Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

For Wal-Mart Stores Inc., the best way to investors' hearts could be through their stomachs.

Shares in the world's largest retailer rose 4 percent Tuesday after it reported a 1.9 percent gain in sales at established U.S. stores in the latest quarter from a year ago, including a 29 percent jump in domestic online sales. 

While much of the focus Tuesday was on Walmart's investments in e-commerce and labor, its success could come down to something more basic: food. 

Can Walmart Catch Up?
Walmart's stock rose Tuesday after holiday sales beat analyst expectations, but shares have under-performed the broader market in the past year
Source: Bloomberg

With its gargantuan aisles filled with everything from video games to paint brushes, it's sometimes easy to forget Walmart is America's largest grocery store. It gets 56 percent of its U.S. sales from food and grocery items. The strength of its grocery game can often make or break a quarter.

Walmart's blockbuster online sales growth in the U.S. in the latest quarter was driven partly by groceries purchased online but picked up at new drive-through stations in store parking lots. Globally, online sales rose by only 15.5 percent, a deceleration from previous quarters. Walmart has been expanding grocery pickup in the U.S., with 600 locations currently, and it plans to double that number by next year.

America Online
Walmart's purchase of Jet.com is boosting its U.S. e-commerce sales, which rose 29% in the latest quarter from a year ago. But overseas sales are weighing on total online figures
Source: Bloomberg, Walmart

More than likely, food also played a big part in Walmart growing sales at established U.S. locations at the fastest pace in four years. Walmart has been drastically cutting food prices in its stores, which has helped it fight back against the dollar stores that have eaten into its market share.

Walmart's price cuts over the past year came as U.S. grocery prices fell by the most since the 1960s. If inflation picks up as much as the Federal Reserve is predicting, then Walmart will be able to pocket the extra dollars in price differences. 

Rising Tide
Sales at Walmart's established U.S. stores rose at their fastest pace in four years
Source: Company filings

Plus, until Amazon.com Inc. figures out how to crack online grocery, food is Walmart's most defensible area against Amazon.

Bananas, milk and other food items tend to be the biggest drivers of customer traffic. Selling food lets Walmart bring in billions of dollars from customers on food stamps. And it's one of the few areas where Walmart would take less of a hit if any kind of border-adjustment tax is pushed through, as a greater proportion of Walmart's food is actually made and sold in America, compared with categories such as clothing and electronics. 

Leaving Walmart Behind
The share of primary household shoppers who shopped at Amazon surpassed the share of Walmart shoppers for the first time since Kantar began collecting the data
Source: Kantar Retail ShopperScape
Note: Share of shoppers who shopped Amazon or Walmart at least once in the previous four weeks

Of course, this is not a time for Walmart to get complacent. Amazon is nipping at the heels of its grocery business.

The e-commerce giant is investing in its fresh offerings and recently got clearance to participate in a pilot program to offer delivery to food-stamp recipients. Amazon is already testing out brick-and-mortar convenience stores and has ambitions for bigger grocery stores. Plus, with more shoppers now visiting Amazon than going to Walmart on a regular basis, it's only a matter of time before shoppers start to turn to Amazon for more of their grocery needs.

Walmart should stay hungry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net