Report: Kroger checks Wal-Mart

Analysts raise smaller grocer’s rating, target stock price

A grocery market analyst said in a report this week that Wal-Mart Stores Inc. is posing less of a competitive threat to Kroger Co., and, as a result, raised Kroger’s rating and target stock price.

BMO Capital Markets analyst Kelly Bania wrote that in recent years, Wal-Mart has lost aggregate market share in about a third of its top 20 markets where grocery-heavy Neighborhood Markets are located. BMO Capital is a financial services provider that covers the nation’s No. 1 and No. 2 grocers — Wal-Mart and Kroger, respectively.

As of June 30, Wal-Mart operated 4,264 stores in the United States, the vast majority of them big-box Supercenters, which offer a mix of grocery and general merchandise such as housewares and apparel. The company also operates Neighborhood Markets, which are roughly 40,000 square feet, one-fourth the size of a Supercenter, and even- smaller store formats, such as the Express stores, which are 12,000-15,000 square feet. There are 372 Neighborhood Markets across the country and more opening every day.

Kroger operates 2,640 supermarkets under its own name and others, such as Food4Less, Harris Teeter Neighborhood Food & Pharmacy and Dillon’s Marketplace.

Another analyst agreed that Kroger has been able to fend off Wal-Mart’s retail grocery push.

“I think Kroger long since proved Wal-Mart’s not a threat to it,” said retail analyst Paula Rosenblum with RSR Research in Miami. “Wal-Mart has taken all the share it’s going to take from grocers. Period. You can take that to the bank.”

Food is Wal-Mart’s biggest revenue driver, representing about 55 percent of its sales. The Bentonville-based company reported $476.3 billion in total revenue for its last fiscal year, while Kroger reported just $98.4 billion.

In Bania’s report, BMO Capital upgraded Kroger’s status to “outperform,” or “buy,” from “market perform,” or “hold.” The group also raised the target stock price for the company to $58 from $52 per share.

Keith Daily, media relations director for Kroger, had no comment about the report.

“We do not generally comment on analyst reports,” he said.

Wal-Mart spokesman Deisha Barnett acknowledged Thursday that the company had seen BMO’s report and said the retailer’s variety of stores from coast to coast serves it well.

“We really believe that the number of formats and the number of stores that we have across the country is a unique differentiator for us that positions us well into the future as we look ahead at how the customer is changing and how we can best serve them as the retailer of choice,” she said.

The BMO paper indicated that Wal-Mart lost market share in four of the top 10 markets in which it operates Neighborhood Markets between 2010 and 2013, including slight market share declines in its largest market by store count, Dallas-Fort Worth, and it’s second-largest market, Phoenix. The world’s largest retailer’s share is also down in Las Vegas and Houston, Bania added.

The research suggested that “Neighborhood Markets may be less of a threat than expected” to conventional grocers like Kroger and that the concept in some cases may be cannibalizing sales from larger Supercenters in the same market.

During a break-out session leading up to Wal-Mart’s annual shareholders meeting last month, Wal-Mart U.S. President and CEO Bill Simon acknowledged that cannibalization was possible, but said it was not significant in assessing the larger marketplace.

Yet Wal-Mart continues to add Neighborhood Markets at a record pace in cities where it already has these stores.

In February, the retailer announced that it was doubling the number of small-format stores it expects to open in the country this year to between 270 and 300 — a mix that will include Neighborhood Markets and Walmart Express locations.

Speaking to a conference of Raymond James analysts in Orlando in March, Simon said he was “real pleased” with how Neighborhood Markets were performing.

He said revenue from the mostly- grocery stores grew 40 percent in the fiscal 2014, which ended Jan. 31, and that same store-storesame-store sales for those open a year or more grew 4 percent for the year and 5 percent in the fourth quarter.

“I’m not sure I know any other that format that grew at 40 percent and had [comparable sales] like this,” Simon said. He projected that Neighborhood Markets will do more than $8 billion in sales in the current fiscal year.

The BMO report also noted that Supercenters appear challenged by declining populations in rural markets. Almost half of Supercenters are located in communities with populations of less than 500,000. The report states 83 percent of those communities showed population declines from 2012-13.

“The demographic shifts are interesting, and that certainly explains why WalmartWal-Mart has been so aggressive about trying to move into cities,” Rosenblum said.

Wal-Mart’s low-end customers are also slower to accept all-natural and organic foods, while Kroger has paid more attention to the need to stock the healthier options, according to BMO’s analysis.

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