Wal-Mart Shoppers Can't Get No Satisfaction

Even though Wal-Mart's customers are dissatisfied, are they staying away?

Jun 6, 2014 at 9:00AM

Wal Mart

Source: Wal-Mart's annual report

Since its founding in 1962, Wal-Mart (NYSE:WMT) has built up quite a reputation for itself. People either love it or hate it, not leaving much room for middle ground. Unfortunately for the retailer, the detractors prevailed in a May Consumer Reports survey on grocery store customer satisfaction. Wal-Mart took last place out of 55 grocers based on the experiences of nearly 30,000 survey participants.

If weak customer satisfaction was the only battle Wal-Mart was fighting, surely it could overcome the stigma. And with the lowest prices in town, does Wal-Mart even care? With grocery sales comprising more than 50% of last year's almost half a trillion dollars in total revenue, it should. 

Unfortunately for Wal-Mart, the survey results are just the latest in a heap of negative publicity that the retailer has received of late, not the least of which involves low employee wages and controversial executive pay packages. And with competition among grocery chains only intensifying, with stores including Sprouts Farmers Market (NASDAQ:SFM) and Costco Wholesale scoring top points in the customer satisfaction poll, Wal-Mart should be bringing its A game. So can Wal-Mart weather this storm, or should investors go elsewhere? 

What's wrong? 
Chief among the complaints of Wal-Mart shoppers was the scarcity of open checkout lines. Shoppers were also unimpressed with inventory shortages and sub-par price-labeling. For all its shortcomings, where Wal-Mart manages to shine is with its everyday low prices, and this could be its saving grace. In 2013, more than half of survey respondents (58%) who broke up with their grocery store did so on account of price. That's up 15% from 2011 levels. This bodes well for Wal-Mart. 

Sales impact
Investors want to know if Wal-Mart's failure to satisfy customers is taking a toll on sales. The answer is yes and no. 

Let's take a look back first. Shoppers in the fourth quarter ended in January began displaying their displeasure with their pocketbooks, Wal-Mart's U.S. grocery same-store sales staging a low-single-digit drop and weighing on the retailer's overall U.S. comparable sales.

Wal-Mart must have taken notice, with first quarter (the most recent quarter for which the retailer reported) food sales showing a positive comp while the consumables business -- grouped in the company's grocery category -- weighed on results.

Meanwhile, Sprouts has been growing its market share at stores open for at least a year. The company in its first quarter reported a 12.8% jump in same-store sales. That momentum is set to continue, with projections for 8% to 9% same-store sales growth for the second quarter. 

Sprouts, having generated $2.4 billion in fiscal 2013 sales, is a mere baby compared to its larger competitor. Like Wal-Mart, however, Sprouts uses value to drive its top-line performance. Sprouts grew its customer traffic and average basket size by 6.5% and 6%, respectively, in its first quarter, which surpassed a near 4% traffic increase at Wal-Mart's smaller Neighborhood Market stores in Q1.

Kink in the armor
In fact, by some measures, Wal-Mart's grocery market share appears to be growing.

According to [Nielsen], we gained 20 basis points of market share in the measured category of 'food, consumables and health [and] wellness/OTC' during the 13-weeks ended [April 27, 2013]. -- Wal-Mart's Q1 earnings press release

But that was then, and this is now. One regional market where Wal-Mart is showing some cracks in its performance is in Texas. In Dallas in particular, where rival Sprouts has a growing presence and where Wal-Mart has some 120 stores, Wal-Mart's approach to a growing population and fierce grocery rivalry has been to expand. It hasn't paid off. 

So far in 2014, Wal-Mart's share of the Dallas-Fort Worth, Texas grocery market took a hit, falling below 2011 levels to 27.1% and down from 2013's 27.8% share, according to The Dallas Morning News. It's one market and not necessarily a litmus test, but it is important, with Dallas/Fort Worth, Texas generating some $14 billion and rising in annual grocery sales. 

Wal-Mart is also making a push into food delivery as well as the grocery pick-up business, with plans to launch its maiden "order online, pick-up grocery depot" in Bentonville, Ark. later this year. But there is still an element of customer service involved in grocery pick up (customer orders online, picks up at store) on which Wal-Mart must  execute. Some of those earlier complaints -- long wait times (albeit in the car and not a check-out line), inventory shortages, and opaque pricing -- could potentially carry over to pick-up and hinder its results.

Sizing it up
Talk about a David vs. Goliath situation. Wal-Mart's $248.2 billion market cap trumps that of Sprouts at $4.1 billion. But the question becomes whether you want to invest in a global retail phenomenon with exposure to the grocery market or a pure play like Sprouts that is chugging along quite nicely.

With Sprouts, you may need to accept higher costs for a while as the company invests in expanding its presence across the U.S.; selling, general, and administrative expenses jumped 20 basis point in the first quarter. But in exchange you get a company that's adding as many as two dozen stores this year and recently lifted its full-year sales and profit guidance. 

As for Wal-Mart, it returned approximately $2.2. billion to shareholders in its first quarter through share buybacks and dividends, unsatisfied customers notwithstanding.  

Bottom line
The thing about Wal-Mart is that it's practically too big to fail. With close to 11,000 retail locations across the globe, it employs more than 2 million people. And Wal-Mart has some bright spots. It is pledging to give Amazon.com a run for its money in e-commerce, where the Arkansas company's sales are growing, and it is making an expansion push in growth markets like Mexico and Brazil.

Let's face it, the worst retailer for customer satisfaction is a designation that no retailer wants to have, but while customers have complained, they haven't really made a mad dash for the exits, either. Comparable sales are certainly something for investors to monitor, but at the moment Wal-Mart's low prices seem to be prevailing.

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Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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