Retail

Grocery Tracker: Turnaround In Sight

As winter turned to spring in the northern hemisphere, grocery stocks have yet to show much sign of warming up. Another down end to the week struck three of the four we track, with one staying relatively flat.

International food retail group Ahold Delhaize (AD) saw shares down starting mid-week. At the time of market close on Friday (March 24), AD shares were worth €19.80 a piece, down 0.35 percent from Thursday’s close and a full 2.7 percent from the start of the week.

While Kroger (KR) rallied in the latter half of the week, it wasn’t enough to compensate for the drop through Wednesday. KR was worth $29.10 on Friday’s close, down 0.27 percent for the day and down a full 1.92 percent from the opening bell on Monday.

The journey was different, but the results were the same for Whole Foods (WFM) this past week. Prices held out flat until Thursday morning before losing steam. During Friday afternoon trading, WFM was worth $28.92, down 0.92 percent from Thursday’s close and down 3.11 percent from its week high.

Big-box magnate Costco’s (COST) ride was also a bit bumpy, though less dramatic than its grocery peers. On Friday afternoon, COST shares were at $166.02, down 0.53 from Thursday’s close and 1.03 percent from the start of the week.

Sure, the numbers aren’t ideal — but on the bright side, U.S. stocks have all managed to rise a bit since a collective low around the ides of March. Perhaps some April showers will reinvigorate investors’ taste for grocery options. Though if new data released by Moody’s Investor Service is any indication, it won’t be until well into summer that grocers will get back into the swing of earnings.

Here’s what we mean. Retail prices for major food sources ended 2016 down 1.3 percent for the year. The food price deflation trend has continued into this year. As a result, grocery stores’ operating profits declined about 5 percent in the same period and U.S. supermarkets had to eat from their margins to stay afloat.

But the new report indicates that this could all change in the latter half of 2017.

First, Moody’s anticipates domestic food prices to rise about 1 percent in 2017, taking a good amount of the deflationary pressure off of supermarkets’ top lines. As a result, the U.S. supermarket sector expects operating profits to grow about 8 percent in 2017.

Moody’s analyst Mickey Chadha said, “As deflation subsides, growth will be skewed toward the second half of the year, driven by improvement at Albertsons, the Kroger Company and Whole Foods Market.”

This doesn’t necessarily mean that the grocery space will look the same it did as before the deflationary period began. Moody’s data projects that natural and organic foods sales, as well as sales of private-label food products, will continue to grow their market share in 2017 — and, of course, there’s the little matter of growth in the online sector.

“Little” may be the key word here, however. Even with all the talk of digital usurpation, online sales make up a notably small fraction of the U.S. food retail market.

This minority share will continue over the next five years. Moody’s expects 2 to 3 percent annual growth for the food retail market over the next five years, with online penetration accounting for less than 3 percent of the total by 2022.

Still, 3 percent of a multibillion-dollar market is a considerable chunk of change. So don’t expect your favorite grocerants or local food delivery services to be phased out anytime soon.

Streamlining and consolidation initiatives along with in-store digitization and other transformations will continue to be used by brick-and-mortar grocery locations in the coming years to increase customer foot traffic, engagement and store profitability.

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