Wal-Mart's Greatest Asset Against Amazon Is Groceries

Jun.17.14 | About: Wal-Mart Stores, (WMT)

Summary

The Agriculture and Food industry is a multi-trillion dollar market in which Amazon has failed to gain significant market share.

Online grocery shopping has several major disadvantages such as fees, required minimums and lack of personal quality control.

Even with several drawbacks, Wal-Mart is investing heavily online and offline in order to protect its grocery market share.

Massive Industry With Unique Buying Pattern

The global Agriculture and Food industry is estimated to reach $7.6 trillion in 2014, according to Plunkett Research. The United States Food and Beverage industry is estimated to be $1.8 trillion. Additionally, Plunkett Research estimates the United States Supermarket industry was $650 billion in 2013. The Grocery industry is simply massive. However, the industry's sheer size isn't the only reason retailers want to carry groceries. Grocery shoppers have a unique buying pattern which can represent a tremendous opportunity for a retailer. According to a KSC Kreate survey, 85% of grocery shoppers surveyed visited a store once a week, with 42% visiting twice or more a week. Retailers are constantly looking to drive traffic to their stores. Groceries give shoppers a reason to return frequently, which presents retailers with the opportunity to sell non-grocery items.

Wal-Mart's (NYSE:WMT) Greatest Asset

Groceries are a vital part of Wal-Mart. In 2013, Grocery sales represented 56% of total revenue. During 2013, Wal-Mart's revenue was $476 billion with $267 billion coming from groceries. For some perspective, Wal-Mart's grocery revenue would make them twice the size of the second largest retailer, according to National Retail Federation's 2013 retail ranking. Groceries drive traffic to stores. For this reason, Wal-Mart needs to fight any attempts to take away their grocery market dominance.

Amazon (NASDAQ:AMZN) And The e-Grocery Market

e-Commerce has been able to transform and disrupt many traditional retail markets. Amazon.com, Inc. is solely responsible for the disappearance of many traditional bookstores. Amazon's dominance forced companies to alter their business model or face the prospects of bankruptcy. Despite its transformative nature, Amazon has been unable to replicate its success in the grocery industry. According to an International Business Times article, Forrester Research estimated the e-Grocery market was $15.4 billion in 2013. This represents a tiny fraction of the total retail food industry which Forrester Research estimated to be $1 trillion, in 2013.

Why Are e-Grocery Companies Struggling?

The KSC Kreate survey demonstrates how important grocery shopping is to consumers. Some consumers shop for groceries 2 or more times a week. Ordering online would appear to be the perfect solution for frequent grocery shoppers. However, online delivery has several major drawbacks such as delivery fees, required minimums, and the inability to select individual items. Additionally, online items aren't even cheaper. Amazon's delivery service, AmazonFresh, requires a minimum order of $35 and delivery is free. However, the AmazonFresh membership costs $299 a year for non-prime members and $299 minus the cost of Prime for Prime members. This isn't an insignificant amount of money for the convenience of delivery. Additionally, the in-person grocery shopping experience allows for greater choice like picking certain fruits and vegetables. The wrong (not ripe enough) avocado can make it impossible to use for guacamole. Even with its drawbacks, the shopping online trend could grow into a threat to traditional grocery stores.

Wal-Mart Isn't Going To Be Left Behind

Wal-Mart isn't going to allow Amazon to dominate the grocery delivery business. In some markets, Wal-Mart has rolled out a service called To Go. To Go customers can order food online and pick up their groceries or have them delivered. Wal-Mart requires only a $30 minimum order and charges $5-$7 per order. If ordering weekly, Wal-Mart's $5-$7 is similar to Amazon's $299 a year subscription ($5.75 per week). Wal-Mart has pushed into the online realm, but is also pushing to increase physical stores. Wal-Mart has opened, and plans to open, many smaller, more focused stores called Wal-Mart Markets. These stores resemble more traditional supermarkets and allow Wal-Mart to craft a better customer experience for grocery shoppers. Wal-Mart appears determined to keep their grocery industry market share by investing heavily in online and offline ventures.

Long Battle Ahead

For Amazon to dethrone Wal-Mart, Amazon will have to find a way to disrupt the $7.6 trillion Food and Agriculture industry. A top quality, low cost grocery delivery service like AmazonFresh could offer increased competition to the traditional grocery industry. However, Wal-Mart and other traditional retailers are investing heavily to improve the current customer experience. Wal-Mart Markets are being opened to offer a better more focused customer experience. Wal-Mart offers To Go, a delivery service which offers the option to pick up an online order.

Stories of Wal-Mart's demise are greatly exaggerated. Wal-Mart generated more revenue in Q1 2014 than Amazon did in all of 2013. Wal-Mart's Q1 net sales were $114 billion while Amazon's 2013 revenue was only $74 billion. Wal-Mart's grocery revenue represents a major competitive advantage over Amazon. Unless consumer habits change, people will continue to shop at their local grocery store. If consumer habits do change, Wal-Mart is well-positioned to take advantage of changing consumer habits. Unlike other retail markets, Amazon won't have an easy time competing with Wal-Mart, in the grocery industry.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.