Costco and Target are primed for growth, experts say

According to participants in Supermarket News' 23rd annual Financial Analysts' Roundtable, warehouse clubs, specifically Costco, may be primed for a growth surge.

Wolfe Research Managing Director Scott Mushkin said that Costco's broad mix of offerings make it a big draw.

"Costco, over time, has created more and more reasons to pay for that membership," Mushkin said. "It's an incredibly positive business model."

"They are probably the best merchants of any retailer I've ever covered," added Karen Short, managing director for equity research at Barclays Capital. "They keep pushing the envelope and keep pushing their vendors, and the deals and price point just keep getting better and better."

As for BJ's Wholesale Club, Mushkin had a negative outlook. "If there were a Costco and a BJ's next to each other, it doesn't make any rational sense to actually have a membership to BJ's because the offering is so much more extensive at Costco and the savings are better," he said.

The participants also singled out Target, which they believe could be a sleeping giant in grocery if it continues to improve its fresh offering and out-of-stocks, and improves on its execution. The panel cited Target's strong private labels and the company's ability to develop innovative departments and merchandising.

Walmart to increase hourly wages, expand parental benefits, close 63 Sam's Club stores

Walmart said earlier this month that it plans to increase its starting wage for all hourly workers in the U.S. to $11 per hour , pay a one-time bonus of up to $1,000 to select employees, and expand benefits for parental leave.

The increased starting rate is scheduled to become effective in February for all Walmart, Sam's Club, supply chain, e-commerce and home office hourly workers. The bonuses, which will range from $200 to $1,000, are for workers who don't benefit from the hourly salary increase.

Walmart President and CEO Doug McMillon said in a blog post that the company is in the "early stages of assessing the opportunities tax reform creates for us to invest in our consumers and associates to further strengthen our business, all of which should benefit our shareholders."

Karen Short, an analyst at Barclays Capital, estimated that tax reform could generate about $4.3 billion in cash flow for Walmart. With the salary hike and increased benefits costing about $700 million plus the incremental cost for expanded parental leave and adoption benefits, Short thinks that about $3 billion per year will be available for the company to invest in lower prices, technology and shareholder returns.

In related news, Walmart said the company plans to close 63 Sam's Club warehouse stores in the next several weeks, with about 10 of the locations to be converted to e-commerce fulfillment centers.

Decline in traffic at Whole Foods described as "staggering"

A recent Barron's story reported that traffic at Whole Foods has declined by 3% in the past 18 months, which translates to 12 million transactions, or the equivalent of 88 lost transactions per day, per store (assuming the average customer spends $36 per store trip).

"... The magnitude of the traffic declines, when discussed in numbers (not %) are staggering," according to Barclay's analyst Karen Short. "To be more specific, as most retailers know, once traffic has been lost, those patterns rarely reverse."

Kroger seems to be the main culprit, as its organic food sales are now about the same as Whole Foods' organic food sales (although it has many more stores). Plus, nearly half of all Whole Foods stores are within three miles of a Kroger, which typically has cheaper prices for natural groceries.

Trader Joe's price investments widening the gap with Whole Foods

According to an analyst, Trader Joe's may be widening its price advantage with Whole Foods. Karen Short of Deutsche Bank Securities said in a report recently that a Trader Joe's in the New York market had a total price advantage of 26% over a neighboring Whole Foods Market across a basket of 77 like items. In fact, Trader Joe's prices were cheaper on 60 of the 77 items checked.

Overall, Trader Joe's prices were 30% cheaper on perishables and 24% cheaper on non-perishables. In addition, Trader Joe's had a 15% advantage in overall prices versus Whole Foods' private label items.

Short said the widening price gap may be the result of a round of price investments by Trader Joe's, which recently reached the 500 store mark. The company made a similar round of price investments in 2013, when they reached the 300 store mark. That event in 2013 garnered a response by Whole Foods, which lowered prices to remain competitive with its rival.

Property worth $4.4 billion in Supervalu deal

In a Wall Street Journal story published earlier this week, Karen Short of BMO Capital Markets estimates the property value of the real estate bought by Cerberus Capital Management and its partners from Supervalu to be worth $4.4 billion. The partnership group agreed to pay $3.3 billion for Albertsons, Acme, Jewel-Osco, Star Market and Shaw's grocery stores.

According to the article, about half the 877 stores to be purchased are company-owned or subject to ground leases.

Cerberus' partners in the deal - Kimco Realty, Klaff Realty, Lubert-Adler and Schottenstein Real Estate Group - are all real estate companies, and are the same partners that teamed with Cerberus in 2006 to purchase 650 Albertsons stores. The group sold off some of those stores, closed others and kept several in operation. And they reportedly earned significant profits.

According to Kimco COO Mike Pappagallo, "Even though we recognize that the benefit here is primarily improving the overall operation of the business, we're comfortable with the fact that the real estate value we have, at minimum, supports the purchase price."