In order to stay in the race, Kroger (KR) has to revisit strategies and prepare itself for more aggressive price war ahead at the cost of margins.
Kroger adds Kitchen 1883 concept to improve customer food and foodservice experience, bets that a restaurant can give customers more reasons to visit the store and shop for essentials.
The Zacks Analyst Blog Highlights: Gilead, Oracle, Morgan Stanley, Expedia and Kroger
Top Stock Reports for Gilead, Oracle & Morgan Stanley
By most accounts, Kroger Co (NYSE: KR ) isn’t really a standout in the grocer league. The firm reported in-line earnings per share and a marginal revenue beat Friday, but lately it’s done little to draw ...
Amazon officially assumed control of Whole Foods Market on Monday and by noon, channel checks at WFM stores revealed that its new tech overlords had already slashed prices by nearly 50%, sending bonds of its grocery-chain rivals reeling as grocers confronted a new dilemma: either slash prices to the point of unprofitability, or hold the line and risk seeing sales evaporate. And as bonds of even highly rated grocery chains have underperformed this week, Bloomberg is questioning whether the WFM acquisition has fundamentally changed market dynamics in what was previously an island of stability in a retail sector beset by bankruptcies. Even before the WFM acquisition, the industry experienced the first signs of strain as Amazon launched its Amazon Fresh grocery service and Wal-Mart started stocking up on reasonably priced organics – factors that contributed to the massive drop in WFM’s market cap, allowing Amazon to scoop it up for less than $14 billion. Prior to this, the conventional wisdom dictated that grocers were impervious to the onslaught of e-commerce that was decimating industries such as clothing and electronics. Investors reasoned that consumers would probably balk at buying perishable goods like food online. But Amazon, with its seemingly infinite capacity to slash prices and brook losses, has created new risks for Whole Foods' rivals. Apollo Global thought buying North Carolina-based Fresh Market for the “every day low price” of $1.4 billion would be a turnaround slam dunk after its success with Sprouts Farmers Markets. One year later, the future profitability of that deal is in doubt, and that uncertainty is being reflected in the price. “The bonds that financed Apollo Global Management’s purchase last year of upscale grocer Fresh Market plunged to new lows this week. The cost of buying contracts to protect against a default in Albertsons Cos.’s debt has jumped. Bonds of Bi-Lo Holdings have lost almost half their value this year.” When Apollo Global bought Greensboro, North Carolina-based Fresh Market for $1.4 billion last year, the grocery world seemed quite different. The chain, known for its fresh produce, had seen sales slow. To lure customers back to Fresh Market’s roughly 170 stores, the private-equity titan was betting it could rely on its experience with previous - and profitable - investments in companies such as organic grocer Sprouts Farmers Markets. But Fresh Market is struggling for some of the same reasons that sent Whole Foods into the arms of Amazon. Mainstream competitors including Kroger Co. and Wal-Mart Stores Inc. have pushed deeper into sales of fresh produce and organic products. Supermarkets have opened so many stores that many analysts expect a shakeout. Before the Amazon deal, Fresh Market bonds traded as high as 91 cents on the dollar. Now they fetch less than 76 cents.” The reason is simple: Amazon, which is insulated not only by its e-commerce hegemony but also by investors who don’t expect the company to turn a profit. One analyst aptly referred to this as the Amazon-Whole Foods "fear factor.” “It’s the fear factor of Amazon,” said Mickey Chadha, an analyst at Moody’s Investors Service. “No retailer can under-price as long as Amazon can, make no money and get away with it. That’s why people are scared.” * * * News of the Amazon deal obliterated billions of dollars of grocers’ valuations, slicing $2 billion off Kroger’s market cap in one day. The grocer’s stock is down 35% this year. Yet its bonds have held steady. Meanwhile, nearly $3 billion in Albertsons bonds due in 2021 have tumbled.. “Kroger’s bonds, which are investment grade, haven’t been hit. But about $3 billion of Albertsons debt coming due in 2021 has felt a chill. The loans have been trading at 97.6 cents on the dollar. Large, liquid, secured loans of that size typically command par, or 100 cents. A public stock offering for the Cerberus Capital Management-backed grocer was again put on hold after Amazon announced its purchase of Whole Foods.” ...causing the cost of insuring them to skyrocket. As one might expect, analysts now believe that large chains with relatively low debt burdens will somehow manage to survive. But smaller chains like Bi-Lo Holdings may soon find that their debt burdens are untenable: “For example, Bi-Lo Holdings has borrowed hundreds of millions to make cash payouts to private-equity owner Lone Star Global Acquisitions. One of the bonds the company sold to pay the dividends now trades at levels indicating investors expect to recoup only a third of what they loaned the company.” Tops Friendly Markets, another troubled grocer, is being choked by its $720 million debt pile. “Tops Friendly Markets, which is reporting millions in losses, is straining under $720 million in debt. Using a maneuver typical of distressed companies, it put off repayments due in 2018 while it grapples with price deflation and traditional rivals in its western New York home turf. If earnings and the balance sheet don’t improve, investors holding the rest of Tops’ bonds could find they’re stuck with spoiled goods.” However, there's at least one factor that may insulate the market's weaker hands, at least for a little while. There are 40,000 grocery stores in the US, only 400 of which are WFMs... So, should investors be bracing for a wave of grocery bankruptcies resembling this year’s record run of failures among department stores, apparel sellers and electronics retailers? Maybe not right away. But once Amazon's had a few years to expand its footprint, a massive shakeout seems inevitable.
