detailed explanation about why they were doing it. And I think that's largely because, you know, just a few years ago, Walmart really, you know, they kind of focused on, they talked about their investments in Chicago following the 2020 Black Lives Matter protests.

2:27They talked about their efforts in Chicago specifically as a way that they were investing in underserved neighborhoods. And now they're announcing that they're closing some of these stores. So yeah, there was a very lengthy blog post that Walmart put out, and they said that the simplest explanation is that collectively our Chicago stores have not been profitable since we opened the first one nearly 17 years ago. These stores lose tens of millions of dollars a year, and their annual losses nearly doubled in just the last five years. Walmart is not pulling out of Chicago entirely. They will have four stores remaining in Chicago.

3:16And Walmart has said that these stores continue to face the same business difficulties as the ones that they're closing. But they said that we think this decision gives us the best chance to help keep them open and serving the community. So obviously here, you know, Walmart is pointing to the numbers. And I think that logically that will make sense for a lot of people. They'll say, well, these stores are losing tens of millions of dollars a year. Obviously, Walmart can't keep them open. But again, it comes after Walmart kind of really touted these stores a few years ago, saying they were really going to be investing in this area.

4:00So, you know, it does beg the question of if you're going to be closing these stores just a few years later, kind of why did you tout your investments in the city in the first place? Yeah, and I think it was around$100 million of investment. And like you said, it was as recent as 2021. So not that long ago. But yeah, I want to just talk a little bit about, you know, this isn't the first time Walmart has done this. Just last year, they did something similar in Seattle, Well, LA, Philly, DC, this seems to be a trend as far as their stores, even these urban small footprint or smaller concepts don't seem to be performing well.

4:42So what are some of the factors, do you think? And is there some planning that is maybe not really connecting with those shoppers? Yeah, I mean, Walmart is an interesting one because and you kind of talked about this at the beginning of the conversation. But when Walmart decides to open a store, it's kind of tamed down in the past few years, at least. But, you know, historically, when Walmart has opened a new location in a new community, sometimes there's pushback from people who worry about, you know, will Walmart be undercutting local small businesses? prices, what does, you know, given that Walmart is a big behemoth, also known for its low prices, there's always a lot of concern about how will Walmart impact the rest of the economy.

5:40And yeah, so I mean, with that, I think that Walmart has struggled in urban areas. In addition to some of the locations you mentioned. I also know that they closed some Portland, Oregon stores as well recently. And so yeah, I think one of the issues Walmart faces in urban centers is just image related. I think also, you know, Walmart is known for very big sprawling stores. that's harder to do in a city. I haven't looked at everything Walmart has tried in urban areas, but one thing that stands out to me is that some other retailers like Target especially has started experimenting more with smaller format stores in cities and kind of just focusing on, for a lot of those locations, buy online, pick up in store is pretty big.

6:39It's really focused on just carrying a lot of the essentials for the person who just might want to, you know, come in and grab a couple things and then walk out. So I'm curious, you know, why that's not really something that Walmart has tried. And I do wonder, you know, if they would try that or if they had tried that, just if their fortunes in big cities would have turned out differently. You know, we should say that this is part of a bigger trend of big chains exiting cities that they initially, you know, boasted that they'd be investing in just last week. Whole Foods pulled out of San Francisco, a pretty prominent opening that they had just about a year ago due to, I mean, this is a little bit of a different case because San Francisco in particular has this, you know, these, I'm doing air quotes.

7:34safety concerns and crime. And, you know, there's a lot of hand wringing around employee safety. So a little different, but I, we have heard that sentiment from across the board from different retailers, which, you know, I I'm sure it's valid, but it just, I don't know. I mean, it's kind of like, I don't think the situation changed too much from 2021 or 22. So it's hard to say whether these are just not really performing as well, or maybe they're just, yeah, just haven't panned out the way they thought. I think the other thing at play here is that, especially in certain cities, people just aren't moving around.

