Investing in Supermarket Stocks in 2023
As dispensers of food, drink and a variety of other consumer staples – supermarkets are often touted as prime examples of defensive stocks. Is this the case in 2023? And, if so, what supermarket stocks should investors consider?
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Why Invest in Supermarket Stocks?
Amidst rising inflation, increasing interest rates and general economic uncertainty, the stock market has been left reeling in 2022.
In such circumstances, many investors attempt to shield their portfolio by rotating out of riskier stocks and focusing on investments which have defensive characteristics.
So-called defensive stocks tend to be companies which, regardless of the prevailing economic climate, can continue to rely on consistent levels of demand from consumers. Within this select group are supermarket stocks, from which consumers purchase a variety of essential goods, goods which they need throughout all stages of the economic cycle.
3 Supermarket Stocks to Watch
So, which supermarket stocks should investors consider adding to their shopping baskets in 2023? In the following sections, we will take a look at 3 supermarket stocks before demonstrating how to invest in supermarket stocks with Admirals.
Whilst the arrival of Aldi and Lidl has wrested a sizeable amount of market share from the more traditional UK supermarket stocks, Tesco remains firmly in control.
The supermarket giant accounted for almost 27% of the UK market in September 2022, considerably more than second-placed rival Sainsburys at 14.6%. Tesco also has a strong presence in Ireland, where it accounts for more than 22% of the market, and further operations internationally.
As such, the FTSE 100 constituent earns a place on our list of supermarket stocks, but it has been far from plain sailing so far in 2022. In the first nine months of the year, share price fell 28.6%. Inflation is hitting supermarket stocks hard, and this was reflected in Tesco’s interim results for 2022 where, whilst revenue climbed 3.5% year on year (YoY), operating profit tumbled 10%.
Still, Tesco’s dominant position in the UK should see it through the current climate and, with much of the headwinds seemingly factored into its share price, there is potential for growth in the future. Furthermore, Tesco shares have a dividend yield of 5.6% at the time of writing, higher than the wider FTSE 100’s 4.15% and considerably higher than the current interest rate of a savings account.
We head across the Atlantic for the next of our grocery store stocks. Walmart is the largest company in the world in terms of revenue, generating more than $570 billion in the year ended 31 January 2022, an increase of 2.4% YoY. However, like Tesco, despite revenue rising so far this year, operating profit has fallen, further evidence of the inflationary pressure facing the industry.
Nevertheless, Walmart has a history of performing well in difficult circumstances, which has earned it a reputation as having recession proof qualities. During the ‘Great Recession’ in 2008, for example, whilst the S&P 500 dropped more than 37%, Walmart recorded gains of 20%. Similarly, in the first nine months of 2022, as the wider S&P 500 fell 25%, Walmart’s drop was a far less pronounced 10%.
Moreover, Walmart’s reputation as a discount retailer should play in its favour at a time when consumers are attempting to reduce spending where possible.
Although perhaps not what you would think of when considering supermarket stocks, tech-giant Amazon has made inroads into the industry in recent years.
Amazon first began dipping its toes into groceries in 2007, with the launch of Amazon Fresh, a grocery delivery service exclusively for Prime members. Subsequently, in 2017, Amazon acquired Whole Foods Market, a US multinational supermarket chain with over 500 locations across North America and the UK.
In 2020, Amazon Fresh opened their first physical store in the US and, as of 2022, the chain now has more than 50 stores across the US and the UK.
Whilst the scale of Amazon’s grocery business pales in comparison to the other supermarket stocks we have looked at, it does seem to be expanding. Of course, what investors get with Amazon is a company which is so much more than simply a supermarket stock, an e-commerce giant with many different products, services and streams of revenue.
How to Invest in Grocery Store Stocks
With an Invest.MT5 account from Admirals, you can invest in the supermarket stocks highlighted in this article. In order to start investing, follow these simple steps:
- Open an Invest.MT5 account and log in to the Trader’s Room
- Click the ‘Invest’ button next to your account details in the Dashboard to open the MetaTrader WebTrader
- Find the stock you want to purchase in the Market Watch and drag the symbol onto the chart to open its price chart
- Right-click on the chart, highlight ‘Trading’ and click ‘New Order’ to bring up the order screen shown below. Here you can select the number of supermarket shares you want to purchase and click ‘Buy’ to send your order to the market.
Industry Headwinds Provide Food for Thought
Although, historically, supermarket stocks have sometimes outperformed the market during times of uncertainty and economic downturns, the current combination of economic headwinds are particularly testing.
The grocery industry is highly competitive and, as there is a significant similarity in the products offered by each store, there is not a high level of consumer loyalty. Many shoppers will simply go wherever they can get the cheapest prices, something which is particularly true in the current inflationary environment.
This leads to intense price competition amongst rival supermarkets, as businesses battle to steal market share from one another. Whilst lower prices no doubt incentivise consumers to return, it also reduces profit margins.
As inflation rises, so too do input costs for businesses, which further erodes profit margins. The high level of price competition in the supermarket industry makes it difficult to pass these higher costs onto consumers, which inevitably results in lower profits.
Therefore, the combination of low economic growth and rapidly rising prices is creating a tough environment for grocers. Consequently, investors should carefully weigh the pros and cons of investing in supermarket stocks before risking their capital.
Investing with Admirals
With an Invest.MT5 account, you can choose from over 4,300 stocks and over 200 Exchange-Traded Funds (ETFs). Other benefits of the account include:
- Competitive transaction fees and no account maintenance costs
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