Mergers Point to Confidence in Supermarkets

If you bought stock in a North American supermarket company on Jan. 1, congratulations! You made money.

For the first time in recent memory, all 24 publicly traded food retail and wholesale stocks tracked by SN showed gains in their share prices during the six-month span from the start of the year through the end of June.

These companies were buoyed by the gradually improving economy and incremental improvements in their own operating performances. (Click here for the report.) To be fair, the stock market overall had a strong first half, with the Dow Jones Index and S&P 500 both up in double digits, but it has been a long time since food retailers as a group have been able to ride that tide.

As Andrew Wolf, an analyst at BB&T Capital Markets, points out in that article, the surge in merger-and-acquisition activity during the past year has also cast a positive glow on the industry. The fact that leading private investors like Cerberus were willing to acquire most of Supervalu’s traditional supermarket portfolio, and that a conservative strategic investor like Kroger was willing to shell out $2.5 billion for Harris Teeter, indicate that some smart minds are placing big bets on supermarkets.

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In addition, Bi-Lo Holdings, also controlled by private equity, is snapping up Sweetbay, Harveys and Reid’s to help solidify its expanding empire in the Southeast, and Ahold, which acquired Genuardi’s in the Philadelphia area last year, has said it remains on the lookout for opportunities. Tops Markets in upstate New York has also grown its presence there with the purchase of Grand Union stores.

There is a pattern here. The acquirers, in most cases, are strong operators that have battled through difficult times and emerged leaner and meaner. They have shed their unprofitable locations over the last several years and have highly efficient, proven systems in place that they can apply to their new holdings.

Read more: Supermarket Stocks Ride Economy to First-Half Gains

Investors have long recognized the growth potential among natural and organic specialists like Whole Foods Market and Natural Grocers by Vitamin Cottage, but maybe it’s time to take another look at the more middle of the road operators.

Supermarkets certainly should not be considered a “hot” investment, but maybe they are at least coming in from the cold.