Once considered a relatively mundane industry, a number of factors – such as technology advances, new market participants, and a global pandemic – have converged to ignite a newfound investment interest in the grocery business. The grocery industry is no longer considered boring and investment in grocery store anchored shopping centers can deliver an exciting return.
In this article, we will make the case for why grocery stores are a good investment and describe three ways that investors can gain exposure to them.
Why Grocery Stores are a Good Investment
The case for grocery store investment can be broken down into four points:
1. Necessity
Grocery stores sell food, which is essential for daily survival. This fact alone makes the grocery business somewhat protected from the volatility associated with various phases of the economic cycle and allows them to retain market share in light of new competition from internet retailers. Regardless of what is happening in the broader economy, shoppers will always need to buy food.
2. Adaptability
Grocery stores have been working hard to adapt to modern shopping trends. This effort has been highlighted during the coronavirus pandemic as grocers have been quick to expand their services to ensure safety and convenience for all customers. These services include home grocery delivery, personal grocery shopping services, and online grocery purchases with curbside pickup. While groceries will always be an essential purchase, the shopping experience continues to evolve.
3. Profitability
The grocery business has notoriously low margins, but efficient supply chain management and recent pandemic driven buying has resulted in a grocery store sales surge and soaring profitability. Sales have increased in nearly all categories including fresh produce, fresh fruits, perishable items, and non-food items.
4. Utility
The near ubiquity of grocery stores make them a perfect distribution point to handle the “last mile deliveries” that have proven to be difficult for e-commerce retailers. For this reason, large companies that sell non-grocery items have taken note and worked to forge partnerships with them. In some cases, they have purchased them outright. A classic example of this is Amazon’s purchase of Whole Foods.
How to Invest in Grocery Stores
Given the recent developments discussed above, there is a very compelling case for long term investments in grocery stores. For investors that agree, the next logical step is to actually make an investment. Broadly, there are three ways that this can be accomplished.
#1: Buy Stock in Publicly Traded Grocery Stores
Unfortunately, some of the most popular and beloved grocery store chains – like Publix, Harris Teeter, Trader Joes, and ALDI – are privately held and cannot be invested in easily. However there are a number of very successful (and profitable) grocery stores in which retail investors can purchase common stock. These stores can be divided into two groups, those who sell grocery items only and those who sell groceries and other items.
Pure grocery companies include stores like: Kroger, Sprouts, Natural Grocers, and WEIS Market. Those with a more diversified offering include warehouse clubs like Costco Wholesale and general retailers like Walmart, and Amazon (which includes their Whole Foods and Amazon Fresh subsidiaries).
Pros and Cons of Buying Stock in Publicly Traded Grocery Stores
The primary benefit of buying publicly traded shares of stock is liquidity. Grocery store shares are traded on major exchanges and can be converted to cash with relative ease. In addition, the transaction costs are low and there is a significant amount of information available that potential investors can analyze before making a purchase decision.
However, publicly traded stock can also be associated with significant volatility. Share price movements can be big and sometimes they are not based on the fundamentals of store performance. Instead, they could be based on macroeconomic trends that may have nothing to do with the store itself. The other downside risk of note is lack of diversification. Purchasing stock in one company leaves an investor highly levered to the performance of that one company.
#2: Invest in Companies That Rent Space to Grocery Stores
For individuals looking to capitalize on the performance of the grocery stores themselves and the underlying real estate, they can purchase shares in the companies that lease space to grocery stores. Tactically, there are two ways that this can be accomplished, by investing in REITs or in deals offered by private equity firms.
Real Estate Investment Trust (REIT)
A Real Estate Investment Trust (REIT) is a specialized type of investment company that takes investor capital and uses it to purchase commercial real estate assets. REITs invest in all property types and asset classes, including grocery stores. In addition, REITs can be publicly traded on stock exchanges or they can be privately traded between accredited investors. For example, Regency Centers Corporation is a publicly traded REIT (REG) that owns 419 shopping centers, 80% of which are anchored by grocery stores like Safeway, King Soopers, and Publix.
Private Equity Firm
Private Equity firms are structurally different from REITs, but perform a similar function in the sense that they also take investor capital and use it to invest in commercial real estate assets, including grocery stores. First National Realty Partners is a prime example of such a firm. We invest exclusively in grocery store anchored shopping centers nationwide. Some of our grocery store tenants include Aldi, Whole Foods, ACME, Walmart, and ShopRite.
Pros and Cons of Investing In Companies That Lease Space to Grocery Stores
The benefit of investing in commercial real estate is that investors get exposure to the grocery store business and they benefit from partial ownership of the underlying real estate. This means a steady stream of income, tax benefits, and the potential for capital gains upon sale.
The downside of the REIT/Private Equity Firm strategy is that it is not a pure grocery play. There are ancillary risks that must be considered including real estate market conditions and the credit risk of the other tenants located in the center. For example, the grocery store could be performing very well, but if the other tenants in the shopping center default on their leases, the performance of the investment could suffer.
#3: Buy a Grocery Store or Grocery Store Anchored Property
This option is perhaps the least realistic, but for well-capitalized individuals that are very bullish on the grocery business, they can purchase an existing grocery store business or purchase a grocery store anchored property directly.
The benefit of this strategy is that the investor gets direct exposure to the grocery business and they have complete control over the management decisions required to run the company or property. They also stand to reap the direct benefits of the success of their business.
However, the grocery business is a notoriously difficult one that relies on extremely high transaction volume to offset low sales margins. In addition, there is significant competition from large, well funded companies who have significant expertise in the grocery business. Finally, purchasing a grocery business or a property that leases space to a grocery store requires a significant amount of capital and it is likely out of reach for most individual investors. For these reasons, this strategy is likely not the best choice.
Conclusions & Summary
The convergence of recent trends, combined with a global pandemic and the enduring necessity of food items has ignited investor interest in the grocery space. For individuals interested in gaining exposure to this sector, there are three ways to do it.
The first option is to purchase stock in publicly traded grocery stores. This is an easy, low cost way to invest in the grocery business while maintaining liquidity. But, this strategy can be subject to significant price volatility and the whims of publicly traded markets.
The second option is to purchase shares in companies that lease space to grocery stores. Practically, this means investing in a REIT or with a private equity firm. The benefit of this approach is that investors get the reward from the performance of both the grocery store and the underlying real estate. However, this strategy also exposes investors to non-grocery store risks that can impact the performance of the investment.
The third option is to purchase a grocery business, or a property that houses a grocery business directly. This strategy provides a significant amount of control, but it also requires a significant amount of capital and operational expertise. For many individual investors, this is likely not the best option.
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.
To learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
