• The case for a grocery store investment contains three major arguments.  First, they sell food products, which are essential items that we all need to survive.  As a result, the demand is, and will always be, evergreen.  
  • Second, grocery stores have proven to be remarkably resilient in the face of e-commerce driven disruption in the retail market.  This is due to individual customer preferences and the preferred routine of the shopping experience.  
  • Finally, grocery stores have proven to be remarkably adaptable to changes in customer shopping behavior.  For example, many have shifted their product mix to include organic food items.  Or, they have invested heavily in the online grocery shopping experience and have even begun to offer delivery services.
  • For commercial real estate investors who agree, there are three ways to gain exposure to the grocery business.  They could buy stock in individual grocery companies.  They could buy shares in a REIT who leases space to grocery companies.  Or, they could invest in a single deal offered by a private equity firm.

For many decades, the grocery store has been a staple of modern life.  In fact, one could argue that grocery stores have been so successful at supplying shoppers with consistent supply of quality food at a reasonable price that they have been taken for granted.  However, the stay at home orders issued at the outset of the COVID-19 pandemic drove a surge in buying that wiped out grocery shelves and provided an important reminder of the critical role that grocery stores, supermarkets, and convenience stores play in feeding their communities. 

As a result of the panic buying, grocery stores like Aldi, Albertsons, and Kroger reported major sales (and profitability) increases which has ignited a resurgent interest in the grocery space from both individual and institutional commercial investors.  While it remains to be seen whether these elevated sales levels can be sustained or if they will revert to historical averages, we believe that there is a compelling case for grocery store investment for the foreseeable future.

In this article, the pros and cons of investing in the grocery business are discussed.  For those convinced that they are worthy of investment capital, we will also describe how to invest in them.  

At First National Realty Partners, we believe strongly in the grocery space.  In fact, we have made it the focal point of our business by exclusively investing in grocery store anchored retail shopping centers nationwide.  To learn more about our current investment offerings, click here.  

Why Grocery Stores Can Be A Good Investment

In this article, we want to highlight three reasons why grocery stores can be a good commercial real estate investment:  demand, resiliency, and adaptability.

There Will Always Be a Need For Grocery Stores

The most compelling argument for grocery store investment is also the simplest one.  Grocery stores sell food, which is something that we all need, every day, to survive.  As a result, there is, and will always be, a constant demand for the items that grocery stores sell.  Because the demand is evergreen, the grocery business is historically stable.  However, it is also a historically competitive business so we like to look for experienced operators who have a long track record of success.

Grocery Stores Are Resilient

There are several unique features of the grocery business that make it remarkably resilient to the type of e-commerce driven disruption that has been so challenging for other retailers.

First, food preferences are uniquely individual.  Shoppers like to feel the ripeness of a piece of fruit or purchase just the right cut of meat.  As a result, many like to shop in store and in person to get the items that are most suitable for their individual preferences.

Second, many grocery items are perishable.  Things like dairy products and meat can spoil if not constantly refrigerated.  As a result, some types of groceries can be difficult to ship safely.  The alternative is to shop in store or to buy online and pick up in store.

Finally, the grocery shopping experience is something that is part of the normal routine for millions of shoppers.  These routines can be difficult to break and, as grocery stores expand their product offerings to include things like banking services and gasoline, they are also incredibly convenient.

Grocery Stores Are Adaptable

Finally, grocery stores have proven to be incredibly adaptable as shopping habits change.  For proof of this, look no further than the changes that were made to ensure the safety of shoppers during the coronavirus pandemic.  Many stores implemented things like enhanced sanitization procedures, one-way aisles, dedicated shopping hours for the most vulnerable shoppers, and buy online/pick up in store shopping options.

For example, Amazon owned Whole Foods is a grocer that has invested heavily in their digital shopping capabilities.  When these capabilities are combined with Amazon’s logistical expertise and extensive last mile grocery delivery network, the number of shopping and delivery options for customers is greatly enhanced.

For individuals that agree with this investment thesis, there are multiple ways to invest in the grocery store business.

How to Invest in Grocery Stores

Depending on individual investor preferences, risk tolerance, and return objectives, there are three options for investing in the grocery business.

