Wmt Food

Walmart.com

Where do you think the majority of Wal-Mart Stores' (NYSE:WMT) revenue comes from? Most people would probably think general merchandise, but that would be incorrect. Wal-Mart's biggest revenue driver is food (55%). This makes Wal-Mart a competitor to Kroger (NYSE:KR), Winn-Dixie/Bi-Lo, Publix, and many other supermarket chains.

There's a reason these names are being used. There's something going on in the Sunshine State that could be a microcosm of what will take place on a larger scale throughout the supermarket industry.

No love for the middle
Floridians, like many other shoppers across the country, either take one approach to buying their groceries or another. Either they're willing to pay a premium for high quality at a Publix or Whole Foods Market, or they're looking for value and would prefer to shop at a Wal-Mart.

As the gap widens between high-income and low-income consumers, there's isn't much demand for supermarkets targeting the middle-income consumer. This is where Bi-Lo Holdings, owner of Winn-Dixie, comes into play. And, yes, there is an investment conclusion.

Impact of Winn-Dixie's woes
Winn-Dixie recently acquired Sweetbay supermarkets. The purpose of this move was to steal share from Publix and Wal-Mart. However, Winn-Dixie has done very little to change the supermarket -- other than the signage and shopping carts. Since Sweetbay couldn't steal share from competitors before, if nothing changes operationally, then it's not going to steal share going forward. If this remains to be the case, which is likely, then foot traffic, sales, and market share will decline. This, in turn, would lead to market-share gains for Wal-Mart (and Publix).

At the moment, according to the Shelby Report, Publix owns a 43% share of the Florida grocery market. Wal-Mart owns a 29% share. And Bi-Lo lags at 14%. That 14% share might not seem like much, but if it declines, then the remaining points will go to Publix or Wal-Mart -- more to Wal-Mart since many middle-income consumers would prefer to save than add to their spending. 

Florida is just one example. This story goes well beyond the Sunshine State. Current (and likely future) consumer trends favor the high-income and value-conscious consumer. Therefore, the middle could fade on a national scale, leading to market-share gains for Publix, Harris Teeter (owned by Kroger), and Whole Foods Market on the high end and market-share gains for Wal-Mart (and to a lesser extent, Target) on the low end.

Now we have to determine the better investment: Kroger or Wal-Mart?

Heavyweights
When the largest retailer in the world goes up against the biggest supermarket in the United States, it's deemed a heavyweight bout. First look at Kroger's revenue and net income over the past five fiscal years:

2010: $76.61 billion/$70 million
2011: $82.05 billion/$1.12 billion
2012: $90.37 billion/$598 million
2013: $96.75 billion/$1.49 billion
2014: $98.38 billion/$1.51 billion

Solid results despite some inconsistency on the bottom line. Now look at Wal-Mart's revenue and net income over the past five years:

2010: $408.21 billion/$14.41 billion
2011: $421.85 billion/$15.36 billion
2012: $446.95 billion/$15.77 billion
2013: $469.16 billion/$17 billion
2014: $476.29 billion/$15.88 billion

Wal-Mart suffered a hiccup in net income in fiscal-year 2014, which was largely due to a reduction in government benefits for low-income consumers, but its Neighborhood Market stores (46 consecutive quarters of comps growth) and e-commerce segment (27% sales increase in the first quarter year over year) are showing good traction, and Wal-Mart is highly capable of cutting costs if necessary. On top of that, Wal-Mart offers a dividend yield of 2.5%, almost double Kroger's dividend yield of 1.3%.

The bottom line
Kroger and Wal-Mart are both likely to be long-term winners. They will both benefit from the widening wealth gap. If you're splitting hairs, then Wal-Mart has a slight edge due to its massive capital and more generous dividend yield. But the real point here is the likelihood of future market-share gains for both Kroger and Wal-Mart.

Dan Moskowitz 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.