Most Consumers Don’t Like Wal-Mart but Shop There Anyway

Wal-Mart Stores (NYSE: WMT  ) relies heavily on groceries for sales. In fact, approximately 55% of domestic sales stem from its grocery segment. That being the case, Wal-Mart is going to aim to deliver in this area in every way possible. While Wal-Mart might be trying its best, it's still not good enough, at least according to consumers. Consumer Reports recently conducted a study of the top 55 domestic grocers, asking the opinions of 27,708 grocery shoppers. Their responses clearly indicate that Wal-Mart needs to improve.

This negative consumer opinion could hint at a long-term problem for Wal-Mart. If this trend persists while grocers like Whole Foods Market (NASDAQ: WFM  ) and Sprouts Farmers Market (NASDAQ: SFM  ) continue to expand geographically and gain popularity, Wal-Mart could lose market share.

Interesting and telling numbers
One of the most interesting results from this study was that despite participants rating Wal-Mart the lowest of all 55 grocers for overall experience, 28% of them shop there anyway. However, this is a negative for Wal-Mart.

The primary reason people still shop at Wal-Mart, based on the survey, is price. We all know that Wal-Mart is known for its low prices. I would also assume that convenience plays a big role. For most people living in the United States, it's much easier to find a Wal-Mart than a Whole Foods Market or Sprouts Farmers Market.

The dilemma for Wal-Mart is simple. Costco Wholesale (NASDAQ: COST) scores higher for customer experience (4th overall) while also offering lower prices. Actually, based on the Consumer Reports study, Costco offers the lowest prices of all grocers on the list.  

If this news spreads, which it should given the popularity of Consumer Reports, then shoppers will realize that paying a $55 membership fee at Costco is worthwhile. The costs savings should more than offset the annual membership fee, especially since consumers spend an average of $6,000 per year on groceries. But what about convenience?

Costco warehouses are often found in or around high-income areas. Therefore, it's not a major threat to Wal-Mart right now. The same can be said for Whole Foods Market. However, Whole Foods Market always has the option to lower prices and alter its site-location strategy. Sprouts Farmers Market positions its stores in primarily middle-income areas, which could make it a future threat to Wal-Mart. Worth noting is that Sprouts Farmers Market, Publix, and Wegmans received the fewest customer complaints of all 55 grocers. 

Getting back to Wal-Mart, the biggest complaints included too few checkout lines, out-of-stock items, and spotty price labeling. Fortunately, Wal-Mart just announced that it will aim to improve its in-store merchandising, which it sees as a $3 billion opportunity. This might help increase the top line and lower costs. But without improved checkout-line efficiency and customer service, it's still going to find itself fighting an uphill battle.

Most growth potential
When it comes to the companies mentioned on this list, Wal-Mart certainly doesn't own the "most growth potential" title. That would belong to Sprouts Farmers Market. First consider top-line growth comparisons over the past five years:

SFM Revenue (TTM) Chart

Sprouts Farmers Market revenue (trailing-12 months) data by YCharts

But that doesn't mean much without net income growth, right? Fortunately, Sprouts Farmers Market delivers in this area as well:

SFM Net Income (TTM) Chart

Sprouts Farmers Markets net income (trailing-12 months) data by YCharts

Sprouts Farmers Market is trading at 45 times forward earnings, making it more expensive than Whole Foods Market, Costco, and Wal-Mart, trading at 27, 22, and 13 times forward earnings, respectively. Also consider that Sprouts Farmers Market will likely suffer some growing pains. If you're looking for growth potential yet you don't want to take on as much risk, then you might want to dig deeper on Whole Foods Market or Costco.

The Foolish bottom line
Wal-Mart always seems to find a way to fix its problems, at least from a financial perspective. For instance, the company's recent initiative to take advantage of a $3 billion opportunity via improved in-store merchandise should help Wal-Mart impress investors. On the other hand, the opinion of consumers on Main Street might eventually catch up to Wal-Mart, especially if they find better shopping options like Whole Foods Market, Costco, or Sprouts Farmers Market thanks to geographical expansion.

For now, Wal-Mart's 2.5% dividend yield appears to be very safe, and Wal-Mart is a big ship to turn if the economy suffered further, which adds resiliency. Additionally, Wal-Mart is looking for growth by opening more small-box stores.

Conclusively, Wal-Mart is good at correcting itself and finding avenues to increase top- and bottom-line potential. On the other hand, you can't ignore the company's reputation in consumers' eyes. Unless Wal-Mart alters that perception, it could face a significant long-term threat. Please do your own research prior to making any investment decisions.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2904323, ~/Articles/ArticleHandler.aspx, 9/5/2015 2:14:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 3:59 PM
COST $138.48 Down -2.00 -1.42%
Costco Wholesale CAPS Rating: *****
SFM $20.70 Up +0.04 +0.19%
WFM $32.02 Down -0.34 -1.05%
Whole Foods Market CAPS Rating: ****
WMT $63.89 Down -0.97 -1.50%
Wal-Mart Stores CAPS Rating: ***