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Understanding Food Stocks' Recent Rally

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Part 2
Understanding Food Stocks' Recent Rally PART 2 OF 3

Grocery Stocks Are Fighting against Key Threats

Pessimism created by Amazon’s acquisition of Whole Foods

Amazon (AMZN) announced its acquisition of premium organic food retailer Whole Foods Market in mid-June. The deal shook the US food retail sector on fears that Amazon might end up disrupting the grocery business as it has disrupted other retail businesses. The deal eroded millions of dollars from the market caps of major retailers soon after the announcement.

While Amazon is among the top threats for grocers, rising competition within the food retail space is a major headwind.

Grocery Stocks Are Fighting against Key Threats

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Retail giant Walmart (WMT) isn’t leaving any stone unturned. It has been cutting prices aggressively to win over customers. A report from Gordon Haskett Research Advisors showed that Walmart has even beaten discount stores Dollar General (DG) and Family Dollar stores (DLTR) in pricing. These price cuts have made Walmart among the cheapest food retailers in the country.

Plus, the German-based supermarket chains Aldi and Lidl have also been slowly increasing their US presence, winning over customers in the process. Aldi has around 1,600 stores in the United States while Lidl operates 25 locations. Both have ambitious expansion plans for the next year.

So, are these threats killing grocers?

Grocers are putting up a tough fight against rising competition to maintain their market shares, as we can see from the recent results of key grocers. Sprouts Farmers Market (SFM) and Kroger (KR) posted better-than-expected sales comps as well as earnings when they reported their results in November. Both companies recorded traffic growth as well as basket size growth.

Kroger also launched its Restock Kroger plan to strengthen its position. The plan focuses on redesigning and remodeling brick-and-mortar stores, growing private label brands, improving its digital shopping experience, and maintaining low prices. The initiative is off to a good start, and Kroger just posted one of its best Black Friday results.

See the next part of this series to learn more about Kroger’s recent price movements.

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