Wal-Mart's Fresh-Produce Initiative: Who Loses?

Watch out, grocery chain investors: The $250 billion freight train that is Wal-Mart is looking to push you off the rails.

On Monday Wal-Mart announced changes across its sourcing, training, and operations "that will ensure the quality and freshness of the fruits and vegetables that it offers customers."

The plan
So how, exactly, does this corporate behemoth intend to achieve its goal?

First, the initiative includes plans to purchase produce directly from growers with the guidance of new produce experts hired by the company. As a result, Wal-Mart will be able to take greater advantage of its own industry-leading network of distribution centers and trucking systems to bring fruits and vegetables to store shelves even faster than its current system allows.

Next, Wal-Mart will be performing "independent weekly checks in its more than 3,400 Supercenters, Neighborhood Markets and Express Stores that sell produce," the reports for which will be sent to "every level of store management" to help benchmark itself and competitors on a week-over-week basis.

Finally, the company is launching "Fresh Produce Schools" and expanded training programs to better educate 70,000 employees -- "including store managers, market managers, and produce department managers from every Walmart store in the U.S." -- on how to better handle fruits and vegetables.

The multibillion-dollar question
Personally, I can attest to being less than satisfied by the consistency and subpar quality of my local Wal-Mart's produce, so it's unsurprising they felt the need to address this as a wide-scale problem in the first place.

The larger question remains, however: Who stands to lose the most from Wal-Mart's newfound passion for fresh produce?

On one hand, there's Safeway , which operates more than 1,600 locations in the U.S. and Canada, and recently achieved anemic same-store sales growth of just 1.5% from the year-ago period during its most recent quarter. Meanwhile, Safeway is already struggling to find growth as revenue remained essentially flat from the year-ago period at $10 billion.

And while Safeway is still a relatively large company, remember that it'll be hard-pressed to match Wal-Mart's incredible reach and pricing abilities. As a result, and considering Safeway already sported a typically razor-thin operating margin at 1.8% last quarter, the chain could certainly feel the hurt should any current customers defect in favor of Wal-Mart's cheaper offerings.

Grocery megachain Kroger , on the other hand, may just have a fighting chance of competing with Wal-Mart's low prices given its own fleet of more than 2,400 grocery stores. What's more, Kroger also enjoys the benefit of operating nearly 800 convenience stores and 348 high-margin, high-cash-flow jewelry stores including Fred Meyer, Littman, Barclay, and Fox's Jewelers. Finally, Kroger also achieved decent 3.5% identical sales growth last quarter en route to growing sales 12.8% to $24.2 billion.

Even so, it's hard to argue with the unrivaled convenience of Wal-Mart's all-encompassing department store model, where consumers can effectively find nearly everything they need in a single shopping trip. By improving its produce-buying experience, then, Wal-Mart is intelligently removing one huge obstacle that's currently keeping shoppers away.

Here's who it won't affect
That said, investors absolutely should not assume Wal-Mart's initiative poses any realistic threat to specialty organic grocery businesses like Whole Foods and The Fresh Market , which both typically serve very different client bases than those to which Wal-Mart caters.

Whole Foods, for one, is firing on all cylinders after its blowout first-quarter earnings results, which included sales growth of 13%, coupled with a 19% year-over-year increase in diluted earnings per share. What's more, Whole Foods turned in a solid 6.9% increase in same-store sales, and managed to generate $178 million in free cash flow during the quarter. Lastly, Whole Foods has $1.3 billion in cash with no debt on its balance sheet, even after returning $74 million to shareholders in the form of dividends and share repurchases.

Then there's The Fresh Market, whose stock popped 8% last Wednesday after the company grew first-quarter revenue by almost 13% year over year on decent same-store sales growth of 3%. Additionally, The Fresh Market boosted earnings by 14.6% from the year-ago period and, though The Fresh Market's balance sheet isn't quite as pristine, with $11 million in cash and $15 million in debt, keep in mind it did decrease its debt levels by more than 63% last year thanks in part to healthy cash flow from operations.

Perhaps most important to this conversation, however, is the fact that Whole Foods and The Fresh Market have both long dedicated a disproportionate amount of their time and energy to consistently ensuring the highest-quality food is carried in their stores. In addition, both companies actively support their communities while providing a culture and atmosphere customers and employees alike actually want to be a part of.

In short, and in keeping with fellow Fool Isaac Pino's thoughts on conscious capitalism last month, companies like these tend to perform well when they sincerely focus on improving people's lives through their businesses. As a result, though Whole Foods and The Fresh Market admittedly trade at a relative premium to their larger peers, I'm betting these two specialty grocers will prove immune to Wal-Mart's market-grabbing ways.

More food for thought from The Motley Fool
It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.

The article Wal-Mart's Fresh-Produce Initiative: Who Loses? originally appeared on Fool.com.

Fool contributor Steve Symington owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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