Wal-Mart's Real Problem: Competitors Can Match Its Buying Power

| About: Walmart Inc. (WMT)
This article is now exclusive for PRO subscribers.


Kroger is now able to match or beat Wal-Mart’s price on many items.

Kroger and Costco now have TTM revenues in excess of $100 million. Amazon.com now has a TTM revenue of $85 million.

Those revenues give those companies wholesale price buying leverage that rivals that of Wal-Mart.

Each of these retailers’ TTM revenues is growing at a much faster rate than that of Wal-Mart.

Smaller retailers such as Safeway and Target may not be able to compete with the prices of Wal-Mart, Amazon.com, Costco and Kroger.

On my last two shopping trips, I observed what might be the cause of Wal-Mart's (NYSE: WMT) decline in shopper visits. Two weeks ago I went to City Market, a Kroger's (NYSE: KR) subsidiary here in Colorado, and earlier this week I visited Wal-Mart. During those trips, I noticed that the prices on groceries and household goods at Wal-Mart and City Market were almost identical.

What was even more interesting was that some of City Market's prices were actually better than Wal-Mart's. For example, a can of Kroger's house brand coffee was priced at $6.99. Comparable Maxwell House coffee at Wal-Mart cost around $7.95 a can. Some varieties of Campbell's soup that cost $1.25 a can at Wal-Mart were selling for $1 a can at City Market.

Wal-Mart's Buying Power

My observations indicate that Kroger now has the ability to match or even best Wal-Mart's prices. That's bad news for Wal-Mart because its business model is based upon offering the lowest price possible. The main reason people shop at Wal-Mart is because of the prices; if Kroger offers similar or better prices, people will shop there instead.

Historically, Wal-Mart was able to offer extremely low prices because of its massive amount of buying power. It had the ability to force suppliers to offer the prices it wanted if they wanted to stay in business. That gave Wal-Mart the leverage it needed to essentially set prices at levels other retailers could not match.

This leverage comes from the sheer size of Wal-Mart; it reported a TTM revenue of $483.79 billion on October 31, 2014. That revenue was more than four times the size of Wal-Mart's largest rival, Costco Wholesale (NASDAQ: COST), which reported a TTM revenue of $114.49 billion on Nov. 30, 2014.

For years, Wal-Mart had no rivals with the leverage to match its prices. The problem is that it now has at least three rivals that have the kind of buying power to match its prices.

Rivals Now Match Wal-Mart's Buying Power

The first of these is Costco; the second is Kroger, which reported a TTM revenue of $106.48 billion on Oct. 31, 2014. The third is Amazon.com (NASDAQ: AMZN), which reported a TTM revenue of $85.25 billion on Sept. 30, 2014.

None of these retailers is Wal-Mart's equal yet, but two of them now have TTM revenues of over $100 billion and Amazon is now in striking range of $100 billion revenue. Such revenues mean that each of those retailers has or could soon have a potential wholesale buying power of roughly $100 billion. It also means that each of these retailers now has the ability to put the kind of pressure on suppliers that only Wal-Mart had just a few years ago.

What should worry Wal-Mart is the speed at which the revenues of these three rivals are growing. Amazon.com reported a TTM revenue of $57.26 billion in September 2012; that revenue grew to $70.13 billion in September 2013 and $85.25 billion in September 2014. Kroger reported a TTM revenue of $94 billion in October 2012 that grew to $99.17 billion in October 2013 and $106.48 billion in October 2014. Costco reported a TTM revenue of $101.22 billion in November 2012 that grew to $106.46 billion in November 2013 and $114.49 billion in November 2014.

Rivals Growing Faster Than Wal-Mart

The interesting thing is that Wal-Mart's revenue did not stand still during this period; it registered an impressive level of growth. Wal-Mart reported a TTM revenue of $464.26 billion in October 2012 that grew to $474.36 billion in October 2013 and $483.79 billion in October 2014. Basically, Wal-Mart's TTM revenue has been growing by around $10 billion a year for the past three years. That comes from a quarterly year-to-year growth rate of 2.86% a year.

What's intriguing is that the amount of revenue growth at Costco and Kroger is rivaling that at Wal-Mart. The rate of quarterly year-to-year revenue growth at both companies exceeds Wal-Mart's. Kroger reported a rate of 11.20% on Oct. 31, 2014. Costco reported a quarterly year-to-year growth rate of 7.39% on Nov. 30, 2014.

Amazon's amount of TTM revenue growth is actually exceeding Wal-Mart's. If it registers the same rate of TTM revenue growth it reported on Sept. 30, 2014-20.14% according to our friends over at ycharts.com-that means Amazon should hit the $100 billion revenue mark next year.

Basically, the buying power of Wal-Mart's three biggest rivals is growing at an astounding rate. It will probably take years for any of these companies to reach Wal-Mart's size; it appears that they can now rival it in leverage. To make matters worse, their leverage will grow in the years ahead if the revenue increases continue.

Target's Dilemma

The people that should be worrying about this growth should be the folks in the executive suite at Target (NYSE: TGT). Target reported a quarterly year-to-year TTM revenue growth rate of 2.75% on October 31, 2014. In terms of revenue and the leverage it brings, they are being left in the dust by Costco, Amazon and Kroger.

Target reported a TTM revenue of $71.85 billion in October 2012 that grew to $73.81 billion in October 2013 and fell to $73.7 billion in October 2014. Target's revenue growth is stagnant, and its revenue is actually falling slightly.

It is hard to see how Target's going to be able to maintain its position as a major retail player if this continues. Four gigantic rivals now have the buying power to undercut its prices and are already doing so.

It looks as if we're moving into a new retail environment where instead of one mega retailer-Wal-Mart-dominating the landscape, we'll have four giants: Wal-Mart, Costco, Amazon and Kroger. One has to wonder how smaller players like dollar stores, Target and lesser supermarkets like Safeway (NYSE:SWY), which reported a TTM revenue of $36.76 billion and a TTM revenue growth rate of 2.58% on September 30, 2014, will be able to survive in this new world of retail.

How are other retailers supposed to compete when at least four companies gain the ability to engage in the kind of deep discounting once reserved only for Wal-Mart?

Disclosure: The author is long KR.

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.

Additional disclosure: The author conducts some retail sales through Amazon.com.