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How to Invest in the Top Grocery Stocks for This Year

Posted on Tuesday, January 21st, 2020 by Matthew Sweeney

How to Invest in the Top Grocery Stocks for This Year

Grocery stocks are issued by companies that sell food through a supermarket, or in some cases, a wholesale warehouse. While consumers can go to a restaurant to get a prepared meal, most consumers purchase what they eat through a supermarket, which sells packaged food and perishables.

Top Supermarket Companies

Many of these grocery store chains are established businesses—far from being dollar stocks that turn out to be no more than a flash in the pan. In fact, some of these companies are not yet publicly traded, but the publicly traded ones are solid for portfolio growth. Some might specifically prove useful for a dividend investing strategy. This is particularly true of the larger brands like Kroger that are not in a period of expansion, and do not need to reinvest profits. Instead, some of these companies pay a portion of the profits to investors in the form of dividends.

Grocery Industry

The grocery industry has come a long way since the days of a corner store. In times past, each food-related shop would normally specialize in one area. The butcher, the baker, the produce vendor, and the dry goods store were just a few places customers would visit to buy groceries.

The term grocery actually comes from the dry goods shop specifically, since the owner of such a store—selling spices, tea, coffee, sugar, and dried foods—would buy them in bulk, hence the title grossier.

The first attempt at a full-service grocer was Piggly Wiggly, which opened in 1916 in Memphis, Tennessee. This was the first time consumers could go through the store and pick out items themselves, bringing them to a cashier (whereas previously, a clerk would retrieve the items for them from behind the counter).

The creation of the automobile and refrigeration meant that consumers could buy and store more food at once, and stores could store larger amounts of food. King Kullen was the first modern supermarket, opening up in Queens, New York on August 4th of 1930. For the first time, a variety of foods could be sold under one roof at discounted prices.

As you can imagine, this did not bode well for the mom-and-pop stores around America. Over the next several decades, corner stores saw a steady decline, especially as consumers moved out of urban environments and into suburbia, where there was more room for larger stores with a bigger supply of everything.

Since the retail market for food products is often a local enterprise, dependent on consumer tastes, suppliers, and the supply chain, corner shops were eventually bought by the competition and absorbed into regional grocery chains. Even so, the grocery industry is still one with a lot of variety, especially region to region. This is an area that is still open to new growth and startup investment, especially in niche sectors that have taken up a sizable percentage of the industry, like the natural and organic market.

Today, supermarkets are the norm in the United States, though, in Europe and other dense urban locations, a smaller-sized convenience store can still operate successfully. To offset tight profit margins, some supermarkets have branched out into other offerings beyond food products—such as Costco. In addition to frozen foods, Costco also sells everything from consumer staples to camping equipment. Other supermarkets, like the Latino Mi Pueblo, have attempted to mimic the mom-and-pop feel of olden times by creating a themed shopping experience.

Top Supermarket Companies

Many grocery stores have also seen growth beyond their brick and mortar real estate and increased their profit margin with online sales. If you are interested in the top grocery stocks on Wall Street, it’s important to keep your eye on the following companies.

Costco (NASDAQ: COST) is not strictly a grocery store, but rather a wholesale club that consumers can access for a membership fee, where everything from food to camping equipment is sold at pre-retail prices. By 2015, Costco had become the world’s second-largest retailer, after Walmart. As of 2016, Costco also became the largest global purveyor of prime beef, rotisserie chicken, wine, and organic food.

By the end of 2019, Costco owned 785 warehouse locations in the United States, Canada, Mexico, the United Kingdom, Japan, South Korea, Taiwan, and Australia, along with announced 2019 revenues of almost $153 billion. Though the dividend yield of Costco is somewhat low (at the time of this article), its share price indicates that dividend payouts are decent, though the P/E ratio is high. Costco cannot be considered one of the cheap stocks to buy now, with share prices around several hundred dollars.

Tesco (LSE: TSCO) is a British grocery and general merchandise retailer with locations in eleven countries. The company is the grocery leader in terms of market share in the United Kingdom and Ireland, Thailand, and Hungary. Tesco is also the ninth-largest retail chain worldwide, by sales, reaching almost $64 billion in the 2019 fiscal year. Though Tesco dropped its US operations in 2013, they began to branch out in 2018 by diversifying what they sell, offering books, clothing, toys, furniture, electronics, and gas—in addition to services like banking, software, and telecom.

Kroger (NYSE: KR) is the largest supermarket chain in the United States based on revenue, with more than $121 billion in announced 2019 revenues. Kroger also owns the distinction of being the fifth largest retailer in the world, and the fifth largest corporate employer in America. Kroger is based in Cincinnati, where it started in 1883 with Benny Kroger, who poured his entire life’s savings into opening a small storefront. His motto was, “Be particular. Never sell anything you would not want yourself.”

As it expanded to forty stores, Kroger was the first grocery store chain to have a bakery, and the first supermarket to be surrounded on four sides by a parking lot. In the 1950s, Benny Kroger started to expand into new markets by buying up other grocery chains. Today, they own almost 2,800 supermarkets under their own name, or through subsidiaries.

Albertsons is the second-largest supermarket chain in the United States after Kroger, with over 2,200 locations. This Fortune 500 company was founded in Boise, Idaho by Joe Albertson. The original store offered free parking, a money-back guarantee, and even an ice cream shop—all of which were unique perks at the time. Before choosing a location to open a new store, Albertson would see if it was a family-friendly area, which he gauged by how many children's clothes were hung out to dry.

