Walmart pushing food sales improvements as a catalyst for revenue growth

Grocery continues to be the hot spot for retail giant Walmart in the U.S. comprising an estimated $167.048 billion in sales revenue last year, and 56% of Walmart U.S. sales over the past three years. The retailer continues to add Neighborhood Markets and focus on the food sales as well as health and wellness offerings.

Two-thirds of the sales generated by Walmart U.S. in the past three years related to food, health and wellness which represented an estimated $199.8 billion last year, growing from $192.68 billion in fiscal 2015, which is why the retailer continued to drill down on food sales with its suppliers at the recent Year Beginning Meetings (YBM) held in Indianapolis in February.

It’s also why the retailer is investing in a new product development lab and sensory kitchen in its Bentonville headquarters. The concept is designed to help food suppliers and Walmart better align on future food offerings, according to Walmart spokesman John Forrest Ales. He said the food lab is slated for completion in late May and will likely be unveiled during the retailer’s annual shareholder week in early June. Those were the only details Ales would provide.

This is not a new concept. Sam’s Club operates a food sensory lab in its headquarters, which is where some of its fresh and frozen food products are born, evaluated and reformulated when necessary.

Charles Redfield, who oversees the food category at Walmart U.S., mentioned the new food lab and sensory kitchen when he spoke with suppliers last month at the retailer’s YBM event. He also said two key customer segments the retailer is focusing on this year are the 79 million in the Millennial generation. Also, the retailer is focused on the Hispanic market. Now just 18% of the general population, the group will represent 38% of the growth in food sales, according to the transcript provided to Talk Business & Politics from suppliers attending the meeting.

He said Walmart is eyeing several macro trends in the food category and is working to address the consumer desires. First and foremost is “trust” because consumers want to know where food comes from and trust its origins and every stage in the supply chain. Redfield said trust must be earned over time and is a top driver of trips and purchases.

Getting grocery right is the key to Walmart’s future growth because food purchases drive trips to Walmart, he said.

“When we get better in food, the whole box grows,” Redfield said, noting that the in the past three years Walmart sales volume in food equals that of 2.5 Aldi chains, Trader Joes or Whole Foods.

Redfield said between 2011 and 2015 Walmart U.S. grew its food marketshare by 1.3%, in a highly competitive space. That said, he also admitted that Walmart U.S. has work yet to accomplish. He said there are planned improvements in dry grocery space optimization and a lot of changes coming in the fresh and frozen food categories.

“We will hire new managers to focus on ‘Fresh’ execution,” he said.

Walmart has added 30 managers in the field to oversee the fresh food offerings in Walmart grocery sections. Each of the new managers will oversee fresh operations at about 10 stores, according to Walmart.

FOOD AGENDA
Redfield said Walmart’s U.S. food vision is the grow sales by “delighting customers with a winning assortment and the absolute best value and omni-channel experience in the market.”

He said Walmart U.S. will provide a disciplined assortment, offer first to market in many cases and offer bonus size packages to pack in more value. Label transparency and traceability is also a priority for the retailer. Redfield also spoke briefly on in-store experience as the retailer works on more efficient displays for features and ramps up the entertainment value with various marketing promotions throughout the year.

Redfield also said the retailer is invoking the next generation supply chain integrating “Best if used by dating,” better inventory flow and improved fill times as it focuses on sales and not shipments. He said management will work with buyers to develop category and subcategory strategies and guide merchandise flow and replenishment. Walmart has raised the threshold for on-time fill rates to 95%, up from 90% previously. Industry experts said the 95% on-time fill rate is close to the standard for the grocery industry.

Walmart’s grocery vision has been vague and void of many details, according to grocery analyst Stewart Samuel of IGD. But he applauds the retailer’s efforts to try and revitalize its grocery offerings particularly in fresh foods, as past efforts were not that successful. Samuel said there is opportunity for Walmart to compete in the private label grocery business as Aldi, Lidl and Costco have done well.

Cleveland Research analysts note that Walmart is focusing more on deep discounter Aldi, who is growing its U.S. footprint to 2,000 stores by 2018, up from 1,500 U.S. locations. Another German discounter, Lidl plans to enter the U.S. grocery market by 2017.

“Walmart grocery appears to be more focused on Aldi pricing and improving its fresh quality with Aldi as a benchmark,” Cleveland analysts said. “Feedback from the channel suggests that there is room in the market for Lidl and continued Aldi expansion.”

Walmart U.S. CEO Greg Foran has made improving private label offerings part of his agenda this year. He recently said private label has to offer value without compromising quality. It’s also important to note that Walmart has pulled back its entry level private label offerings brand Price First in recent months, limiting the assortment to things like trashbags and non-edibles, according to analysts with Cleveland Research. Price First was designed to compete against Dollar Store and deep discounters like Aldi and at one time included a wide range of consumer staples.

SUPPLIER INTERACTION
Redfield told suppliers that their partnerships must be customer focused, transparent and proactive on the part of the supplier.

“You have to tell us why your item should exist,” he said.

While grocery is a huge focus for Walmart a recent report from Cleveland Research following the YBM meetings indicates that 70% of suppliers do not have resources dedicated specifically to Walmart’s grocery chain with Neighborhood Markets. In fact 65% said they do not plan to add separate resources dedicated to the grocery format.

This is an interesting stance given that much of Wal Mart’s growth has come from this grocery segment over the past year. With more than 650 stores open, Neighborhood Markets would rank in the top 15 as a stand alone grocer. The grocery stores posted comparable store sales up 7%-8% last year outperforming the 3%-4% growth in the supermarket index, Cleveland analysts noted.

Despite the grocer’s strong performance, Foran said are more improvements that can be made, particularly in fresh, before further accelerating growth.

Suppliers were also interested in why Walmart revised its Neighborhood Market new store growth down from original guidance of 180 to 200 new stores to 160 to 170 in 2015, pulling back further to 85 to 95 in 2016. In spite of the strong performance Foran is being more thoughtful of the cannibalization the stores can have on supercenter sales. Foran recently said Neighborhood Markets should complement the supercenter and be a respectful distance away.

That is not the case in Bentonville, Fayetteville or most of Northwest Arkansas. Former Walmart U.S. CEO Bill Simon believed five miles was enough space between two formats. In Bentonville there are four Neighborhood Markets within five miles of the supercenter. All of those Neighborhood Markets have opened in the past three years. In West Fayetteville there are two Neighborhood Markets within five miles of a supercenter with a third Neighborhood Market under construction just 2.5 miles away.