8:17They don't have the same behavior as they did before the pandemic, you know, so there are certain cities where there's a larger percentage of people still working remotely. You know, New York definitely won. I think San Francisco definitely won. So, you know, with Whole Foods in particular, I think another issue there may have been that people just weren't coming, as many people were coming, say, on like their lunch break, as maybe Whole Foods slash Amazon had expected. And then, yes, I mean, there's also the concerns around crime and shoplifting. In some locations, you think of Walmart and CVS, they're starting to lock up a lot more of their products and customers have to flag down a store worker to get them to unlock the product, which is, I mean, it's like a catch-22, I guess, because I mean, I know for me personally, it takes me longer to get stuff.

9:19And then I'm like, well, maybe I don't need to get this at Walmart, or excuse me, Walgreens. And so yeah, I think that in general, there are a lot of challenges that retailers are facing right now in big city centers in the US. And the approaches they used to take there maybe haven't, the approaches they used to take doesn't work as well now, basically. I don't have exact numbers in front of me, but it does seem like Target seems to be the only exception in these cases. They have done pretty well with the small format stores. Like Walmart, for example, has never, for as long as I remember, has never been able to enter New York, for example, whereas I feel like there's a Target on every corner in Manhattan right now.

10:06So yeah, there's different cases there. But the last thing is just Walmart's had a pretty big week as probably as usual, but they've sort of divested a lot, right? This isn't just the stores. They had some layoffs in e-commerce after a few years of really doubling down on it and then laying off warehouse workers, fulfillment workers, and then just hours ago offloading Bonobos. So a lot going on. But there seems to be a little bit of a trend of maybe writing some things in or reworking some strategies. Right. Walmart, like a lot of companies, I think is maybe cutting back on certain investments as, you know, the economy might worsen.

10:54And, you know, cutting back on investments, that's kind of what we're going to be talking about in our next segment. Yes, thank you for that transition. Speaking of Whole Foods, we couldn't help ourselves jumping the gun, but we are going to be talking about Amazon and Whole Foods relationship this week. CEO Andy Jassy released an annual letter to shareholders in which he sort of hinted a little bit about how Whole Foods has been performing since the acquisition in 2017. We, you know, Kayla and I spoke about this a few weeks ago in that this always seems to be a little bit of a gray area. There's never, you know, ever since the acquisition, you can never really tell how well Whole Foods is doing.

11:41And I think it's maybe part of Amazon's bigger issue with not really knowing what to do with groceries and Whole Foods itself. And I think this is sort of what they're hinting at is a very select, very specific segment of overall groceries. And it's a very small percentage of where Americans shop. So they sort of hinted that maybe they would like to go in a more mass direction, but they kind of tried that and it didn't really work. So I'm not sure where we're at. What do you think? Yeah. So to take a step back, Andy Jassy released an annual letter to Amazon shareholders. So he kind of started off the letter with a bit more of a somber tone because it was a lot about, again, cutting back, shutting down certain unprofitable businesses.

12:31So he said, over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative's long-term potential to drive revenue, operating income, free cash flow, and return on invested capital. A lot of buzzwords there. And then he went on to say, In some cases, it led to us shuttering certain businesses. He cited, you know, their bookstores and their four-star stores specifically. And then he went on to talk more about the state of the grocery business. So he said, while we're pleased with the size and growth of our grocery business, we aspire to serve more of our customers' grocery needs than we do today.

13:20And then he all but admits the Whole Foods acquisition hasn't performed as well as the company had hoped. Whole Foods is on an encouraging path, but to have a larger impact on physical grocery, we must find a mass grocery format that we believe is worth expanding broadly. so he basically is saying Whole Foods is not that mass grocery format that we believe is worth expanding broadly and then he talks about Amazon Fresh which like in theory could be that mass grocery format that Amazon could expand but he doesn't like outright say they're going to expand that he says Amazon Fresh is the brand we've been experimenting with for a few years and we're working hard to identify and build the right mass grocery format for Amazon scale, which suggests, again, they haven't found that yet.

