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Wal-Mart (NYSE: WMT), the world’s largest employer, has long been a staple in the retail industry. When it decided to make a serious push into the grocery business, many investors feared for the fragmented grocery industry.
And for good reason, as many of the major natural and organic grocers have seen their sales crumble over the last couple years, and with that, grocery stocks have stumbled. This list includes Whole Foods Market (NASDAQ: WFM) and The Fresh Market (NASDAQ: TFM), both of which have seen their stock fall by 40% in just the last 12 months. Another grocery stock, Sprouts Farmers Market (NASDAQ: SFM), is down over 20% in the same time period.
However, Wal-Mart is starting to falter. The retailer’s stock has fallen 20% in the last year as the company admitted that e-commerce is eating into its business model. Wal-Mart is now rethinking its strategy, which includes closing stores and possibly focusing on a smaller store format.
Best-Positioned Grocery Stock
With Wal-Mart’s hiccups, will the natural foods operators be able to turn things around in 2016? Possibly, but what’s for sure is that Kroger Co. (NYSE: KR) is much better positioned than any other grocery chains to capitalize on Wal-Mart’s stumbles.
Wal-Mart’s entry into the natural and organics food business appears to have done little to phase Kroger. Wal-Mart, with a $212 billion market cap, dwarfs Kroger’s $40 billion but acquisitions and the foresight to enter the organic foods market has helped insulate Kroger.
Kroger is the largest grocery store operator in the U.S. What’s more, Kroger has grown in the second-largest retailer in the U.S., behind only Wal-Mart. It managed to beat Wal-Mart at its own game by offering merchandise beyond just food and by opening in-store pharmacies.
With that, shares of the grocery stock have muscled higher by 13% over the last year, against a market that’s been drifting lower. This grocery stock could still outperform in 2016 as it looks to capture more market share in the grocery business.
Going Natural
With Amazon.com (NASDAQ: AMZN) having already disrupted Wal-Mart, it’s now coming for the grocery business by offering online grocery delivery. However, Kroger, with its vast footprint, is ready to put up a fight.
It was able to get out in front of the natural foods movement with locally grown and natural foods. Now Kroger is looking to increase its scale even further to help combat the new competition from Amazon. Kroger only has stores in 34 states, leaving plenty of room for growth.
With that, Kroger is looking to buy The Fresh Market, which is a $1 billion market cap specialty grocer. The Fresh Market is focused on the southeastern U.S. Many of its stores are located in North Carolina, Virginia, Georgia, which could easily be linked up to Kroger’s current distribution network.
Kroger bought another southeastern-focused grocery chain in 2014, Harris Teeter. It also purchased Roundy’s last year, a midwest chain. Adding The Fresh Market to its portfolio would be just another step in its quest to grow its footprint in the higher-end grocery market.
The Fresh Market would give Kroger access to one of the fastest-growing states, Florida. This state is The Fresh Market’s largest market, where it has over 40 stores. Kroger only has one store in Florida.
Meanwhile, Kroger, trading right at 20 times earnings, is still cheaper than Whole Foods and Sprouts Farmers Market.
In the end, Kroger remains the kingmaker in the grocery industry and the best grocery stock to own. It’s well-positioned to fend off any competition from Amazon or other grocery-related startups, while also taking more share from Wal-Mart and natural grocers.
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