Online e-commerce will exacerbate the already-competitive supermarket backdrop and spells uncertainty for grocers down the road, according to Goldman Sachs.
While dollar stores may be more "immune" to the growing challenges, analyst Christopher Prykull assumed cautious coverage on a slew of supermarket names, including a sell rating on Sprouts and a neutral rating on Kroger.
"Online grocery is in early stages, but growing, and companies are starting to invest behind it," warned Prykull. "While we do not forecast grocery penetration to exceed categories that we believe are more suitable for online, such as consumer electronics, books, and apparel, we do believe penetration will steadily increase as companies (Amazon, Wal-Mart, Kroger) invest in the channel and customers become more comfortable shopping for groceries online."
As big consumer retailers like Wal-Mart and Amazon.com shift attention toward grocery, more shoppers are easing into the online supermarket. A recent Goldman Sachs survey found that 56 percent of respondents shop online for at least some of their groceries versus only 35 percent five years ago.
Given Amazon's foray into the supermarket space earlier this year with its purchase of Whole Foods Market, companies like Kroger have struggled to rebound. Since the announcement of the Amazon-Whole Foods deal in June, shares of Kroger have shed more than 25 percent of their value.
Wal-Mart accounted for 24 percent of Whole Foods' new customers and Kroger 16 percent, from Aug. 28 through Sept. 3, according to data analytics firm Thasos.
In his coverage of Kroger, Prykull called the company's online positioning "ok," but cautioned investors that Wal-Mart's regained momentum will create headwinds.
"The company's historical growth algorithm has broken down as Wal-Mart has regained momentum and hard discount continues to encroach," wrote the analyst. He set a $22 price target on Kroger, about even with the stock's closing price on Monday.
Prykull said things aren't looking as good for Sprouts Farmers Market, which also shares many of its customers with Whole Foods.
"Unsustainable non-perishable pricing to likely drive gross margin lower, particularly as produce pricing only becoming more competitive," he wrote. "Sprouts has high exposure to markets suitable for online grocery and natural and organic sales are maturing and moving mass."
The analyst's $18 price target is 21 percent lower than Monday's closing price.
On the flip side, relatively "immune" Dollar Tree may present an opportunity for investors.
Unlike Kroger and Sprouts, Dollar Tree shares are up both over the last six months as well as year to date. Thought to be resistant to Amazon's aggressive pricing policy and apart from its target audience, Dollar Tree may be safe for now.
"Convenient locations, a lower-income demographic, value price points, and destination for 'fill-in' trips as opposed to 'stock-up' trips makes Dollar Tree more immune to potential online encroachment," said the analyst.