Following up on last week's story that sent grocer - and Wal-mart - stocks tumbling, when Amazon annonced it would cut Whole Foods prices as soon as Monday, Bloomberg reports that according to channel checks, "Amazon spent its first day as the owner of a brick-and-mortar grocery chain cutting prices at Whole Foods Market" by as much as 43%. It's official pic.twitter.com/sJcCJNrt5b — Jason Del Rey (@DelRey) August 28, 2017 Some early examples observed at the Whole Foods store on 57th Street in Manhattan: organic fuji apples were marked down to $1.99 a pound from $3.49 a pound; organic avocados went to $1.99 each from $2.79; organic rotisserie chicken fell to $9.99 each from $13.99; banana prices were slashed to 49 cents per pound from 79 cents. Following the news, European grocer stocks ticked lower again, while Kroger was down 2%, as apparently the size of the markdowns came as a surprise to the market and as Whole Foods peers will now struggle to catch down to its heavily subsidized competitor, watching their margins and profitability erode in the process.
A day after Amazon revealed its plans to cut prices at Whole Foods Market following the completion of its takeover on Monday – an announcement that obliterated billions of dollars’ worth of food suppliers and rival grocers’ market capitalization - Bloomberg is reporting that WFM’s rivals are mulling an incredibly difficult choice: Whether to follow suit and cut prices in one of the few segments of the food market that’s actually growing, or hold the line against their high-tech rival and risk being undercut into oblivion. Price reductions could draw in new customers to brick-and-mortar locations. However, already thin profit margins and technological barriers make lowering prices a risky proposition. “…the price reductions could draw in curious new shoppers and present brick-and-mortar retailers with a dilemma. Do they follow suit and see their margins squeezed, or hold fast and risk sacrificing sales in one of the few areas of the food industry that’s actually growing?” Greg Portell, a partner at consulting firm A.T. Kearney, said that it will be difficult for rivals to match Amazon’s “dynamic” pricing model. “Changing prices across the board is not a simple process for most retailers,” said Greg Portell, a partner at consulting firm A.T. Kearney. “It takes time and labor. What Amazon has done is bring a level of dynamic pricing that will have to be matched by anybody selling food. It will disrupt the way the sector works.” Amazon’s decision to slash prices of organic food products marks a new chapter in the grocery price war, which had previously been fought over more mainstream products. “Up until a couple of years ago, the grocery price war had largely been fought over mainstream products like soda, soup and cereal, leaving higher-end organics to compete on quality. Organic products still have fatter margins, giving Amazon more room to experiment on pricing.” The e-commerce giant has another crucial advantage over its rivals: Its investors don’t expect it to turn a profit – at least not right away. This allows the company freedom to “tinker” with prices, according to Bloomberg. “Amazon is less constrained by profit expectations thanks to a tech-industry ethos that values growth above everything. So it can tinker with the prices of organic eggs, almond butter and rotisserie chicken, experimenting with what gets customers to respond and then doubling down on those successful bets.” Ken Harris, managing partner at Cadent Consulting Group, said that Amazon’s ability to bring “21st-century technology” to the neighborhood grocery will have a “profound” impact on the industry. “When you think about Amazon’s dynamic pricing, it is taking a 21st-century technology and putting it in front of consumers in a new venue,” said Ken Harris, managing partner at Cadent Consulting Group. “Consumers have come to expect it in other places but not their neighborhood supermarket. So it’s profound, and other retailers have to take notice.” Ironically, Amazon is using the same strategy against WFM’s competitors that they once used to undercut the organic foods pioneer. After WFM popularized organic foods in the US, Wal-Mart and other mainstream grocers started stocking similar items and selling them for less. “For years, organic food was a niche category, but Whole Foods showed there was growing demand as it opened more than 400 stores across the country. Eventually, major chains like Wal-Mart and Kroger responded by stocking