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

Consumer Reports just conducted a study on grocery stores, which revealed some interesting and important consumer opinions. These consumer opinions could wreak havoc on Wal-Mart over the long haul. Other companies stand to benefit.

Apr 5, 2014 at 10:00AM

Wmt Grocery

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.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale and Whole Foods Market. 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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