Target and Wal-Mart Make Grocery Retailing Inroads

Recent research shows that consumers now favor big-box retailers over traditional grocers for their food-shopping needs. If this is true, then it could provide a substantial investment opportunity. However, look closely at the sampling and wording for this study.

Feb 25, 2014 at 5:30PM

King Retail Solutions and the Terry J. Lundgren Center for Retailing at the University of Arizona teamed up to find out where most consumers shop for food these days. The study concluded that Target (NYSE:TGT) and Wal-Mart Stores (NYSE:WMT) have become popular destinations for food.

If you were only to read the paragraph above, then you would might conclude that Target and Wal-Mart have tremendous potential. Can you image the sales increases if traditional grocery stores were to fail and everyone began opting to shop at big-box retailers for their food-shopping needs? Unfortunately for investors, it's not that simple. While there is definitely some truth to this study, you might want to avoid relying on it too heavily. Here's why. 

Numbers have the potential to lie
When studies entail large samplings, numbers often tell the truth. However, for this study, which is appearing at various places online and might sway investors, only a little more than 1,200 people were surveyed. That's 1,200 people out of 313.9 million people living in the United States. While the study did reach across all three key age demographics -- Baby Boomers, Millennials, and Generation X -- that's not nearly enough of a sampling to sway your investment decisions. There's yet another reason to use caution when looking at these statistics.

The study showed that 77% of people surveyed bought food from non-grocers in 2013, and 96% of people surveyed plan on buying food from non-grocers in 2014. Those are large percentages, but assuming you currently go to a traditional grocery store for your food-shopping needs, did you happen to also visit a big-box store, convenience store, or dollar store over the past year for food? If you're like most people, then the answer is yes. Notice that the study doesn't refer to all or the majority of purchases, just whether or not a consumer purchased (or plans to purchase) food from a non-grocer.

However, the study still holds a little weight.

Numbers that matter
Perhaps the most interesting stat for this study is that 83% of people who make at least $150,000 per year shopped at a big-box retailer for food over the past year. This shouldn't come as a surprise for Target, which aims for wealthy consumers who are looking for discounts.

For Wal-Mart, it's somewhat surprising, but there are two key reasons for this being a reality. One is convenience -- almost everyone living in the United States is within driving distance of a Wal-Mart. The other reasons is that, also according to the study, many of today's consumers rate price (and convenience) as more important than quality. Excluding Baby Boomers who earn $50,000 or more and live in rural areas, this also includes wealthy consumers.

Ironically, only 73% of people who earn $25,000 or less shopped at non-grocers over the past year. While there is no proof as to why this "trend" is taking place (keep in mind this study is only based on 1,200 people), an educated guess would be that some of these consumers are opting for dollar stores, which are often located in lower-income areas.

This ties into the most popular (or most favorite) non-grocers for consumers. According to the study, they rank in the following order: Target, Wal-Mart, Walgreen (NASDAQ:WBA), CVS, Costco Wholesale, Dollar General (NYSE:DG), farmers markets and food stalls, Dollar Tree (NASDAQ:DLTR), 7-Eleven, and Kmart of Sears.

Walgreen and the dollar stores are enticing investment options, but not just for this reason. CVS recently announced that it will soon halt the sale of tobacco products. Considering that many CVS and Walgreen stores are located close to one another, smokers will soon take their business to Walgreen. This will likely lead to market-share gains and increased sales for Walgreen.

For Dollar General and Dollar Tree, today's low-income consumers are struggling more than they have in the past due to the end of the payroll tax holiday, a reduction in food stamp benefits, and a lack of wage growth opportunities. Therefore, these consumers are going to go for the lowest-priced goods possible. While Dollar General has more geographical exposure than Dollar Tree, the latter sells everything for $1. This caters best to the low-income consumer.

The Foolish takeaway
Target and Wal-Mart have the potential to steal market share from traditional grocers, but if you read a study online regarding consumer trends, be sure to look at the sample size, as in how many people are being surveyed. With only 1,200 consumers being surveyed for this study, you might not want to put too much weight into it. Also notice the wording, "bought groceries from a non-grocer in 2013." This would likely to apply to most people. It doesn't mean these consumers bought groceries from a non-grocer most of the time. All of the above information should be looked at as one small piece of information to put toward a potential investment decision. Please do your own research prior to making any investment decisions. 

Want to invest in the next Wal-Mart? 
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and CVS Caremark. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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