Wal-Mart Stores aggressively pursuing grocery share, seeks to ‘innovate for speed’

Wal-Mart Stores has been doubling down on lower pricing strategies, investing in improved private label and continually testing shopper convenience options and the efforts are paying off in it getting a bigger slice of the $800 billion U.S. grocery market, according to Andrew Wolf, an analyst with Loop Capital.

Wolf estimates Wal-Mart has grown its grocery share to about 21.5% on the heels of the retailer’s strong first quarter earnings results. To put that in perspective, the combined Whole Foods and Amazon grocery share is just 2.5%, according to data marketing firm Statistica. That same report from Statistica showed Wal-Mart’s grocery market share at 17.3% for 2016. Kroger was the next largest at 8.9%.

Friday’s announcement by Amazon to buy Whole Foods for $13.7 billion is not likely to hinder Wal-Mart’s grocery share in the short term, according to Raymond James & Associates equity analyst Budd Bugatch.

“Whole Foods is not a new grocery business or competitor. Wal-Mart and Costco have been competing against Whole Foods and a vast majority of other food retailers for an extended time. Admittedly, the acquisition brings new ownership to Whole Foods and will likely accelerate the delivery and other technology innovations for groceries; but it doesn’t change the end market fundamentals of the grocery business. Grocery is highly competitive and a low margin business,” Bugatch said Friday in a note to investors.

“Wal-Mart and Costco’s grocery businesses are each significantly larger businesses than Whole Foods providing them a vastly different level of scale. For reference, ‘grocery’ represented 56% of Walmart’s U.S. (not including Sam’s Club) sales in fiscal 2017 implying a $172 billion business (which is 10.75 times the size of Whole Foods,” he added.

Wolf arrived at his market share estimate for Wal-Mart based on the retailer’s recent earnings. He said Wal-Mart’s domestic grocery same-store sales outpaced U.S. supermarkets by 2.9% in the quarter. This was on top of Wal-Mart’s 1.6% performance in the fourth quarter of 2016. He also estimates Wal-Mart’s gain largely came at Kroger’s expense.

June 15, Kroger reported dismal results with same-store sales down 0.2% for the quarter, marking the second consecutive quarter of decline as comparable sales fell 0.7% in the previous quarter. The Cincinnati-based grocery chain also cut its earnings guidance for the year amid weaker margins from deflationary prices and markdowns from competitors like Wal-Mart.

“We’re going to react, and not allow our customers to think they have to go somewhere else for the best value for those products,” Kroger Chief Financial Officer Michael Schlotman said during a June 15 conference call with analysts.

Rupesh Parikh, a senior analyst with Oppenheimer, said Kroger will not lose on price amid Wal-Mart’s rollbacks and other price investments. He said margins will continue to be compressed in the near term with Lidl’s U.S. opening and Aldi’s planned expansion.

WAL-MART PLAYBOOK
Wal-Mart began testing lower prices in 11 Midwest and Southeastern states in February and analysts said that hit Kroger hard at that the same time there was commodity price deflation in the price of milk and eggs. Schlotman said inflation on meat prices began to return in the back half of the quarter and he expects that to continue through the summer.

“Kroger has discussed that while certain markets are indeed more competitive, such as those in which Wal-Mart is changing prices, certain other markets are less competitive than normal,” Wolf said in his report.

Sean Naughton, analyst with Piper Jaffray, also noted Kroger’s comps are lagging Wal-Mart’s grocery comps and positive traffic which indicates there is likely some share shift between the two retailers in certain markets.

Both retailers have a new threat to contend with in the Mid-Atlantic states as German grocery giant Lidl opened its first 15 U.S. stores on Thursday. Lidl is not a new threat for Wal-Mart as its grocery chain ASDA in the United Kingdom has been duking it out with Lidl and Aldi for the past few years.

Wal-Mart execs were recently asked how they were bracing for the Lidl threat. David Cheesewright, Walmart International CEO, has said Walmart U.S. has been working together leveraging assets to drive better private label quality products from around the world which can be sold in the U.K and the U.S. ASDA lost share to Lidl in the U.K. amid an all-out price war, since that time Cheesewright has been more focused on delivering better quality products at values and improving overall customer service.

Walmart U.S. CEO Greg Foran has said Wal-Mart will always compete on price but importance of the right assortment can’t be underestimated. He said the retailer is making progress on achieving price gaps in terms of its private label mix and he reiterated private label is an important part of  the overall assortment.

THE PRIVATE LABEL PUSH
But there’s another reason Wal-Mart said it’s investing its private label mix. The widespread availability of name-brand products online will compress the margins of those products over time, Doug McMillon, president and CEO of Wal-Mart Stores, said at the recent Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference in New York.

“Having a private brand from a margin mix point of view has always been important, but it is even more important now,” McMillon said.

He said Wal-Mart has been seen as offering name brands for less but that doesn’t mean private label can’t also drive loyalty in the store and online. Aside from having a wider assortment and comparable prices to Lidl and other competitors, McMillon said product sizes are also important so customers can easily compare items.

Wal-Mart and Kroger also continue to roll out their grocery pick-up services which they believe offers many consumers the ultimate in convenience. Analysts say the smaller format, easy-to-shop Lidl and Aldi stores often make the shopping experience faster than at a traditional supermarket or supercenter.

“We need to innovate for speed, so people can find the item they need to get in and out of the store quickly,” he said. “We are going to try to take away the advantages the discounters have, and then play to our strengths,” McMillon said.