Motley Fool Hidden Gems Investing - Grab Your Groceries

Episode Date: August 17, 2023

More of us are going to Walmart, but Aldi just made a big move that has put it on the radar of Big Grocery. Bill Barker and Deidre Woollard discuss: - Whether Walmart is learning from grocers or grocers are learning from Walmart. - If an Aldi acquisition spells the end of the beloved Winn-Dixie brand. - Why Amazon has struggled with getting grocery right. Companies discussed: WMT, TGT, KR, ACI, AMZN Host: Deidre Woollard Guest: Bill Barker Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. The grocery wars are on. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Bill Barker. Bill, how are you today? I'm well. Thanks for asking. Glad to hear it. We're sort of wrapping up retail week here with Walmart. For me, it's the biggest bellwether. On the show yesterday, we had Jason Moser, Dylan Lewis, they talked Target. The news was not so great for Target, but Walmart delivered today. So literally in this case, not only were comparable sales up 6.4%, but e-commerce was up 24%. Feels

like it's been a bit of a long journey for Walmart and e-commerce, but I don't know, I think they may have figured it out. What do you think? Yeah. Up 24% is an awfully good number, and supportive of the continued growth here, the opportunities that they have, somewhat later to the game than they might have been. But that just gives them more room to grow from here. I feel like the Jet.com thing, when that happened, there was a lot of, like, oh, that's a lot of money to pay. But eventually, it all worked out. Yeah. I think it's the future, it's the present. They were about one step in the past

for a while there behind the game on e-commerce. But I don't think that going forward, they're going to be anything other than a major player. Yeah. I'm excited to see how much their membership has grown as well. They're not prime yet, but you can't count them out, either. They're not prime. No, but they're doing just about everything right now. It's reflective in the stock, which was hitting all-time highs last week. Sold off a little bit today, despite the good earnings report and upgraded guidance. A lot of good news, but when you're at an all-time high, then Maybe you are just happy to stay close to it after you've reported earnings.

Yeah, this season has been interesting with good results, and then the market is maybe not such a big fan. But I think one of the differences between Walmart and Target is groceries. Walmart is the biggest grocer, around 25% of the market share, depending on who you talk to. We all go to Walmart for groceries, I think, or at least some of us do. but it's not the greatest grocery experience I've ever had. But I am noticing that there have been improvements lately. Anecdotally, at my local Walmart, I'm seeing more prepared meals, I'm seeing a bigger variety of produce. I think they've got some advantages over other grocers that make it more profitable, because really, they've got the whole rest of the store to play

with. But is it learning from other grocers that are stepping up their game? Well, I think that with 25% of the market, which is, I think, about as big as the next four biggest grocery operations in the country, everybody is learning from Walmart. They do have the opportunity to sell a lot of things beyond groceries when people come in for groceries, which they're doing on a more frequent basis and a recurring basis and a loyal basis to Walmart. Walmart's picked up some ideas on loyalty and things from the other operators that have been doing this for a lot longer. But at this point, I don't think that Walmart is the one that is learning from them as much as they are from Walmart.

Interesting. The other side of that for growth is health and wellness. On the earnings call, one of the things I thought was interesting was that they talked about the role of GLP-1 So that's the prescription drugs that are like the hottest thing right now, the Wagovi, Zempik, the ones that treat diabetes and increasingly treat weight loss. I think the pharmacy aspect of Walmart is kind of interesting because Target took a different approach. They outsourced their pharmacy to CVS. Walmart has kept everything in-house. It's starting to look like an even greater player with some of their health initiatives. But what do you think of these two strategies?

Target loves its partnerships, Ulta Beauty, Starbucks, CVS. CVS, Walmart, they don't do that. What are some of the pros and cons there? Well, the pros for Walmart is, they get to keep more of the money. Well, yes, that does help. And if you can do it efficiently and do it profitably, keeping the money is what you want to do. And they've got the space to do it. And I think that they don't have the same problem at times that Target does with figuring out how to control the brand. That is, Target is trying to sell a more upscale feel to the experience while still providing competitive prices. And Walmart is price first,

very proudly so. Now, I think it's a nice operation to be able to sell about a quarter of all the food in the country and to sell ways to lose weight. They got you from both ends. It's like that omnipresent company in the Wall-E movie back in the day from Pixar. They do everything. I think that this just It allows them to both sell more food and more ways to lose the fat that you might pick up from eating too much of Walmart's or anybody else's food. When you factor in the clinics as well, they didn't talk a lot on this earnings call about their initiatives in clinics and things like that.

