Which One of These Suit Your Portfolio Needs?

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Discount retailers and warehouse retailers have been ruling the retail market lately. This is mainly because of a large change in the spending habits of customers. The current economic condition is such that the one who provides maximum benefit to entice customers wins the game. Hence, dollar stores such as Dollar General Corporation (NYSE: DG) have been making the most of it. Dollar stores’ everyday low prices give the budget constrained shoppers a strong reason to visit their stores.

Even warehouse retailers such as Costco Wholesale (NASDAQ: COST) have been in vogue because of their thin margin strategy, which enables customers to get increasingly low prices.

On the other hand, grocers such as Kroger (NYSE: KR) and Safeway (NYSE: SWY) are having a tough time planning for new strategies to drive traffic in stores. These players have to find other ways to sell their products. Their problems seem to be endless when rising input costs were added to the weak economic conditions along with losing market share.

The Real Picture…

The ongoing problems faced by grocers and the benefits of an uncertain economy, derived by the discount retailers and wholesale retailers can be shown in the chart below:

<img src="http://media.ycharts.com/charts/45973c5c3c6cdfa20333ab346cc4309b.png" />

SWY Revenue Quarterly YoY Growth data by YCharts

In the last one year, both Dollar General and Costco have had revenue growth greater than Kroger and Safeway. This is simply because of increased traffic driven by their low price offerings.

For example, Costco has been attracting members because of its increasingly low prices and great customer service. Moreover, its business model of charging annual membership fee adds to its revenue. Increased focus on online sales and international operations drove Costco’s recent quarter revenue by 14%. Costco buys directly from manufacturers at a bargaining price which is passed on to the customers, if goods are bought in bulk. Its high volume and thin margin business model enables the warehouse retailer to steal away shoppers’ attention.

Also, Dollar General posted a stellar quarter some time back owing to its products which are mostly priced at $10. The company has also managed to maintain its cost structure well by having smaller format stores unlike Safeway and Kroger which have larger stores, increasing the cost burden. These smaller stores also help customers in navigating it easily. It has also been expanding its store count with a target of 625 new stores during the year.

On the other hand, Safeway posted a lackluster quarter owing to the closure of 17 Genuardi stores. Safeway has been facing huge problems in attracting customers. Hence, it has finally taken help of a customer loyalty program, a program launched last quarter. The loyalty program called “Just For U” is aimed to provide special discounts to customers who visit their stores frequently.

This is exactly what Kroger had started following, the benefits of which were visible in its quarterly performance. It mailed coupons to its loyal customers which pulled customers to its stores frequently. In fact, Kroger made quite a number of efforts in order to boost its top line. It entered into the popular yogurt business and the snack chips business which helped the retailer witness better days. Hence, Kroger registered a 3.89% increase in revenue in the last one year. Moreover, Kroger is also expected to benefit from its new single-serve coffee pods which it will be introducing soon.

However, it seems that even Safeway has realized the importance of providing incentives to customers and has started working on it. Even if it cannot provide everyday low prices, it is trying out new ways such as providing fueling stations in the parking lots of its stores and planning a makeover for its stores. These strategies coupled with its loyalty program are expected to help the company stage a comeback.

Final Thoughts

Hence, being dynamic and adapting to the customers’ preferences is the most important thing in the prevailing circumstances. The current situation is such that the consumers are trying to make the most of their money. Hence, retailers such as Costco and Dollar General are doing well. Even Kroger has managed to pull itself from the ongoing problems through implementing correct strategies at the right time. However, Safeway’s lack of efforts led to its suffering and its current initiatives can help the grocer come out of the ongoing crisis efficiently. Hence, investors should select the best out of these retailers before investing their dollars.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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