Whole Foods’ Sales Are Booming, Is This Bad News For Target and Wal-Mart?

November 28th, 2017 by Trefis Team
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Since being acquired by Amazon (NASDAQ: AMZN), Whole Foods’ revenues have grown impressively. While some of this is due to good publicity from price cuts of as much as 43% on key items, which were implemented shortly after the deal closed, some of it is likely from the relationship with Amazon attracting customers with Amazon Lockers and other items. In fact, the deep price cuts at the store led to a 25% increase in customer traffic in August. Although Whole Foods’ prices are still fairly high compared to other grocery chains, the price cuts are definitely helping to attract customer attention and drive foot traffic. Clearly, Amazon is looking to compete hard for value-conscious consumers in the near term.

Retail giants such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) have been investing heavily in e-commerce and omni-channel retail strategies in order to keep up with changing industry dynamics. Wal-Mart has spent billions on e-commerce initiatives and acquisitions, while Target has been working hard to improve its capabilities in the space. Below we take a look at how these two retailers have fared in the wake of the Whole Foods business growing rapidly.

Solid Performance: Wal-Mart & Target

While Wal-Mart is the biggest player in the U.S., capturing 14.4% (as of 2016) of the U.S. grocery market, Target captures only 2.1% of this highly fragmented market. On the other hand, Amazon & Whole Foods together capture an even smaller 1.4% of the total U.S. grocery market, indicating that they still have scope to grow and better compete with other grocery players. Amazon is expected to command approximately 3% (third largest grocery share behind Wal-Mart and Kroger) of the total estimated $903 billion grocery market by 2021, according to Cowen & Co. Both Wal-Mart and Target have acknowledged this growing threat, and plan to counter it by accelerating efforts in technological capabilities and leveraging their wide networks of stores in the U.S.
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In the quarter ended October, Wal-Mart U.S. delivered a strong top line performance with comparable sales growth of 2.7%. The company’s grocery business continued to improve, as food categories continued to deliver strong quarterly comparable sales performance, led by strong customer traffic. Moreover, Wal-Mart has been investing in programs such as online grocery pickup, in addition to improving its assortment of fresh produce and vegetables. Meanwhile, Target’s revenue increased 1% year-over-year (y-o-y), primarily due to 0.9% growth in comparable sales. The company was able to grow its comparable sales after two straight quarters of declines, suggesting that initiatives such as an expansion of small-format stores and revamping existing stores are resonating well with customers. However, factors such as free delivery and promotional activity continue to be a drag on the bottom line of both companies.

Target generates stronger overall sales in stores that offer groceries, which represent about 20% of the company’s total sales. On the other hand, groceries account for 56% of Wal-Mart’s total business. The company tends to dominate food prices in the retail industry due to its sheer size and logistical capabilities, which gives it a competitive edge. The combined Amazon-Whole Foods entity will need to come up with more ways to convince customers to opt for its stores and products over Wal-Mart’s, as its scope for further price cuts is likely relatively limited.

It will be interesting to see how Amazon performs in the coming years, but as of now, Wal-Mart remains well-positioned in the grocery space. However, Target may see some pressure if it doesn’t make substantial progress with its e-commerce offerings and its grocery business.