Goldman Sachs Warns Online Food Sales Could Mean Trouble For Grocers

A report from Goldman Sachs warns that as more consumers get comfortable shopping for groceries online, the already-competitive supermarket backdrop might get even worse for grocers in the future.

Analyst Christopher Prykull assumed cautious coverage on a slew of supermarket names, including a sell rating on Sprouts Farmers Market and a neutral rating on Kroger, according to news from CNBC.

“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, Walmart, Kroger) invest in the channel and customers become more comfortable shopping for groceries online.”

As retail giants like Walmart and Amazon have begun focusing on offering grocery items to customers, shoppers are getting more comfortable ordering food online. In fact, a recent Goldman Sachs survey found that 56 percent of respondents shop online for at least some of their groceries, up from only 35 percent five years ago.

Amazon’s acquisition of Whole Foods Market earlier this year has also spelled trouble for companies like Kroger. Since the deal was announced in June, shares of Kroger have lost more than 25 percent of their value.

Prykull called Kroger’s online positioning “ok” but cautioned investors that Walmart’s regained momentum will create headwinds.

“The company’s historical growth algorithm has broken down as Walmart 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.

And Prykull said things aren’t looking good for Sprouts Farmers Market, which also shares many of its customers with Whole Foods.

“Unsustainable non-perishable pricing … [is] likely [to] drive gross margin lower, particularly as produce pricing only [becomes] more competitive,” he wrote. “Sprouts has high exposure to markets suitable for online grocery, and natural and organic sales are maturing and moving mass.”