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Should You Invest in Grocery Stores?

[Updated: May 02, 2021 ] Jan 18, 2021 by Liz Brumer
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Retail has had a rough few years. Most retail subsectors have experienced slow, steady declines in demand even before the coronavirus pandemic shattered the retail market, forcing several retailers into bankruptcy or closure.

One subsector, however, that has done exceptionally well during this time period is grocery. Grocery stores serve an essential need in our economy: food. There's no doubt this subsector has proven its importance and resiliency in our economy over the past year, but does that mean you should invest in grocery stores? Here's the Millionacres take.

Unparalleled demand but don't expect it to last

In March 2020, grocery store sales skyrocketed, particularly online grocery shopping, which saw 100% increases in users in just a few weeks. Grocery sales climbed to all-time highs of $7.2 billion in June 2020 and have tapered off to roughly $5.9 billion in November 2020. Revenues are still up for grocery stores as a whole, but it's unlikely this unprecedented demand will be maintained beyond the current economic circumstances.

Bain & Company predicts grocery profits from 2020 to 2030 will achieve a moderate 1.2% annualized growth rate. It only makes sense for grocery demand and sales to balance back to normal levels as restaurants and food delivery services make their comeback over the next several years. Grocery is definitely in demand, which is driving prices for grocery-backed retail up to record low cap rates, which means investors diving in now should expect to pay top dollar.

Ways to invest in grocery stores

Most real estate investors choose to participate in the grocery sector by investing in real estate stocks or real estate investment trusts (REITs) that lease retail space to large grocery retailers. Grocery REITs like Regency Centers (NASDAQ: REG) and Retail Opportunity Investments (NASDAQ: ROIC) lease space to large grocery retailers including Whole Foods (NASDAQ: AMZN), Walmart (NYSE: WMT) , Kroger (NYSE: KR), and Costco (NASDAQ: COST) and are a great way to invest in grocery, backed by a diversified portfolio of retail properties across the nation. Investors can also purchase shares of the company directly.

But investing in the companies that own and lease grocery store space to large retailers or warehouse clubs and supercenters is only one way to invest in grocery. Investors can also buy and own their own retail space that leases to smaller, boutique independent grocery retailers or convenience stores, or invest in grocery suppliers such as farms or cold storage and distribution companies like REIT Americold Realty Trust (NYSE: COLD).

Good for diversification and a fairly safe play

Investing in grocery stores can be one way to diversify and somewhat recession-proof your investment portfolio. Grocery's historical performance from 2006 to 2018 has been around 5% or less, making its dependable growth a safe play for investors.

If you do choose to invest in grocery, it may be beneficial to focus on the future of this sector, which will likely include increases in e-commerce and online grocery shopping as well as consumer preference for grab-and-go or convenience-based grocery stores like Amazon's (NASDAQ: AMZN) Amazon Go and Amazon Fresh.

Owning shares in companies or REITs that lease or serve the upper-scale and discounted grocery markets will provide further diversification and allow you to benefit as the market changes. Ultimately, the companies and retailers who can provide e-grocery, grocery delivery, online ordering, or localized sustainable food solutions, particularly in high-density urban markets, are poised to see the greatest growth over the next decade.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, and Retail Opportunity Investments and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.