Should You Invest in Food Retailers ?

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Food retail is a very low margin business in the U.S. The industry is extremely competitive and from an investment point most of them do not seem to offer good returns to investors. Fierce competition drives down prices on a daily basis and companies have to eke a profit on huge sales volumes. Another factor that must be considered is that Wal-Mart and its Sam’s club units try to grab more share of the business from food retailers.

Four of the top publicly-traded food retailers are listed below:

S.No.CountryADRs List
1BulgariaComing Soon
2CroatiaCroatia ADRs
3Czech RepublicCzech ADRs (All)
4GeorgiaComing Soon
5HungaryHungary ADRs (All)
6KazakhstanComing Soon
7LatviaComing Soon
8LithuaniaLithuania ADRs
9PolandPoland ADRs (All)
10RomaniaRomania ADRs
11RussiaRussia ADRs (Only Exchange Listed),Russia ADRs (All)
12UkraineUkraine ADRs (All)

Cincinnati, OH-based Kroger (KR) has 2,435 supermarkets and multi-department stores and many other varieties of stores in most of the midwest and in the Southern states.Its profit margin last year was just 0.78%. In five years the stock has been an average performer.

The grocery chain Supervalue(SVU) operates stores throughout the country. The profit margin in 2012 was negative 1.37% and the stock has fallen about 42% in 52 weeks.

Safeway Inc(SWY) runs 1,678 stores in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. In Canada it has stores mainly in British Columbia, Alberta and Manitoba/Saskatchewan. It has a profit margin of 1.20% and the dividend yield is decent at 3.43%.

Whole Foods Market, Inc. (WFM) is a natural and organic foods supermarkets and operates 311 stores, of which 299 stores were in 38 United States and the District of Columbia; seven stores in Canada; and five in the United Kingdom at the end of 2011. Whole Foods has a unique business model and is profitable. In the past 52 weeks the NASDAQ-listed company’s stock is up about 18.0% which is extremely good in this industry.

Overall grocery retailing is a cut-throat business and though some of these companies are publicly-traded they are not the best for investment. They produce average returns with the exception of Whole Foods and most have low to below average dividend yields as well. Hence investors may want to avoid investing in this sector or invest a small percentage of their assets.

Note: Dividend yields noted are as of Feb 13, 2013

Disclosure: No Positions

Cumulative Real Returns and Annualized Returns of Major Asset Classes of US Markets

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Every year Credit Suisse publishes the Global Investment Yearbook which contains a wealth of data on many markets. From the 2013 edition here are two charts related to the US markets.

The Cumulative Real Returns from 1900 to 2012 & the Annualized Real Returns of Major Asset Classes(%):

Click to enlage

US-Real-Returns-from-1900-2012

 

 

Source: Credit Suisse Global Investment Yearbook 2013, Credit Suisse

Since 1900 U.S. stocks have yielded a real return of 6.3% compared to just 2.0% for bonds. Stocks have out performed bonds strongly over very long periods.

From the report:

Figure 1 shows that, over the last 113 years, the real value of equities, with income reinvested, grew by a factor of 951.7 as compared to 9.4 for bonds and 2.7 for bills. Figure 2 displays the long-term real index levels as annualized returns, with equities giving 6.3%, bonds 2.0%, and bills 0.9% since 1900.

During the time period from 2000 to 2012 stocks had a negative return due to the global financial crisis and the dot-com implosion.

For Higher Returns, Invest In Consumer Staples Than High-Yield Utilities

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Consumer staples stocks traditionally have paid moderate dividends and offered slow and steady growth. Utility stocks on the other hand, have high dividend yields and are considered to have higher growth rates.

When it comes to choosing a sector for investment investors are faced with this question: Should I go with consumer staples which pay moderate dividends or should I go with utilities which pay high dividends?. In the long-term the low-dividend yield consumer staples have easily outperformed utilities. Though utilities have high dividends their dividend growth rate tend to be lower. Hence investors looking to invest for the long-term should invest some potion of their portfolio in consumer staple stocks.

In order to confirm the above theory I used two ETFs for the sectors – Select Sector SPDR-Consumer Staples ETF (XLP) and Utilities Select Sector SPDR ETF (XLU) to measure against the S&P 500 ETF (SPY). In both the 5-year and long-term returns XLP outperformed XLU as shown in the charts below.

5-Year Return Comparison:

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SPY-vs-XLU-and-XLP-5-Years

Long-Term Return Comparison:

SPY-vs-XLU-and-XLP-Since-2001

Source: Yahoo Finance

According to Standard & Poor’s data, the 5-year annualized price return for consumer staples and utilities are 6.09% and -1.54%. The difference in returns is not surprising. In the 3-year and 1-year categories also consumer staples beat utilities.

Note: Chart data shown as of Feb 8, 2013

Disclosure: No Positions

Scientific Research and Innovation Grows In Emerging Countries

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Scientific research and innovation was dominated by western countries up until a few years ago. The majority of the scientific publications in the world were published by researchers in these countries. However emerging countries are starting to compete fiercely in the field of scientific innovation. According to an article in OECD Observer, globalization and democratization of scientific research and innovation  have especially lead Asian emerging countries to new global hubs of scientific research.

Click to enlarge

Research-by-Country

Source: Emerging innovators, OECD Observer

Only ten years ago China lagged in the field of scientific research.Today it has surpassed Germany and France to become number two in producing scientific  publications in co-operating with partner countries such as Canada, USA and Japan. South Korea has also increased its R&D spending significantly in the past decade and today published more scientific research than Sweden, Russia and Turkey.

The U.S. still ranks the top country in research and innovation as in the above diagram. But China’s jump to number two position is surprising.