The grocery wars have been heating up, and Walmart (WMT) looks poised to take the lead, while Kroger (KR) will lag behind, according to Deutsche Bank.
On Tuesday, the firm upgraded Walmart to a Buy rating from a Hold and raised the price target to $113 per share, which represents a 19% increase from Tuesday’s opening price.
“The retailer is reaping returns on the many years of investment in e-commerce and customer service, and we believe the company is now in position to accelerate market share gains in grocery,” analyst Paul Trussell said in a note to clients on Tuesday.
In 2017, Walmart came in second place to rival Amazon (AMZN) in the grocery wars, accounting for about 11% of the market. However, “we believe the retailer could surpass Amazon by end of 2018…WMT has positive momentum with robust underlying trends in the core business, and an expanding online platform that positions the company as a legitimate contender against AMZN in the long-term.” Trussell said.
In an attempt to beef up its online grocery delivery presence, Walmart started free two-day shipping in January of 2017, and partnered with various delivery services like Uber, Lyft, DoorDash and Postmates. According to Deutsche Bank, these initiatives will help “Walmart reach ~17% online grocery market share by 2025.”
Kroger is in a “position of weakness”
Meanwhile, another player in the space looks relatively weak compared to its more dominant rivals: Kroger.
The firm downgraded the grocery giant from a Hold to a Sell and lowered the price target to $24 a share, about 18 percent lower than Tuesday’s opening price.
Despite Kroger’s recent push into e-commerce, Trussell stated that in order to compete with Walmart and Amazon, the grocery giant needs to get more aggressive and speed up investments.
“In a period of rapid change in the grocery sector, it will likely be quite challenging to grow profits while playing from a position of weakness,” Trussell explained.
Kroger’s inability to meet earnings expectations for the past four years is also a major warning sign according to Trussell. Wall Street analysts are expecting Kroger to report third quarter earnings of $0.43 per share.
“We compare WMT – a winner in the space, in our view – who is finally poised to grow U.S. EBIT [earnings before interest and taxes] dollars for the first time in over four years versus KR’s current goal to add $400M to EBIT over the next two years despite being at more nascent stages of investment.”
Walmart shares were trading around 2% higher midday Tuesday, while Kroger shares sank about 5%.
