Rising competition and persistent deflation have hurt share prices for supermarkets

This year has been difficult for supermarket stocks. All the major supermarket chains are in the red. Whole Foods Market (WFM), Kroger (KR), Sprouts Farmers Market (SFM), and Supervalu (SVU) are sitting at year-to-date (YTD) losses of 16%, 26%, 20%, and 33%, respectively, as of October 21, 2016.

Why Competition and Deflation Hurt Supermarket Stocks Like WFM

Concerns over increasing competition and persistent deflation have pressured supermarket stocks. The companies have been forced to revise their earnings outlook downwards, which has hurt their share prices.

Poor performance has led to consolidation and sell-offs in the supermarket sector

A challenging operating environment and declining same-store sales have led to supermarkets selling either part or all of their companies. In March, Apollo Global Management, LLC (APO) purchased The Fresh Market as the company was unable to keep pace with the rising competition.

On October 17, Supervalu (SVU) announced the sale of Save-A-lot, its discount grocery chain, to Onex Corporation for $1.37 billion. The company plans to repay its debt using the deal proceedings.

Is Whole Foods in the queue for a takeover?

Rumors about Kroger’s interest in purchasing Whole Foods floated in the market on October 6. The takeover speculations boosted the share price of Whole Foods. However, none of the companies commented on the rumors.

Kroger has been very active in identifying cheaply valued grocery players in order to expand its business. Roundy’s, Vitacost, and Harris Teeter are some of its recent acquisitions.

However, it isn’t clear if Kroger would be keen on purchasing Whole Foods. It already has a well-established natural food business under its umbrella.

Also, from a valuation standpoint, Whole Foods doesn’t fall under the “cheaply valued” category. For a more detailed view of WFM’s valuations, read the next part of this series.

Kroger and Whole Foods Market are among the portfolio holdings of the VanEck Vectors Retail ETF (RTH), with respective portfolio weights of 3.6% and 1.3%.

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