INVESTING62 KIPLINGER’S PERSONAL FINANCE^ 09/2017COURTESY WAL-MARTIT WAS THE SHOT HEARD ’ROUND
the retail world. When Ama-
zon.com (symbol AMZN)
announced its deal to buy
upscale grocer Whole Foods
Market (WFM) for $13.7 bil-
lion, investors in everything
from warehouse clubs to
grocery stores to drugstore
chains ducked for cover.
Fair enough. No one
wants to compete with
Amazon. The largest U.S.
e-commerce company has
a voracious appetite for
growth and has proved
willing to forgo profits in
pursuit of it. As a result,
Amazon has put relentless
pressure on retailers that
sell everything from clothes
to consumer electronics.
Now it’s the grocery busi-
ness’s turn. Share prices
across the sector plunged
after the deal was an-
nounced on June 16. Even
investors in drugstores got
nervous. What if Amazon’s
move into brick-and-mortar
retail gives the company
a beachhead for invading
their market, too?
Stocks of Amazon’s per-
ceived victims have contin-
ued to struggle. From the
June 15 close through June
30, shares of Smart & Final
Stores (SFS) dived 19%,
SuperValu (SVU) sank 13%,
and Kroger (KR), which
was also hit by disappoint-ing quarterly results, fell
5%. WAL-MART STORES (WMT,
$76), which derives more
than half of its sales from
groceries, declined 4%. As
for two retailers Kiplinger’s
has written about recently,
COSTCO (COST, $160) fell 11%,
but CVS HEALTH (C VS , $ 80)
bucked the trend and edged
up 0.5% as investors quickly
realized that the firm, which
has a huge pharmacy-bene-
fit business, is more than a
drugstore chain (see “Sur-
viving Amazon,” July, and
“Cheap Stocks for a Pricey
Market,” Aug.; prices are
as of June 30).
When a sector sells off
indiscriminately, bargains
often materialize. The chal-
lenge in picking winningstocks in the grocery aisles
is that food prices have been
falling. When that happens,
it’s harder to sell groceries
profitably. The long-term
drop in food prices makes
all of these stocks tricky
picks, at least at current
prices, says Kim Forrest, se-
nior analyst at the Fort Pitt
Capital Group. She advises
against picking up shares
of Whole Foods’ rivals. “It’s
too soon to go there unless
they have a ‘magic’ formula
to overcome the def lation
that is omnipresent in the
grocery business.” More-
over, she says, Amazon is
just one factor behind fall-
ing food prices. “The expan-
sion of discount grocers Lidl
and Aldi should be concern-
ing, too,” Forrest adds. “It’s
great for consumers, not so
great for shareholders.”
Against that backdrop,
companies that have low
prices baked into their DNA
are in a stronger position
than others, analysts say.
Take Costco, for example.
Analysts at Cowen & Co.
say the warehouse club has
proved itself adept at deal-ing with food-price def la-
tion throughout its exis-
tence. It already knows how
to thrive with low prices
and so-called loss leaders,
such as discounted gasoline.
Besides, its business model
goes beyond just selling gro-
ceries. It derives most of its
operating profit from mem-
bership fees. Furthermore,
part of its appeal is that you
can stumble upon discounts
while walking through the
physical store, which is
known as the “treasure
hunt” effect.No slouch. Wal-Mart also
deserves a closer look.
The world’s largest retailer,
with 4,700 stores in the U.S.,
Wal-Mart has hardly been
passive as Amazon seduces
its customers. In January,
the retailer eliminated the
$49 membership fee for free
two-day shipping and cut
the minimum order for free
shipping from $50 to $35. At
Amazon, customers need to
sign up for Amazon Prime,
which costs $99 a year, to
get free two-day shipping.
Meanwhile, Amazon is
expected to turn Whole
Foods’ 466 stores into dis-
tribution points, and there’s
no reason Wal-Mart can’t
use its own stores in a simi-
lar way. Cowen notes that
about 90% of the U.S. popu-
lation lives within 10 miles
of a Walmart store. At the
same time, the company has
made building up its e-com-
merce business a priority.
With the real estate already
in place, Wal-Mart is also
capable of selling groceries
online and delivering them
to customers’ doors. And,
of course, Wal-Mart’s motto
is “Everyday Low Prices.” ■Food Fight
Amazon is wreaking havoc on grocery stocks.
But not all of them are toast. BY DAN BURROWSSTOCKS■ IT WON’T BE EASY FOR
AMAZON TO DISPLACE
WAL-MART, WHICH HAS
4,700 STORES IN THE U.S.
AND AN AGGRESSIVE
ONLINE STRATEGY.