Grocery price check: Costco is 58 percent cheaper than Whole Foods, JPMorgan finds

October 19, 2017 in Latest News

Though Amazon has promised steep discounts at Whole Foods stores, now that it owns the organic supermarket chain, Costco still reigns supreme in the ongoing grocery price wars, according to JPMorgan.

“[Costco] offers an unquestioned value prop with the best pricing, curated assortment, strong private label offering, and treasure hunt atmosphere,” JPMorgan analyst Christopher Horvers wrote in a note to clients.

After completing price checks at Costco, Whole Foods, Wal-MartTarget and Aldi, Horvers and his team found Costco’s stickers, on a per-unit basis, to be a “whopping” 58 percent cheaper than those at Whole Foods.

Costco and Whole Foods share the least of their merchandise assortments in common, JPMorgan discovered, while Costco and Wal-Mart see the most overlap in their grocery stock keeping units, or SKUs.

To be sure, being a low-price leader comes with pros and cons. Investing in discounting can squeeze a retailer’s profit, and that’s what some investors worry about, as it relates to Costco.

Shares of Costco took a hit one week ago when the company posted narrower gross margins and a fourth-quarter decline in membership renewal rates. Shoppers were seen buying more fuel, which is less profitable, at Costco during the latest period.

In June, when e-commerce giant Amazon first announced its plans to acquire Whole Foods, companies like KrogerSprouts Farmers MarketSupervaluAlbertsons and even Costco watched their stocks tumble.

Goldman Sachs was one of the first investment banks to react, immediately downgrading Costco shares on the news and adding to any arguments against Amazon’s retail rivals. One trading day later, Deutsche Bank followed suit with its own Costco downgrade.

The same group of grocery stocks dropped again, a few weeks later, when Amazon revealed it would be slashing prices across Whole Foods stores once the deal between the two was complete. Investors’ fears over Costco were seen ballooning.

Nonetheless, JPMorgan’s latest price checks point out that Whole Foods’ value proposition greatly contrasts that of Costco, still.

“It is clear that [Whole Foods’] pricing would need to narrow substantially to be a threat to COST, while the Whole Foods business model would need to shift away from its ‘foodie, organic, and natural’ value prop,” Horvers wrote.

When looking at baskets of perishable groceries, dry goods and household items — each from Costco, Whole Foods, Wal-Mart, Target and Aldi — Costco was consistently the least-expensive option, JPMorgan found.

Wal-Mart’s private-label products turned out to be the cheapest of the group when compared with national brands. But Costco’s Kirkland Signature nameplate is a stronger player than its peers when it comes to quality, Horvers added.

Costco faces an uphill battle from here in trying to win back lost confidence on the Street.

On a conference call with analysts and investors last week, Chief Financial Officer Richard Galanti said, “As it relates to the publicity and the news and the noise around Amazon and Whole Foods, all we can do is perform.”

One factor that would help is if value-minded consumers understood the price comparisons that JPMorgan uncovered.

Costco, with its massive stores, is trying to keep up with the shift online. The warehouse retailer recently launched two new delivery options for its members, one called Costco Grocery. The service offers shoppers about 500 nonperishable goods for two-day delivery, with orders over $75 dropped off at no charge.

A second service, offered in metropolitan markets and powered by Instacart, lets shoppers choose from 1,700 items, including fresh groceries, for same-day delivery.

Costco is the the third-largest grocery retailer in the U.S., after Wal-Mart, which is No. 1, and Kroger.

Costco shares are down about 1.8 percent this year.

Source: CNBC

The Grocery Chain That Soared 65% In 2014

January 5, 2015 in Latest News

grocery-storeIn the grocery industry, investors have gotten used to Whole Foods Market dominating the pack, with its emphasis on higher-margin organic and natural foods that cater to a premium customer base.

Yet when you look at some of the best-performing stocks in 2014, Whole Foods is nowhere to be seen.

But traditional grocery giant Kroger has lit up the charts with a 65% gain last year. Effectively, Kroger has taken the best bits of Whole Foods’ strategy and integrated them into its own business model, and so far, the results have been extremely successful.

As in most industries, the name of the game in the grocery business is growth, and lately, Kroger has been one of the most successful grocery companies in producing the growth that investors want to see. Kroger managed to produce 11% higher revenue in its fiscal third quarter last month, with same-store sales growth of 5.6% coming in well ahead of Whole Foods and its slower 3.1% rise in comps.

More importantly, Kroger is getting even more of its revenue to the bottom line in the form of profits. Third-quarter earnings per share jumped 21% from year-ago levels, showing the rise in margins the company has managed to achieve. Kroger also pushed its expectations for full fiscal-year earnings higher, with hopes that a better winter-weather picture than last year could help drive gains above its previous targets.

Kroger has achieved this success using a wide variety of different strategies.

First, it has challenged Whole Foods on its own turf, promoting greater sales of organic and natural foods in an attempt to capture the higher margins that those products command compared to traditional grocery offerings. With natural foods boasting double-digit percentage growth, Kroger still has plenty of room to expand and become even more of a powerhouse in the space, even as it already has reached the No. 2 spot behind Whole Foods in terms of sales of organic food.

Kroger hasn’t just counted on organics, though. Kroger’s private-label store brands have taken off, making up more than a quarter of the grocer’s overall revenue and having seen growth accelerate recently. With many shoppers looking for ways to save money, private-label sales are essential, yet paradoxically, they often mean more profits in Kroger’s pocket because the grocery chain doesn’t have to share margin-enhancing profits with a brand-name food producer.
In addition, Kroger has looked at vertically integrating its business even further, with the company owning its own food production facilities to make milk, juice, and other beverages for which freshness carries a greater price premium.

Of course, one big challenge Kroger will have now that it has become a major threat to Whole Foods is whether it can sustain the competitive advantages it has earned. In response to its recent slump, Whole Foods has made several efforts to bolster its brand, with a new marketing campaign touting its status as America’s Healthiest Grocery Store and seeking to cement its place in American households. If Whole Foods can demonstrate to Kroger shoppers that they’ll find better products by switching, then Kroger could see its recent comparable-store sales gains start to slow.

Another concern that many investors have is that Kroger has turned to the credit markets in a big way to help finance its acquisition-led growth spurt. With $11.5 billion in debt outstanding, Kroger has identified the need to get the liability side of its balance sheet under control, but it could nevertheless take a year or more to get Kroger’s debt levels down to where management feels comfortable in the long run.

Kroger has made the most of the opportunities it has to grow its business, making good use both of acquisitions and of boosting its own business from within. Investors shouldn’t expect to see 65% returns year in and year out, but going forward, Kroger has several promising strategies that could generate more positive gains for long-term shareholders for years to come.

Source:  Motley Fool