The U.S. grocery wars are heating up this holiday season. But while pricing cuts at Target Corporation (NYSE: TGT) and Amazon.com. Inc.’s (AMZN) Whole Foods are pressuring margins, grocery stocks are also getting squeezed by wage pressures as well.
Earlier this month, Amazon issued its third wave of price cuts at Whole Foods since taking over control of the company in August. Target announced its own wave of price cuts in September, and both Kroger Co. (KR) and Sprouts Farmers Market (SFM) blamed falling prices on lackluster earnings in their most recent quarters.
Unfortunately for grocery investors, these pricing wars are only part of the equation. Target recently announced that it has raised its minimum wage for all employees, including the 100,000 seasonal employees it hires for the holiday season, from $10 to $11 per hour. Target also said it plans to hit a $15 minimum wage for all employees by 2020. Within the last two years, Wal-Mart Stores (WMT) and Costco Wholesale Corp. (COST) also raised minimum wages to $11 and $13 per hour, respectively.
The one-two punch of rising wages and falling prices is great news for employees and shoppers, but it’s bad news for grocery investors. In September, UBS analyst Michael Lasser took a close look at how rising wages may impact the struggling U.S. retail sector and found that grocery stores could be hit the hardest. Lasser singled out Kroger and Sprouts as particularly exposed.
“Notably, 62 percent of SFM’s current footprint is in states with minimum wage hikes already planned over the next three years versus a retail average of 31 percent,” Lasser says. “Further, given both KR and SFM have sub-5 percent operating margins, additional expenses have an amplified impact on earnings.”
At the same time, Lasser says Costco is relatively well-positioned to deal with a push for higher wages because its wages are already well above average in the space.
But before grocery investors get too bearish on Kroger and Sprouts, there could be…
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