Retail

Walmart is a grocery powerhouse ... and it still has room to run

Key Points
  • Walmart attributes strong online sales partly to growth in its grocery business.
  • Considering how few Americans buy their groceries online today, Walmart has room to run.
  • In the U.S., a mere 3% of grocery spending takes place online, according to Bain & Co. research. But in the U.K. and South Korea, online grocery penetration can be as high as 15%.
  • Online grocery sales are expected to capture as much as 20% of total grocery retail by 2025, reaching $100 billion, based on a separate study by the Food Marketing Institute conducted by Nielsen.
A man pushes his shopping cart past bread for sale at a Walmart Supercenter store in Rosemead, California on May 23, 2019.
Frederic J. Brown | AFP | Getty Images

Walmart just proved it's a grocery powerhouse. And it still has plenty of room to run.

The big-box retailer's strong food business has been a key factor to recent sales gains, and this latest quarter, reported Thursday, was no different.

Total revenue grew 2.5% to $127.99 billion from $124.89 billion a year earlier. Within that, e-commerce sales surged 41%, driven by strength in grocery. More shoppers are heading to Walmart's website to place grocery orders and either pick it up at a store later that day or have it delivered to their house. Grocery sales account for 56% of Walmart's total U.S. revenue, making it the country's largest grocer.

Walmart shares were up about 1% on the news, having climbed more than 30% this year. During trading Thursday the stock hit a 52-week high of $125.38.

Walmart said its grocery business grew at a mid-single-digit rate, with snacks and beverages, fresh foods and pet items among the strongest categories. That helped offset some weakness in apparel.

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"Improvements in areas like bakery and meats are resonating with customers," CFO Brett Biggs said. "We've focused on improving fresh presentation and product quality and this has resulted in stronger sales and market share gains."

What really has served Walmart well compared with peers, like Amazon, Kroger, Costco and Aldi, is its impressive delivery infrastructure.

In the U.S., 3,100 Walmart stores are serving customers who want to order their groceries online and pick them up in person. About 1,400 other stores are delivering online orders to shoppers' homes.

"The grocery delivery, the grocery pickup — they're building customer loyalty that continues to drive the positive growth we are seeing at Walmart," Jharonne Martis, director of consumer research at Refinitiv, said on CNBC's "Squawk Box." "They're doing a really good job at the integration between online and physical stores."

Earlier this month, Walmart rolled out a "Delivery Unlimited" membership option, where customers can pay $98 annually, or $12.95 monthly, for unlimited grocery deliveries from 1,400 shops. Walmart is also trying an in-home delivery option, which costs $19.95 a month, in Kansas City, Pittsburgh and Vero Beach, Florida. It has said it plans to scale this offering "aggressively."

But the competition is still there.

Amazon announced plans in October to start delivering grocery products for free within a two-hour window to all paying Prime members living in the 2,000 regions eligible for the service. Until then, Prime members had to pay an additional $14.99 per month to get access to Amazon Fresh, a separate program that offered two-hour grocery delivery.

Kroger has also promised to continue ramping up its supply chain.

Still, even though Walmart's grocery business is humming, analysts say there are more gains to be had, especially considering how few Americans are buying their groceries online today.

In the U.S., a mere 3% of grocery spending takes place online today, according to Bain & Co. research. Americans haven't been as quick to jump on board with placing their grocery orders from their computers or smartphones, especially when compared with markets like the U.K. and South Korea, where online grocery penetration can be as high as 15%.

But analysts expect online ordering to explode as more customers get comfortable with it.

Online grocery sales are expected to capture as much as 20% of total grocery retail by 2025, reaching $100 billion, based on a separate study by the Food Marketing Institute conducted by Nielsen.

"Walmart is really defining a new frontier for competition" in grocery, said UBS retail analyst Michael Lasser.

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During a call with media on Thursday, the CEO of Walmart's U.S. business, John Furner, said Walmart is still testing a "number of innovations" to improve in grocery. He said the company has a few projects around the country where it's looking for ways to pick online orders more rapidly, for example, and not get in the way of other shoppers in stores.

Walmart's U.S. e-commerce chief Marc Lore added that the company has been doing some "local marketing" to tout its expanded suite of grocery delivery options. But he said Walmart hasn't yet launched a national campaign. Lore said Walmart will look to do that "as it makes sense."

Walmart CEO Doug McMillon said Thursday the retailer still has progress to make online on the whole. It's still working to get the right assortment of general merchandise to compete with the likes of Amazon and Target.

Moody's analyst Charlie O'Shea said he expects what Walmart is doing in food ultimately "will ripple into other higher-margin categories."

Programming note: Walmart CEO Doug McMillon will address CNBC's Evolve event next week. Register to attend at cnbcevents.com/evolve.