14:12So it's kind of weird. I feel like we always have the same conversation about Amazon and grocery, which is that they say they're really focused on grocery and they want to expand that, but their investments haven't always panned out. Mm-hmm. Yeah. And there seems to be a lot of experimentation. They've opened some concepts, closed some to some degree of success, but the overall theme seems to be they're still figuring it out, which is interesting because Whole Foods was a huge, huge acquisition. It was like$13 billion and it was probably their biggest, I think, at the time. So this wasn't just a tiny little piece that they scooped up.

14:56This was, I think, what they thought was going to be the future of Amazon's grocery strategy. Yeah. And I mean, yeah, it's interesting at the time when Amazon acquired Whole Foods, you know, they really didn't have a grocery business. So the whole idea was, we're going to learn a lot about grocery by acquiring Whole Foods. And like, Yes, I think they have, but clearly not enough to figure out what the right physical store format for them is in grocery, because that's the reality. You know, people bought groceries a lot online during the pandemic. Whole Foods delivery definitely benefited from that.

15:38But ultimately, most people still buy their groceries in stores. And so if Amazon wants to be a bigger player in grocery, they have to, again, have a big store footprint. The other thing that I think is interesting here is I wonder if part of the reason why Amazon has struggled in grocery is because they have tried to do a couple of things at once. Like, one, they've tried to invest in these kind of technologically innovative stores. I'm thinking of the Amazon Go convenience stores and then also trying to do mass grocery with Amazon Fresh. And so I feel like it's kind of been hard. And then also Whole Foods.

16:24They have to, you know, maintain that because that is still a big business. So I think it's like they have had to balance a lot over the past few years. And I wonder if they would have been better served by focusing on one thing and expanding that. Well, just to transition, there's another pivot this week or pullback due to some changes or drops in demand is Tonal. The connected fitness startup had some shakeups in the executives suite. So they had the founder and CEO, Ali, already, I hope I'm saying that correctly, step down following the company's latest funding around$130 million, which, okay, that's, I feel like, a lot for a company that's still trying to turn a profit.

17:17But yeah, that brings their total to 580 million over something like seven rounds. But yeah, there's been a lot of changes over the last six to 12 months at Tonal. And it's, of course, you know, they're not alone. They're in, you know, in there with Peloton and Mirror, although Mirror maybe has that Lululemon shield or safety net a little bit. But yeah, Ana, what do you think about, you know, having a new, fresh new CEO kind of step in and try to turn the business around? Yeah. So definitely, you know, that's kind of one of the first things a company wants to do when they've run into trouble. I think the other issue that Tonal is going to face here is just like, what is the state of the at-home fitness industry?

18:07Because it is a industry that saw a lot of interest, again, during the pandemic, but now kind of the growth rates of these, the startups in that space haven't really panned out, maybe the way that investors thought. So, you know, Tonal has kind of been on, again, it saw a lot of interest during the pandemic, but it's been on a little bit of a cost-cutting path for the past year. So in July 2022, Tonal also laid off 35 % of staff, which highlighted the challenges of growing a fitness device startup sustainably. That was around the time too that VCs were starting to get a little bit more selective.

18:55I think they were trying to get ahead of the fact that they knew capital was going to be harder to raise next year. So they were like, maybe if we cut enough staff, we will be in a good position next year. At the time, the company said Tonal is prioritizing becoming a self-sustaining business with an emphasis on profitability, while sales have continued to grow at an unprecedented rate. So have the costs of our business, particularly in light of that macroeconomic climate and global supply chain challenges. Yeah, so a lot going on there. But yeah, I think that clearly what this most recent news as well as the layoffs last year indicated is that Tonal is still trying to figure out how to become this self-sustaining business that they want to be.

