Buying Up Your Local Grocery Store Could Really Pay Off By Brad Thomas, Editor, Wide Moat Daily I never considered myself a bagboy. That employment designation, I decided at the tender age of 14, was beneath me. Instead, I was a courtesy clerk. Unlike "bagboy," "courtesy clerk" had a professional ring to it. It had dignity and spoke of responsibility. No pay difference, admittedly. But you take what you can get. Besides, I was a savvy businessman by then, having worked for years as a paperboy. So I knew what rewards I could reap from excellent customer service. The little old ladies at the grocery store loved how quick and careful I was about loading up their purchases. And some of them tipped very well as a result. (Yes, this was way back when people actually tipped for such things.) I can't say that my "courtesy clerk" position taught me a lot about money management or responsibility. Again, that was something I was used to from my paperboy days. But it did give me an insider's look into the grocery store business that's kept my attention even all these years later. That may have been why I went on to build and buy shopping centers with segments created to grocery-store specifications. For instance, in January 2001, I purchased Chester Plaza in Chester, South Carolina, with its BiLo grocery-store (guaranteed by Koninklijke Ahold Delhaize N.V.) anchor, for $2.25 million. There was a Wall Street Journal notice about it: "IRT Sells Shopping Center for $2.25 million; Continues Asset Recycling and Focus on Larger Markets." IRT Property Company, for the record, was a publicly-traded real estate investment trust ("REIT") at the time – though not the IRT symbol you'll find listed today. A competitor, Equity One, bought it out in 2003; and then Equity One was sold to yet another REIT, Regency Centers (REG), in 2017. In fact, Wide Moat Research covers Regency Centers today. As for the Chester Plaza, I no longer own it. It's one of the assets I lost in the 2008 housing crash. However, that BiLo? It's still there (operating under the Food Lion brand), proving how durable a good grocery-store chain can be. The Truth About Grocery Store Profits You may have heard that grocery stores operate with very thin margins, and that's true to a degree. While physical-store-owning retailers' net profit margins can be as high as 9%, grocery stores tend to run between 1% to 3%. Hardly an impressive amount at first glance. However, you have to remember they sell a lot of items every single day. Peter Zaleski, a professor of economics at Villanova University, has noted that it's worth it "to be in this business" because of the sheer volume of goods sold every day. And when you add in the efficiency, bank-approved respectability, and scale of a grocery-store chain – where less is required to get more done – you can have a good business model going on. That's why companies like Walmart (WMT) and Target (TGT) offer a wide array of groceries at so many of their stores. Not only does it draw customers in who might see some article of clothing or toy they want to buy, but it also makes a quantifiable profit all on its own. It's also why several grocery-store-only companies have been able to go public, including: - Sprouts Farmers Market (SFM)
- Village Super Market (VLGEA)
And that's to say nothing of bulk-package giant Costco Wholesale (COST), which has been a market darling for years. It's also important to point out how recession-proof these companies are. The reason why grocery stores are able to sell so many items so consistently is because they're mostly selling necessities. As in food and drink: products that customers are in continuous need of. Rain or shine. Better or worse. Rich or poor. While consumers can and certainly do cut down on how much soda and snacks they buy when the economy turns sour... they're still going to be buying fruits, veggies, bread, milk, butter, and the like. When properly placed in the right location under the right management, grocery stores have it made – in the shade or the sun. A Small-Cap Grocery Store That's Too Good Not to Put in My Shopping Basket Grocery-store chains are in an especially good spot today, though. And no, it's not because they've been intentionally gouging their customers. Late last year, right before the elections, Senator Elizabeth Warren and Representative Adam Schiff both called for investigations into grocers for "predatory practices." Which, frankly, was stupid. And the proof is in the numbers. In 2019, a company like Kroger carried gross margins (revenue minus cost of goods sold) of 20%. Flash-forward to late 2024 and the company's margins are... still 20%. The problem was and continues to be inflation, which hits retailers right along with their customers. Are grocery stores expected to just swallow that cost instead of passing it on to their customers? Not if they want to stay in business. Or, better yet, blame politicians on both sides of the aisle for using the Covid-19 crisis to overspend left and right. So, no, that's not why grocer's profits are rising. In fact, they know they have to offer as many bargains as possible in order to stay competitive. It's that very necessity that's spurred so many of them to offer their own private-label brands for everything from salad dressing to bread. That way, they can offer cheaper goods at better margins, benefiting both themselves and their shoppers. In addition, restaurants – another low-profit-margin business, unfortunately – have had to hike their own prices by unappetizing amounts. It's keeping many more people cooking at home than in the past. Knowing all of that, I've got my eye on one particular publicly-traded chain. Its stock is looking a bit beaten up right now due to forces outside its control. But considering how it's impressed me for quite a while with its management style... I'm more than ready to recommend it in Wide Moat Confidential, my small-cap service. In fact, I'm putting the copy together right now. If you're already a subscriber, you can look for this newest pick next week. The sooner I let you know about it, the better. Because while its shares might look depressed right now... I'm positive they won't stay that way for long. Regards, Brad Thomas
Editor, Wide Moat Daily MAILBAG Do you agree with Brad that grocery stores are in a good spot today? Write us at feedback@widemoatresearch.com. | 