more organic items. U.S. consumers bought more organic fare than ever before in 2016, with sales increasing 8.4 percent to $47 billion and accounting for more than 5 percent of all food sales in the country, according to the Organic Trade Association. But as organics became more widespread, the traditional supermarkets undercut Whole Foods on price, and the chain’s same-store sales have fallen for eight straight quarters as it struggled to respond. It introduced a new store format called 365 that offered less expensive items to attract younger, budget-conscious shoppers. But the declines continued, and the company had only opened a handful of 365 locations before Amazon pounced in mid-June.” Another huge advantage for Amazon is that it can offer steep discounts to members of its Amazon Prime service. The company should have little trouble cross-selling to its dedicated Prime members because, according to Bloomberg, nearly two-thirds of WFM’s customers are already Prime subscribers. “Amazon will speed those efforts by layering on discounts for Prime members, who are typically shopping at Whole Foods already. Nearly two-thirds of Whole Foods’ regular customers are Prime members, according to retail consultancy Magid. “Whole Foods customers are very Amazon-savvy,” said Matt Sargent, Magid’s senior vice president of retail. “That’s a good thing but with this deal, Amazon bought the same customers it already had. So they have to expand beyond current Whole Foods customers by offering more value.” Whether Amazon can convert those value-seekers into long-term customers will be the challenge, Barthashus said.” However, Amazon’s decision to slash prices so rapidly could backfire. The company could face scrutiny from regulators if it fails to keep its online and in-store pricing tags in sync. “If the retail giant is unable to move quickly enough to adjust price tags in the store to reflect the discounts it’s advertising, the company could get called out by watchdogs and even fined by federal trade regulators, according to Cadent Consulting’s Harris. “There are huge risks,” he said. And even with all this attention, Whole Foods is still a small player in the U.S. grocery market compared with Wal-Mart and Kroger, who together garner more than 30 percent of sales.” Amazon said in a press release Thursday that "starting Monday, Whole Foods Market will offer lower prices on a selection of best-selling staples across its stores, with much more to come. Customers will enjoy lower prices on products like Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic Gala and Fuji apples, organic rotisserie chicken, 365 Everyday Value organic butter, and much more." After the announcement, shares of WFM rivals like Wal-Mart and Kroeger's tanked, along with shares of WFM's suppliers. If Amazon's track record is any indication, even if its rivals resist cutting prices right away, they likely will be forced to in the near future, ushering more of the deflationary pressures that the Fed and academic economists hate so much.
The Zacks Analyst Blog Highlights: Amazon, Whole Foods Market, Kroger, Walmart and Costco
On Thursday, meal-kit delivery company Blue Apron said its IPO would be priced at $10 per share, which is at the low end of the company's already slashed price range. Should you invest?
Amazon's (AMZN) $13.7 billion ($42 a share) purchase of Whole Foods Market (WFM) came as something of a surprise. But when you think about it, the deal makes perfect sense for both.
COMPETITION: Amazon’s Whole Foods Deal Adds Pressure on Grocery Services to Deliver. Now, with the e-commerce giant planning to buy Whole Foods WFM -0.31% Market Inc. for $13.7 billion, giving it a large foothold in the food retail industry, the stakes are all the higher for companies such as Instacart Inc., Peapod LLC, Shipt Inc. […]
The Zacks Analyst Blog Highlights: Amazon.com, Whole Foods Market, Aramark, Unilever and Service
What suddenly went wrong with Costco (COST), which otherwise looks quite sound fundamentally.
Grocery chain Kroger's CEO, Rodney McMullen, joined CNBC's "Squawk on the Street" for an exclusive interview Tuesday morning.
With the help of our new style score system, we have identified three consumer staples stocks that have excellent prospects and are good bets in this uncertain market.
This is a Real-time headline. These are breaking news, delivered the minute it happens, delivered ticker-tape style. Visit www.marketwatch.com or the quote page for more information about this breaking news.