Are These 3 Stocks At Risk As Walmart Bolsters Grocery Business?

Joe Goldman |

WalmartAmerica’s largest grocers are about to face some intensified competition, particularly in the fresh produce division. Walmart (WMT), the world’s largest retailer, has publically revealed plans to bolster their fresh produce and grocery business.

Jack Sinclair, the executive vice president of Walmart’s food business, announced in a June 3 statement that, “We’re listening to our customers and delivering on our promise to offer great produce at the most affordable price.” Sinclair also announced a 100 percent money-back guarantee if customers are unsatisfied with their fresh produce.

Groceries and consumables already encompass more than half of Walmart’s sales, but the company still sees room for expansion. Walmart hopes to double locally grown produce sales by 2015 while offering customers the best prices possible.

Could Walmart take a big bite out of the national produce market? Here’s how three of the largest grocers may be affected.

Kroger (KR), America’s largest grocery chain, boasts over $90 billion in annual revenue and 3,574 stores (including Ralphs, Smiths, Food 4 Less, City Market, and many others). Shares are trading just south of all-time highs at $33.02.

As a direct competitor with Walmart in the grocery business, Kroger should feel somewhat threatened by Walmart’s aggressive expansion into fresh produce.
The company earns at least 90 percent of its revenue from supermarkets, meaning it could be vulnerable if Walmart gains a competitive advantage in that space. If consumers feel that Walmart offers a complete grocery shopping experience with a wide array of brands and fresh produce at good prices, Walmart could begin nibbling away Kroger’s market share.

However, Kroger’s downside is limited. Its prices are competitive to Walmart’s and its stores are frequently geographically more convenient, particularly in urban areas. A mass costumer exodus to Walmart simply will not happen, but Kroger must be proactive in staying competitive in produce.

Whole Foods Market (WFM): With 350 stores, $12 billion in revenue, and strong growth, Whole Foods stock is has tripled over the last three years. Whole Foods is also the least likely grocer to lose market share to Walmart.

The company has established itself as a high-margin, organic grocer. Whole Foods typically builds stores in higher income areas and is therefore positioned in an entirely different market than the value-oriented Walmart. Investors should expect its 20% earnings growth to stay strong and its produce numbers to not even flinch as the company marches towards its goal of 1,000 stores.

Safeway (SWY): With around 1,700 stores and $44 billion in revenue, Safeway is America’s second largest grocer. It owns a number of grocery chains including Safeway, Vons, Pavillions, Dominicks, Randalls, and more. The company is a well-diversified, enormous grocery chain, which means Safeway is in a similar position as Kroger.

Walmart’s announcement is definitely negative news for Safeway’s shareholders. Because Safeway is heavily focused on its supermarket business, heightened competition from Walmart could take a nibble out of its earnings. However, Safeway stores have prominence in thousands of communities nationwide where customer loyalty is high. Some consumers may decide to take their grocery dollars to Walmart, but most people are likely satisfied with the quality, prices, and convenience of their neighborhood Safeway. Just like Kroger, Safeway’s downside is limited.

In Sum, Walmart’s revamped fresh produce section will likely capture some market share from large grocers such as Safeway and Kroger. Consumers are always hunting for the lowest price, so if Walmart can offer high-quality, home-grown produce for cheap, the customers will take note.

However, supermarkets are so convenient and engrained in our culture that a mass exodus (or even a mini exodus) to Walmart is unlikely to happen. Shareholders of all four companies can breathe easy, while investors in Walmart should view this news as a small positive catalyst for the stock moving forward.

(Image via Flickr)

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
KR Kroger Company (The) 33.39 0.32 0.97 2,215,753
WMT Wal-Mart Stores Inc. 70.03 0.17 0.24 1,974,865
WFM Whole Foods Market Inc. 30.91 0.41 1.34 1,614,772
ROL Rollins Inc. 33.12 -0.01 -0.03 68,488

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