On December 31st 2018, the Wall Street Journal reported that Amazon is planning to add more Whole Foods stores to put more customers within its two-hour delivery service range. On the morning of January 4th, 2019, the Wall Street Journal reported that GM is partnering with DoorDash to experiment with autonomous car delivery for both restaurants and grocers. 

‍What are the implications of getting that cage-free, responsibly-raised chicken from Whole Foods delivered straight to your door?‍

Any Way We Look at it, More Grocery Delivery = More Margin Compression

As covered in detail below, this means something different for the different players in the ecosystem:‍

• ‍Amazon and Walmart have higher capacity to absorb the margin hit due to massive scale.
• Delivery pure-plays like HelloFresh and Blue Apron fight to maximize market share while managing cash burn to increase takeout appeal to the bigger players.
• Traditional grocers like Kroger appear stuck in the middle: unable to hide the margin pressure yet required to support overhead of fully penetrated store footprints.

For our earnings sentiment analysis we leveraged the Amenity Viewer's Query Insights feature to perform text analytics at scale across all publicly available earnings transcripts where a meaningful mention of "delivery growth" occurred. This allows us to quickly identify the key themes and pain points in grocery delivery:

1. The shift to delivery is real

Amazon (10/25/18):

• "...we started to have greater expansion of our grocery delivery out of Whole Foods using Prime Now. We’re now in 60 cities in the U.S. giving customers delivery in as fast as an hour, thousands of great organic products from Whole Foods."

Sprouts Farmers Market (11/1/18):

• "On the home delivery front, our partnership with Instacart has continued to grow."

Kroger (12/6/18):

• "Our digital sales grew by over 60% in the third quarter."

Walmart (11/22/18):

• "Online Grocery continues to grow rapidly and that is a significantly higher ticket than the average"

2. Widespread evidence of the margin pressure a traditional grocer like Kroger faces

Kroger (12/6/18):

• "The gross margin rate reflects the timing and size of company’s price investments compared to a year ago, rising transportation costs and growth of the specialty pharmacy business."

Sprouts Farmers Market (11/1/18):

• "...our new store strategy to maximize the potential of in-store and e-commerce sales which are relatively low today. But to the extent that they continue to grow, we think that Sprouts will be better positioned to play stores and leverage without having duplicative cost of either shutting down stores or changing the business model compared to many other conventionals."

Smart & Final Stores (7/25/18):

• "But I still would tell you we’re making money on delivery, but the margins are still a little bit lower, because we are paying the third party, too."

Blue Apron (11/14/18):

• "...the payback period for new customers has been extending, largely due to the acquisition cost per customer increasing to a level that has more than offset the net contribution gain."

HelloFresh (11/13/18):

• "So we’ve been going with the good momentum into the fourth quarter. Part of that momentum was certainly driven by the fact that we had decreased prices"
• "...reduced prices always help us to acquire customers at very attractive prices. On the other hand, as you all know, the obvious thing is that there is a short-term margin drag."

Walmart (11/15/18):

• "That’s largely been offset by price investment, which as you can see in our gross margin, continues to be a factor, in fact, the leading factor for gross margin pressure."

Sprouts Farmers Market (8/2/18):

• "Overall, the promotional environment remains competitive and we continue to maintain our pricing strategies"

Target (11/20/18):

• "So as we said, it (gross margin) was a little lower than we had anticipated, really driven by 2 things: the supply chain costs that we're seeing because digital came in at a 49% growth, which was higher than we had anticipated, so therefore, we're going to see a little bit more pressure there."

3. Is Grocery Unique? We see supply chain margin pressures across Retail as mix shifts to e-commerce

• Black Friday: Retail Sector Earnings Analysis: Beware Supply Chain Issues
• Chico's: Chico's Earnings Analysis: Is Our Retail Warning Ringing True?
• FedEx: Earnings Sentiment Analysis at Scale: FedEx is Patient Zero as Supply Chain Issues Reverberate
• 2019 Outlook: Earnings Sentiment Analysis at Scale: 5 Under the Radar Companies to Watch in 2019

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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