Albertson partnered with Skaggs to create the first combination of grocery and drug stores in the 1960s—but the partnership dissolved in the 1970s. In the meantime, Albertsons had expanded into new territories like California, Texas, Florida, and other states. In 1999, it made an acquisition of American Stores Corporation, which included ACME, Jewel, and Lucky, making Albertsons the second-largest domestic grocery chain. Today, Albertsons is primarily owned by Cerberus Capital Management. It is not publicly traded, though there have been ongoing discussions of an IPO.

Aldi is a privately owned (and not publicly traded) grocery brand based in Germany. Aldi has actually been split into two different divisions since the 1960s, and each one is technically a separate company: Aldi Nord, and Aldi Sud (Aldi North and Aldi South). Each company covers a particular territory in Germany and beyond, but both companies operate a combined 1,600 stores in the United States, including Trader Joes, which is actually an acquired subsidiary of Aldi Nord.

Aldi began as a small store opened by brothers in the city of Essen in 1913. By the end of WWII, Aldi had expanded to a dozen stores and continued to expand. Though Aldi had already started expanding in the United States, it was the reunification of Germany that really caused Aldi’s rapid expansion. The company’s business model is selling cost efficient, no-frills staple items, many of which are limited to Aldi’s own brand.

Whole Foods Market is now owned by Amazon (NASDAQ: AMZN) but has retained its unique brand identity as an organic and wholesome alternative to the typical supermarket. The company is known to sell products without hydrogenated fats, artificial colors, flavors, and preservatives. With 500 stores in the United States and the United Kingdom, Whole Foods has quite a visible footprint in the popular culture of healthy eating, including the largest grocery store in Manhattan.

Founded in Austin, Texas, the owners were evicted for storing food in their apartment, so they moved into the store, where they showered with a hose attached to the dishwasher. To top it all off, a devastating flood destroyed their inventory, and they had no insurance. Fortunately, the community banded together to salvage the store, which reopened a month later. From these humble beginnings, Whole Foods aggressively expanded in the next several decades, making an acquisition of health food chains around the country and doubling their number of stores in the past decade.

Trader Joes is owned by German grocery store brand Aldi but also retains its own identity as a trendy bohemian grocer, with its own range of health-conscious branded products. What most shoppers don’t know is that it actually started in California during the 1950s as a store with great similarity to 7-Eleven. Eventually, founder Joe Coulombe decided to take a different route. Inspired by a trip to the Caribbean, Coulombe decided to spin Trader Joe’s as a place where American consumers could satisfy more exotic tastes they may have acquired on their travels.

Though Trader Joe’s has a South Seas Theme overall, each location is meant to reflect its hometown, with artwork created by staff members. It carries a limited number of options for every product, and most products are of the unique Trader Joe’s brand. Trader Joes is also known for its wine selection, floral arrangements, and the friendly neighborhood vibe that can be found at any of its 500 locations around the United States, many of which are in unique locations, such as converted older buildings.

Food ETF

It can be hard to gauge the best investments among grocery stocks, so investors might instead consider buying a share of an ETF. An ETF, or exchange-traded fund, is like a mutual fund in that it represents a share in a diverse set of investments—but it’s like a stock in that shares of an ETF are purchased on the stock market—not by putting money into an account. Investing in anything is difficult. By investing in an ETF, you can avoid having to analyze factors like market cap, cash flow, profit, dividend yield, and other factors. With a Food ETF, you also avoid investing in a company that looks like the best thing on the shelf—only to see it turn into one of the biggest stock losers.

You might first want to look at the Consumer Staples Select Sector SPDR Fund (XLR), which contains a diverse range of holdings both in food production and distribution, including companies like Walmart, Costco, and Kroger—though two of its largest assets are Pepsi and Coca-Cola.

The First Trust Nasdaq Food & Beverage ETF (FTXG) is another good option for making an acquisition of diversified holdings in food and beverage. Its main holdings are Archer-Daniels-Midland Company and US Foods, which primarily deal with food production and not distribution. Tyson is its third-largest holding, a company that deals with distributing beef and poultry.

Keep in mind that some grocery chains are not publicly traded, while others are actually subsidiaries of other companies that have nothing to do with groceries (such as Whole Foods and Amazon). That said, you may not find an ETF dedicated exclusively to grocery or supermarket chains—there may not be enough diversity to support such an ETF. However, you can find plenty of ETFs in the food and beverage sector, which includes assets like grocery store stocks and supermarket stocks.

Should I Invest in Grocery Stocks?

There are not a whole lot of recognizable, name-brand grocery stocks on the stock market. However, the ones that are on the stock market tend to be sizable behemoths, such as Kroger and Costco. Purchasing shares of these companies could be a good idea. Grocery stores, for the most part, tend to be conservatively financed operations selling a much needed commodity (food). These companies are typically managed by families that have been in the business for decades—many of which got their start by personally running a grocery store. Grocery stocks and supermarket stocks can be great investments as part of a diversified stock portfolio.

Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Costco Wholesale (COST)$318.31flatN/A37.76Buy$305.27
Tesco (TSCO)GBX 255.80flat0.03%19.09BuyGBX 289.45
Kroger (KR)$28.23flatN/A14.40Buy$27.83
Amazon.com (AMZN)$2,134.87flatN/A92.78Buy$2,338.42
First Trust Nasdaq Food & Beverage ETF (FTXG)$23.02flat1.22%N/AN/AN/A

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