19:43Yeah. And part of that is, like I said, bringing on a new CEO who was the current or I guess now former president, Crystal Zell, who also joined last July. So she's very new to the company, but seems excited to take on the challenge. Maybe, you know, a young non-founder type of executive might be able to, you know, really hone in there and see what works and what doesn't work. Because this is a huge investment and that got, like you said, a lot of interest. And I think that demand during the pandemic really put, I think, you know, a lot of pressure to continue it. But at the end of the day, how many tonal systems or how many Pelotons or mirrors do people need?

20:31I think the subscription really is supposed to be the retention factor or the retention play here. But it's hard to say because at the end of the day, anecdotally speaking, I feel like people feel the need to go back to a gym to actually work out in, you know, well, a proper way or whatnot. But yeah, it's hard to say unless people I think like the people who built a home gym or really invested heavily are still of course keeping up with it but I don't think it's a coincidence that somebody like Peloton who I'm sorry I'm bringing into this a lot of their ads talk about how people still use their app 90 percent you know they left it out that number and yeah that's because they want to show that despite things opening back up people want to work out on these devices so there is there's a lot going on.

21:23And I think there's maybe a market cap there that they knew they were going to hit eventually. Right. I think the thing was, is, and you know, this is the issue that Peloton has run into. Again, a lot of these startups saw very good growth during the pandemic. And they basically thought, oh, what this means then is we're going to, this has basically grown our total addressable market. And, you know, this growth rate will continue even after the pandemic. And I think now what has happened, what a lot of people have realized is that what actually happened is people who maybe would have bought a Peloton in three years decided to buy it earlier than anticipated because during the pandemic, you know, again, they weren't really going to the gym.

22:12So they're like, I might as well buy a Peloton now. So with the troubles these companies have run into, that's not to say that people are not going to be using these devices, that there's no room for these type of businesses, but they're not going to be as big as I think a lot of people initially thought. And a company like Tonal is now course correcting because they raised a lot of money with the idea that it would be this much bigger business. And yeah, again, Tonal is not alone in these challenges. But one statistic I think is really interesting. So to bring another at-home fitness startup into this discussion, Lululemon, for example, acquired Mirror in 2020 for 500 million.

22:58And when Lululemon bought Mirror, the device cost$1 ,550. Now it costs just under$1 ,000 at$995. I can't remember the date of the article I grabbed that from. So if that's changed slightly, I apologize. But still, like the price of that has dropped dramatically. And I think that that just shows like in order for Lululemon to move the mirror product, they had to cut the costs. And yeah, I mean, I don't think that that is something you do when there is just endless demand and everyone's snapping up to buy it. It shows that again, all of these companies are trying to course correct and figure out what the right model is for at-home fitness.

23:45Lastly, you know, a big part of that, of course, it was an investment in retail and showrooms. I remember talking to Tonal about, I think around 2021, around how they really see showrooms as a big part of their acquisition because people really need to feel and see how this weight system works. Although, you know, a barrier of entry, at least for me, is drilling my wall. So not sure how they could fix that. Yeah, me too. There's a couple different things. I don't know if like Tonal or Peloton also wants to finance a down payment for a home. No, actually, I cannot accept that. But I mean, like the biggest the reason why I haven't invested in one of our bought one of these devices is just because simply I don't have room.

24:34So, you know, there's a lot of logistical issues that startup that people face in buying these products. and yeah it again goes to show that maybe the market um for people want to buy these products isn't as big as these startups initially hoped yeah yeah it will be interesting to see whether they pull back on those retail partnerships like the one they had with nordstrom um to kind of you know try to target a specific type of customer yeah yeah to to be determined but that's all we have for you this week. You can rate and give us a review on Apple Podcasts, Spotify, or wherever you're listening to us.

25:14Also, don't forget to subscribe to the Modern Retail Podcast to hear interviews with industry leaders every Thursday. And of course, come back on Saturdays for the Modern Retail Rundown. Thank you for listening. Thank you, Gabby.