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Grocery Will Feed the Big Dogs This Holiday

Grocery and food will give the biggest mass merchants a leg up on the competition this end-of-year season.

Bank of America analyst Robert Ohmes has Target and Walmart as his top fourth-quarter picks heading into the holidays.

Although all retailers face supply chain bottlenecks and rising costs, Ohmes believes that Target and Walmart’s strong inventory positions set them up for success.

“Both retailers should benefit from more favorable Port access, long-term container shipping agreements and chartered vessel capacity. Walmart and Target should gain share from smaller competitors this holiday that lack scale and face more shortages due to the challenging supply chain environment,” Ohmes wrote in a research note published Monday. Gross margins should get a boost from an assortment where higher-margin goods are selling in stores. He also expects Walmart and Target to see less labor cost pressure and shortages as both are anniversarying significant wage increases over the past 18 months.

Both have experienced “impressive” general merchandise momentum, as “general merchandise spend has continued to grow 20-30 percent over 2019 through September,” Ohmes said. They’re also taking share in the food and groceries, he added, citing a Nielsen data report that shows that food category trends have shifted since March in their favor. A separate report from Ohmes on Oct. 5 noted that tonnage declines for supermarkets had fallen, implying share gains for the mass discounters and other outlets. That conclusion was supported by total store sales gains by all other outlets, such as mass discounters, for the first four weeks ended Sept. 25.  And Ohmes’ thesis gets even better for both discounters. The analyst believes that Target and Walmart will become the beneficiaries of ticket-growth increases at supermarkets.

We see risk for supermarkets that inflationary concerns could further divert customer traffic to mass/discount players like Walmart & Target with stronger price positioning,” Ohmes wrote in his Oct. 5 report.

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Target’s food and beverage sales have meaningfully outpaced the overall grocery industry in recent quarters, with the retailer gaining about $2 billion in market share. While food and beverage sales only contribute about 20 percent of total sales for fiscal 2021, Target is still a Top 10 grocer by volume and ranked No. 4 in the digital space.

“We expect Target to continue to grow & gain share in the grocery space as it expands the grocery assortment available through same-day services,” Ohmes wrote.

Target has about 1,500 stores that now offer Fresh & Frozen available via Drive Up and Pick Up & 1,200 stores that now offer adult beverages via Pick Up.

In addition, strong omnichannel execution at both banners, including same-day pickup, drive up and delivery from store, could be a significant advantage this holiday season if “shipping cut-off dates are moved up earlier due to the challenging freight and logistics environment for the pure on-line retailers that ship from distribution centers using third party services,” Ohmes said.

Target’s and Walmart’s competitors include Costco Wholesale Corp., Dollar General, Dollar Tree, and BJ’s Wholesale.