Today's column allows me to make a bizarre admission, but one which ties directly into the content. While many entrepreneurs may take a lunch hour, eat at their desk or perhaps workout to blow off some steam during the workday, I head to the grocery store, at least three times a week. It's a stress reliever, believe it or not. Only takes 20 minutes or so, keeps our household well-stocked, and provides fodder for my fascination with the industry. Several members of my wife's family have worked in the business as owners and store managers, and it is a fascinating and highly competitive world that is going through some big changes.
The grocery business is about as high turnover-low margin as they come and that situation may continue to degrade, especially now that Amazon.com Inc. (AMZN) has entered the fray with its purchase of Whole Foods Market on June 15. That issue has been weighing heavily on grocer names as investors fear that Amazon, which seems always willing to operate at very low, no or even negative margins, will rule the grocery world.
The damage has been severe. Kroger Co. (KR) , the largest stand-alone grocery chain in terms of revenue, has seen its shares plunge 40% year to date, including 19% on the day that the Amazon-Whole Foods deal was announced. Last year Kroger's sales topped $115 billion, on which the company earned $1.96 billion. That may seem like a chunk of change, but represents a very small, 1.7% net profit margin.
Others, such as Supervalu Inc. (SVU) , which has about 1,900 stores in 40 states, have been hurt; SVU shares are down 38% year to date. Even smaller, regional players such as Weis Markets Inc. (WMK) , which has about 200 stores, more than half in Pennsylvania, is down 34% year to date.
Meanwhile, Walmart Stores Inc. (WMT) has become a force to be reckoned with in the grocery business, delivering its own damage to the stand-alone grocers. Last year, 57% of Walmart's revenue, or $277 billion -- more than two times Kroger's revenue -- was from grocery. Many of the everyday prices I've seen at our closest Wal-Mart Supercenter cannot be beat by other supermarket chains, at least in my experience.
If you think Walmart is running scared about Amazon's foray into the business and the prospect that one day Amazon drones will deliver your groceries, think again. Walmart announced at its investor day yesterday that it nearly will double the number of locations allowing pickup of online grocery orders to more than 2,000 next year. (Ever confident, the company also announced a $20 billion share buyback).
Amazon's willingness to operate businesses unprofitably or just marginally profitable is one if the things that makes grocery chains so nervous. In August, the company announced it was lowering prices at Whole Foods stores; its tie-in with Amazon Prime, online ordering and pickup and discounts on grocery items are yet other supposed nails in the coffins of the more traditional grocers.
Amazon, in my view, may be somewhat of a force to be reckoned with in the grocery business; however, there still will be plenty of room for more traditional grocers. Kroger, trading at 10 times next year's consensus earnings estimates and yielding about 2.5%, will survive. Walmart will continue to thrive. There will be consolidation in the industry, and perhaps some bankruptcies. However, brick-and-mortar grocery is not going away anytime soon.
Online ordering is a nice feature for some; then there are the rest of us with our weekly (or thrice weekly in my case) grocery store runs, complete with impulse buys, which is what makes it fun. No drone deliveries necessary, at least for this guy.