Sector Spotlight: Amazon's grocery expansion changes consumer staples landscape

Business Insider

a day ago

Welcome to the latest edition of 'Sector Spotlight,' where The Fly looks at a new industry every week and highlights its happenings.
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CONSUMER STAPLES NEWS: Amazon's (AMZN) most direct rival in handling ad sales across the web, the Trade Desk (TTD), could be in danger of losing one of its most valuable clients – Walmart (WMT), The Information's Catherine Perloff and Theo Wayt wrote. Last year, Walmart renegotiated its four-year-old arrangement with the Trade Desk, under which advertisers buying spots on the Web using Walmart shopper data for targeting have to use the Trade Desk's technology. The new arrangement is no longer exclusive, according to a person with knowledge of the situation.
Walmart is expanding its 10% employee discount to include nearly all grocery purchases, effective immediately, in an effort to help employees with rising grocery costs amid inflation, The Wall Street Journal's Sarah Nassauer reported. Extending the discount to more goods year-round is 'one of our most requested benefits,' said Walmart Chief People Officer Donna Morris in a letter to staff Wednesday. Amazon's Whole Foods currently offers workers a 20% discount on most in-store purchases on the first day of employment, while Target (TGT) offers a 20% discount on fresh and frozen produce and some store brand items and a 10% discount on most other goods, available on the first day of employment.
Manchester United (MANU) announced a new three-year partnership with Coca-Cola (KO), naming Coca-Cola as the club's Official Carbonated Soft Drinks Partner in the United Kingdom and Europe. The agreement includes pouring rights for Coca-Cola, Coca-Cola Zero, Diet Coke, Fanta, Fanta Zero, Sprite, Sprite Zero, Dr Pepper, and Dr Pepper Zero. Marc Armstrong, chief business officer at Manchester United, said: 'Coca-Cola and Manchester United are two of the world's most iconic brands, each with a proud history of bringing people together. We are forming a partnership that will go beyond matchday refreshments at Old Trafford – creating engaging and memorable experiences that connect our fans to the club in fresh and impactful ways.'
Amazon.com announced customers in more than 1,000 cities and towns can now order groceries with their Same-Day Delivery orders, with plans to expand to over 2,300 across the U.S. by year-end. Amazon said: 'This marks one of the most significant grocery expansions for Amazon as the company introduces thousands of perishable food items into its existing logistics network that is already optimized for speed and efficiency. Customers will have the option to order produce, dairy, meat, seafood, baked goods, and frozen foods, alongside the millions of items such as everyday household essentials, electronics, fashion, home and garden, and more already available for Same-Day Delivery on Amazon.com.' Shares of competitors Kroger (KR), Instacart (CART), Walmart and Target were all lower ahead of the market open on Wednesday following Amazon's announcement.
Costco announced July comparable sales were up 6.4%. The company reported net sales of $20.89B for the retail month of July, the four weeks ended August 3, an increase of 8.5% from $19.26B last year. Net sales for the first 48 weeks were $248.35B, an increase of 8.1% from $229.81B last year.
ANALYST COMMENTARY: BofA downgraded Target to Underperform from Neutral with a price target of $93, down from $105. Target is now underperforming Walmart on a comparable sales compound annual growth rate vs. 2019 and digital trends 'look very challenged,' the analyst told investors. The firm sees increasing longer-term sales and margin risks given slowing digital sales growth, a lack of scale in digital advertising and third-party marketplace, elevated tariff, pricing and merchandising headwinds, and increasing competitive threats from both Walmart and Amazon, the analyst added.
Morgan Stanley, which has an Overweight rating and $300 price target on Amazon shares, believes the company has been losing 'modest' online grocery share to Walmart, DoorDash (DASH), and Uber (UBER) due to price, selection, convenience, delivery, and pick-up options, and thinks this category expansion and effective price reduction is an important signal of increased investment to drive durably faster growth. The grocery opportunity is large, but the extent to which Amazon increases competition could eventually challenge growth or profitability of peers, the firm argued, noting that among all grocers, Walmart has the most demonstrable track record of share gains and that it has been preparing for this risk over the last decade.
Evercore ISI believes this expansion deepens Amazon's customer engagement by strengthening a high-frequency purchase category into the Prime ecosystem, increasing stickiness and customer lifetime value. The deeper integration of groceries with Amazon's vast general merchandise offering positions the company more aggressively against competitors like Instacart, Walmart+. By setting a relatively low free delivery threshold of $25, Amazon applies pricing pressure that may challenge rivals' ability to compete on convenience and cost. Given that this segment is a $1T-plus market in the U.S. and perhaps $2T-plus across all of Amazon's global markets, there should be a large growth opportunity here, Evercore added. The firm has an Outperform rating on Amazon with a price target of $280 on the shares.
Oppenheimer increased its price target on Walmart to $115 from $110 and reiterated an Outperform rating on the shares ahead of quarterly results. Following a more difficult backdrop to start the year due to unexpected tariff and expense headwinds, the firm believes a positive guidance revision cycle could again materialize soon. Oppenheimer is lifting its Q2 constant currency sales projection to reflect the potential for stronger top-line momentum than it envisioned a few months ago. The firm is now anchored to the high-end of management's FY25 guidance range of $2.50-$2.60. Oppenheimer believes the company could lift FY25 financial targets either with the upcoming Q2 report or with the Q3 print.
Benchmark upgraded Instacart to Buy from Hold with a $67 price target. The company's Q2 results and outlook, including a GTV growth inflection, suggest 'it may not matter' whether the company is not sustaining category share, as the firm suspects to be the case, since the company is riding 'a secular tailwind gaining momentum each quarter,' the analyst noted. Instacart continues to benefit from competitive pressures facing regional/smaller grocers that need its platform to compete with mass merchants and online players like Walmart and Amazon Fresh, so the trend appears sustainable, the analyst contended.