Option #1:  Buy Publicly Traded Stock

Common stock in some of the largest grocery chains is publicly traded, which means that it can be bought and sold through major stock exchanges.  With this option, commercial real estate investors could purchase shares in pure-play American supermarket chains like Kroger Co. (Ticker:  KR) and Albertsons (Ticker:  ACI).  Or, they could purchase shares of stock in general retailers who also sell groceries.  Options here include Walmart (Ticker:  WMT), Costco Wholesale (Ticker: COST), Target (Ticker: TGT), or Amazon (Ticker:  AMZN).  

There are several benefits to this approach.  First, grocery stocks are very liquid, which means that they can be quickly sold, with low transaction costs, when capital is needed.  Second, some grocery stocks pay a respectable dividend, which can produce a steady stream of income for investors.  For example, Target stock has a dividend yield of 1.18%, which far exceeds what is offered in many savings or money market accounts.  Finally, the barriers to entry with this approach are very low.  Any investor with a brokerage account and enough capital to buy at least 1 share can invest.

The risk of this approach is that the share prices of grocery stocks can experience significant volatility, along with the broader stock market.  Even if the underlying business is sound and the store is profitable, the share price can still fluctuate based on broader economic factors like inflation or unemployment.  In addition, buying the stock of one grocery store exposes shareholders to diversification risk because investment performance is tied to the success of a single business.  If that company suffers some sort of operational issue or runs into some sort of negative situation, they could lose market share to competitors and their share price will suffer.

Option #2:  Buy Shares in a REIT That Owns/Operates Real Estate With Grocery Store Tenants

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances commercial real estate assets.  If an investor does not want to invest in grocery stores directly, they could invest in a company that owns real estate and leases space to grocery stores.  The logic behind this approach is that the stability of the grocery business makes them a good retail tenant and makes the property attractive to future investors.  For example, Kimco Realty (Ticker:  KIM) and Weingarten Realty Investors (Ticker:  WRI) are two publicly traded REITs who invest grocery store real estate across North America.

The benefits of this approach are much the same as buying stock.  Publicly traded REITs are liquid and can be bought and sold with ease.  As a bonus, REITs solve the diversification issue that is associated with buying single stocks because a REIT investment is spread over several different properties that may have several different grocers as tenants.  This way, if one property or tenant runs into trouble, there are a number of other performing assets to offset their performance.  In addition, there are certain tax advantages to investing in a REIT.

The risks of the REIT approach include things like tenant default, falling rental rates, and a general economic downturn.  In addition, investors have no say in how the REIT invests their capital and no say in day to day management decisions or when the property is sold.  Some may not like this lack of control.

Option #3:  Invest With a Private Equity Firm

A private equity firm is a company that invests in the equity of other companies, including those that own commercial real estate.   Private equity firms offer investments in “funds” which pool investor capital for general investment purposes, like a REIT.  And, they offer investments in single deals, which means that they are raising money for a very specific purpose.  This discussion focuses on the single deal option.

The major benefit of investing in a single deal offered by a private equity firm is that investors have the benefit of knowing exactly which property their money is going to be used to purchase, who the tenants are, where it is located, and what the finances look like.  This gives the investor more control over how their capital is allocated and it allows them to deploy it as they see fit, with a partner they are comfortable with.

The downside of a private equity investment is that it may only be available to investors who meet certain income and net worth requirements and it requires a significant time commitment of 5-10 years, during which time investors are unable to access their capital.  In addition, the transaction costs of a private equity investment are higher than a stock or REIT, which can impact overall returns.

Summary & Conclusions

For many years, the grocery business was considered stable and even a little bit boring.  But a once in a century pandemic sent grocery sales soaring and reignited investor interest in the space.

The case for a grocery store investment contains three major points.  First, they sell food products, which are essential items that we all need to survive.  As a result, the demand is, and will always be, evergreen.  Second, grocery stores have proven to be remarkably resilient in the face of e-commerce driven disruption in the broader retail market.  This is due to individual customer preferences and the preferred routine of the shopping experience.  Finally, grocery stores have proven to be remarkably adaptable to changes in customer shopping behavior.  For example, many have shifted their product mix to include organic food items.  Or, they have invested heavily in the online grocery shopping experience and have even begun to offer delivery services.

For commercial real estate investors who agree, there are three ways to gain exposure to the grocery business.  They could buy stock in individual grocery companies.  They could buy shares in a REIT who leases space to grocery companies.  Or, they could invest in a single deal offered by a private equity firm (like ours).

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you are an Accredited Real Estate Investor  and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

 

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