But it's becoming a bigger part of things as well. And you just mentioned a good point, which is Walmart has so much square footage that they get to be a little bit flexible. So with the e-commerce thing, they've sort of reconfigured some of their stores. You know, they're using less of the floor space for actual people in the grocery store because there are sometimes less of them using more of it for faster delivery and things like that. So do you think that over time we'll see Walmart keep the same footprint but change up how it uses it? I think that Walmart's strategy has been to take up more and more space to go less in on the centers that are not super centers. They're more and more all the groceries and all the stuff. That's where the focus has been, rather than more urban locations which

which are not maybe offering groceries as well. They're really not looking to create smaller experiences. They've got lots of space. That allows them to try things with part of that space when some of the operations are falling behind other parts. I don't see any problem with Walmart continuing to build extremely large operations or expand the smaller ones when they can. Yeah, they've got the ones that are branded neighborhood market. Those seem to be the take on small space, but I don't think it's a huge part of the business at this point. No, and it's not where the emphasis of the future of the company is going to be, I don't think.

Yeah, I would agree with that. I want to talk for a second about a company that isn't publicly traded. I'm almost starting to wish it was. It was in the news. Aldi, they made a big deal yesterday. They're picking up about 400 Winn-Dixie and Harvey's markets from Southeastern Grocers, which seems to be sort of divesting everything. It's an all-cash transaction. This seems kind of big to me for Aldi, a move from the sort of discount grocery, kind of weird grocery, to really more traditional. Aldi's an interesting story. Their growth has been huge. In the beginning it was Aldi and Lidl. Now it's more Aldi all the way. They're on track to reach 2,400 stores in the U.S. by the end of the year. Now they've got these other stores. I think they're going to keep

them branded as Winn-Dixie's and Harvey's, but who knows? Is Aldi making a serious run at traditional grocery now? Away from, as you put it, weird grocery? Discount groceries. But you've been to an Aldi, right? It's a little weird. I've been. I think that they've got a lot of options here if the deal goes through. And that is, one, to keep the brands where they are. But also, I think a significant number of them are going to be converted to Aldi. And it's going to depend on how loyal the customers are pretty loyal to Winn-Dixie. Generations of shoppers in the Southeast have grown up with Winn-Dixie and don't want to see it go. Aldi is intelligent enough to discern

which of the locations should not be rebranded and keep the Winn-Dixie name, but they'll probably include a few more of Aldi's selections. I think that a lot of them are going to convert to Aldi, though. That would be a shame. It's like a 100-year-old brand, I think, Winn-Dixie. It's a tradition. It is a tradition. There's no plan, as I understand from the reports, to change all of them. But Aldi's a much more successful operation than Winn-Dixie is. That's got to do with management. This is part of expanding Aldi in that geography. Without eliminating the brands they're acquiring, there is some brand strength there. But let's face it, there's not that much brand strength there, or this

wouldn't be a company that went bankrupt as frequently as it did. Yeah, good point. I think the other thing that's interesting about this, too, is, Aldi is increasing their distribution centers. I think they're opening their 26th one in Alabama. So, they're sort of going after the market where Winn-Dixie already has a strength in the South. Yeah, I think this is a great expansion in terms of the geography. I see this, again, if it goes through, not everything goes through, Not everything that's announced necessarily gets to fruition. We'll see who rises up against this. Let's talk about that, because there

is another big deal in big grocery, and it's just going on and on. That's Kroger's $25 billion deal to acquire Albertsons. That has seen a lot of pushback from some of the unions And earlier this week, seven secretaries of state, they asked the FTC to block the deal. So, if that deal doesn't happen, does that mean maybe the Aldi deal doesn't happen either? There are separate deals, and I think that Winn-Dixie is more in need of aid than Albertsons was. A world in which Albertsons and Kroger's continue on their way, nobody really suffers from that. The combination is going to work for some small efficiencies that Kroger's would realize. If this deal doesn't go through, I think you just continue to watch the decline of Winn-Dixie

and Harvey's. They have already shuttered a lot of operations. I think that the Aldi deal is more likely to go through. FTC is willing to listen to anybody that wants a deal blocked. This is a sympathetic ear to that cry these days, not just in the tech space, but as we see also in the grocery. I feel like with the Kroger-Albertsons deal, if it doesn't go through, it's not great for Kroger, but I don't think it's going to hurt Kroger. I think it's more likely to hurt Albertsons. That's really the loser in that, I think.

