6 Companies Battling for Americans' Grocery Money (Update1)
BOSTON ( TheStreet) -- Consumer-staples retailers are undergoing abrupt changes to their industry. The latest example is the battle over Americans' grocery purchasess being waged by traditional supermarkets, dollar-discount stores, big-box department stores and wholesale clubs.
The fight has grown heated as more retailers of decidedly different stripes are offering refrigerated food products and, in some cases, prepared and fresh foods, which is contributing to a shift in buying habits.
"The latest trend shows consumers making more trips to drug, club and dollar stores, while cutting back on trips to Wal-Mart(WMT) and traditional grocery stores," said Joseph Agnese, an S&P Capital IQ analyst.
And that put a chill into Wal-Mart, the nation's largest grocer. The company said last week it will spend $1 billion this year to cut prices on such goods and is considering allocating another $1 billion to reducing prices next year.
The strategy behind this grab for groceries is based on the premise that customers coming in to, say, a discount store for the reduced costs on one product segment or to a drug chain store to pick up a prescription, will then fan out to other parts of the store and buy groceries, given the convenience, and then maybe make an impulse purchase of higher-profit items.
"Consumers today shop a multitude of formats based on need," Agnese said. "There are many types of trips consumers make, from convenient fill-in trips, such as to a dollar store or drug stores, to one-stop shopping to stock-up trips at traditional supermarkets and clubs.
"The struggle today is to maximize share of wallet by trying to fulfill as many of the consumers' needs as possible and to do it well," Agnese says of the different types of consumer staples retailers.
"For supercenter operators, such as Wal-Mart and Target(TGT ) , food is the customer magnet that sharply increases the store's overall sales volume, taking customers away from traditional grocery stores," he said.
And now "dollar stores are adding consumables, especially frozen food, in an effort to drive traffic into stores," said Agnese, referring to companies such as Family Dollar Stores (FDO) .
Wal-Mart has been hurt by this, hence the aggressive move to cut prices to gain back store traffic after its disappointing results in its most recent fiscal quarter ending in January. It reported that U.S. comparable-store sales grew only 1.5%, below analysts' estimates of 1.8%, despite the start of the price-cutting strategy. That prompted S&P to cut its rating to "buy" from "strong buy" on its shares in expectation of slow earnings growth on the year.
In contrast, Target reported that February same-store sales grew a huge 7%, after increasing 4.3% in January.