How Wal-Mart Became A Grocery Giant In The U.S

From a small store in Arkansas started in 1962, Wal-Mart (NYSE:WMT) has become the largest grocery retailer in the U.S. Currently, its grocery sales are higher than the sales of three of the largest grocery chains in the US (Kroger, Safweway, and Supervalu) combined. ^[1] So how did Wal-Mart grow to such size? How did it transition into a retailer, which gets more than half of its revenues from groceries? Wal-Mart accomplished this by effectively executing its basic business strategy of low price, good quality and wide distribution.

Wal-Mart’s share in the U.S. grocery sales has increased considerably over the past 10 years. ^[2] The retailer has been successful in taking share from supermarkets and local grocery stores with its Every Day Low Price strategy. Its sheer size gives it strong negotiating power over its vendors and enables it to buy its inventory at lower prices than competitors. At the same time, Wal-Mart is fervent on maintaining a low cost supply chain and passing on these savings to its customers. For these reasons, by keeping it prices lower than competitors, the retailer has taken over a large share of the U.S. grocery market.

With continued efforts to keep prices low, emphasis on adding groceries to majority of its stores, and urban expansion with smaller format stores, Wal-Mart is likely to continue its successful run into the future.

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History Of Wal-Mart’s Grocery Business And Its Importance

Wal-Mart began its operations in 1962 and expanded aggressively in the U.S. However, the retailer did not introduce full-line grocery to its stores until 1988. ^[3] Ten years later, Wal-Mart introduced Neighborhood Markets to stay ahead of the local grocery and convenience stores.

Since then, groceries have been one of the prime focus areas for Wal-Mart. The share of groceries in the retailer’s total revenues has been on a consistent rise. In 2002, groceries accounted for about 24% of Wal-Mart’s revenues. This figure increased to 39% by 2007 and currently stands at around 55%. ^[2] This implies that the retailer is trying to increase its dependence on groceries. This brings us to another question – why are groceries so important?

Wal-Mart’s share in the U.S. grocery market has increased four folds since the launch of its first Neighborhood Market in 1998. ^[6] Since data on the overall size of the grocery market in the US is not available, we have estimated this figure using consumer spending data on food products provided by the Bureau Of Economic Analysis. Then using WMT’s reported grocery sales we estimated WMT’s share of the market in the US. According this calculation, Wal-Mart’s share was less than 7% back in 2002 and has increased to about 15% in 2007 and touched 18% in 2011. ^{[2] [7]}

By 2011, Wal-Mart’s grocery revenues were higher than those of three major grocery chains (Kroger, Safeway and SuperValu) combined. ^[1] Wal-Mart’s grocery sales in the US were ~$145 billion, followed by Kroger at $65 billion, Safeway at $33 billion and Supervalu at $23 billion.

How Did Wal-Mart Succeed In Gaining Share?

Wal-Mart pricing strategy, EDLP (Every Day Low Price), is to provide the lowest prices to its customers on a daily basis. To maintain its low cost provider status, WMT uses a two pronged approach. First, it leverages it scale to exert buying power on its suppliers and obtains a lower price for its inventory than competitors. Second, WMT is relentless on cutting costs across its supply chain and maintaining as lean a structure as possible. By doing these two things, the company is able to pass on its savings to customers while still maintaining margins that are equivalent or higher than competitors. To note an example, even when the U.S. grocery market was feeling the impact of food price inflation in the latter half of 2012, Wal-Mart was able to lower its grocery prices and take share from competitors who had no choice but to raise prices to maintain their margins. ^[8]

As another strategy to take share in the grocery market, Wal-Mart has been increasing the number of grocery SKUs at many of its stores. Primarily, it has been doing so by converting its discount stores that are smaller and offer fewer SKUs of groceries into Supercenters that are larger and offer a complete range of groceries. Over the past five years, Wal-Mart has closed 447 Discount Stores and opened 773 Supercenters. Additionally, Wal-Mart has continued the expansion of its Neighborhood Markets and currently operates more than 200 such stores in the U.S.

Lastly, Wal-Mart launched its in-house grocery brand, Great Value, in 1993 and by 2009 the company was offering more than 100 food categories under this brand. ^{[3] [9]} Currently, Great Value is the largest food brand in the U.S. in terms of volume and sales. ^[3] Success of this brand was not only driven by its low pricing, but also by its quality. To maintain this level of quality, Wal-Mart has undertaken rigorous testing of more than 5,000 products against national brands. ^[9]

Will Wal-Mart Continue To Gain Share Or Face Additional Threats?

Wal-Mart should continue to sustain its low price advantage over its closest competitors. On average, Wal-Mart’s products are about 17% cheaper than the products in supermarkets such as Kroger and Safeway. ^[8] In a comparison with other grocery stores, of a basket of 31 similar items, 68% of the items were found to be cheaper at Wal-Mart. ^[3] Moreover, the price of this basket at Wal-Mart has fallen in five of the past 12 quarters. ^[8] To keep its prices low, Wal-Mart has to make continuous efforts. In October last year, the retailer announced that it will invest $6 billion in retail pricing by 2017, primarily reducing logistics costs. ^[10]

However, there does exist a worthy threat from dollar stores. Dollar stores are essentially very small discount stores that are conveniently located in low income neighborhoods. With aggressive expansion, dollar stores such as Family Dollar, Dollar Tree, and Dollar General have slowly gained share in the grocery market primarily from traditional grocery stores and drug stores. ^[11]

To fend of this competition, Wal-Mart is looking to expand into urban areas where its presence is currently limited with its smaller format Express stores. These stores are about one-tenth the size of a typical Wal-Mart Supercenter and suitable for areas with space constraints. Express stores allow the customers to shop for their basic needs in their neighborhood conveniently.

In conclusion, Wal-Mart has been chipping away and gaining share of the US grocery market because of its low price strategy and broad distribution. With the continued efforts to keep the price low and plans for urban expansion, we expect Wal-Mart’s share in groceries to increase further.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Companies’ SEC filings [↩] [↩]
2. Wal-Mart’s SEC filings [↩] [↩] [↩]
3. Here’s How Wal-Mart Became The #1 Grocery Store In The Country, Business Insider, Feb 11 2011 [↩] [↩] [↩] [↩]
4. U.S. Bureau Of Economic Analysis [↩]
5. Big Retailers Fill More Isles With Groceries, The New York Times, Jan 16 2011 [↩] [↩]
6. Did you know that Walmart controls over 30% share in 44% of major U.S. grocery markets, Food First, Sep 1 2010 [↩]
7. U.S. Bureau Of Economic Analysis [↩]
8. As Grocery Prices Rise, Wal-Mart Gets Cheaper, The Wall Street Journal, Oct 15 2012 [↩] [↩] [↩]
9. Walmart’s revamped Great Value brand delivers affordable, quality choices when consumer needs them most, Wal-Mart, Mar 16 2009 [↩] [↩]
10. Wal-Mart to invest $6 billion in price, Super Market News, Oct 12 [↩]
11. Dollar stores take on Wal-Mart, and are starting to win, Forbes, April 16 2012 [↩]