Yeah. Usually, when you're selling, you're selling for a good price. Yes, for a good reason. At least, in management's opinion, a good price. I would agree, if this falls through, then Albertsons is the stock that you would not want to be along with. Yeah. I like Kroger in general. Some of the digital initiatives they've done are interesting. They've got an innovation center. They seem to be testing out some things that I like. It's hard for them.

They're competing against the Walmarts of the world, and that is not an easy thing to do. No, no. Walmart is an exceptional operator. Grocery is a very, very low-margin business. You survive on scale, largely, although there are plenty of small operations in cities and things that are still mom-and-pop shops, but they tend to survive until mom-and-pop let them go. There aren't dozens of buyers looking for those operations afterwards. I think that Kroger's is going to be around and competing well. Lots of loyal fans.

There are still dozens of brands around the country that have got their 2%, 3%, 1% in different geographies. Kroger's does a lot better than that, of course, as does Albertsons. the combination would provide a decent competitor to Walmart. Still much smaller, but closer to it than anybody else. Yeah, I think consolidation is absolutely part of the story. As you mentioned, small towns increasingly have less and less of those grocery stores. There's more Walmarts, more Dollar General. Dollar General is now trying to do something that looks a little more like a traditional grocery store. The question I have is, you just mentioned the margins. Grocery is this tricky business. It's this

low-margin business. And yet, it's one Amazon really wants to get right and doesn't quite seem to get right, because it's trying Amazon Fresh, and it's been retooling those stores. I think they just laid off a bunch of workers. Some of those stores are closing. On the other hand, they're trying to push fresh delivery, allowing non-prime members to order Amazon. Can Amazon win at grocery outside of Whole Foods, of course? And as investors, do we need it to or want it to? I'm not sure if, you know, psychically we want it to. And from this perspective, has anything changed less in the last 50 years that is as central

to the life experience as grocery shopping? It is basically the same as when I was being taken to the grocery store by my mother 50-some years ago. It looks awfully similar. Yeah, you go to Whole Foods, there are more fresh counters. There's a sushi operation there some of the time. But the middle of the store, which is where most of the stuff is being sold, is almost identical to what it was 50 years ago. You do occasionally choose to use self-checkout. But the rest of the experience is very, very similar to what it was 50 years ago. Amazon wants to reimagine it, and nobody's along for the ride yet. Webvan came and went 25 years ago. They were going to revolutionize,

they were going to be the Amazon of grocery delivery. That's just not how people are continuing to get their groceries, are they? A little bit. I don't know. One of the things I always check for myself as an investor is my age. Is it an age thing? I talk to a lot of younger people, and a lot of younger people don't go to the grocery store anymore. They're full-on delivery. And I think one of the things that's interesting about being all delivery is that most of your experience doesn't come from the end caps or things like that anymore. You're not having the discovery part of it in a physical way.

You're having the discovery of it in an online way. So, it really kind of changes the game a bit. It depends how much fresh produce you're getting, how much import. That can be an unfortunate experience. How much import you put on selecting that yourself, or whether you want to just take a shot on whoever delivers it to you, chooses the same way you would have chosen. It is just, to me, the case that Amazon has been working on this for a long time. It's not just grocery. They haven't succeeded on any physical locations.

Not quite, no. Amazon Books, Amazon Go. They've tried fashion. It's not working out. Whatever all these things are, are not things that have delivered the Amazon superior operations to a physical location. They're tests, and Amazon is perfectly willing to burn some money on testing something that might turn out to be big. They don't go in huge on these things, but none of them have grown, have they? No, not really. Grocery is trickier than it looks. Apparently. Nobody has really changed things that much. I mean, Walmart's the biggest change

in grocery in the last four years. Yeah. And they just keep going. Well, thank you for your time today, Bill. Thank you. as always people on the program may have interests in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear i'm deidre woolard thanks for listening we'll see you tomorrow