U.S. grocery retail had a disruption of sorts this week, thanks to one firm’s seemingly insatiable appetite to grow. Will it rain discounts for grocery shoppers? What does this mean for supermarkets’ profitability? What should investors be paying attention to? Get the insights in this week’s Steady Investor News…

After crushing traditional retail stores’ margins with its online discounts, Amazon is brandishing its next trump card – this time in the brick-and-mortar space. Within just a day of formally owning the organic grocery chain, Whole Foods, Amazon slashed prices of the former’s products by as much as 43%. We wonder what that means for already skinny margins of U.S. grocery retail – is it headed for a race to the bottom in terms of product prices?

Grocery has only so much scope of product differentiation, thereby tending to make its consumers price sensitive and its product prices highly competitive. On top of that, Whole Foods’ high-end quality is suddenly coming at bargain prices (thanks to Amazon’s growth-first- margin-later strategy). So, it won’t be a surprise if traditional grocery players feel the heat.

Will Wal-Mart’s ‘everyday low prices’ get even lower in response? How far would Kroger stretch its price penetration strategy? Traditional grocery chains could be walking a tightrope – on one hand, the fear of losing sales to Amazon could push them towards undercutting; but on the other hand, risking already thin margins for a market-share war could leave their shareholders jittery.   Nevertheless, a race towards upping the ante on customer experience in some form or the other is expected. Wal-Mart is already doing that on the technology front, having partnered with Google to leverage the latter’s AI expertise for enhancing customer experience in terms of preference-based product suggestions and voice-assistant services.

Key Takeaway for Investors

Increased competition in any sector pushes players toward innovation and evolution. While this evolution brings opportunities for investors, the competition warrants increased selectivity when it comes to investing in the sector – something which should hold for grocery retail or even retail in general given the recent developments.

No matter how promising, every sector and individual stock is vulnerable to volatility. That’s why, diversification across sectors and asset classes is essential for cushioning downside risks and therefore optimizing returns. A core principle of doing that is included in the “Modern Portfolio Theory.” This theory emphasizes that diversification across non-correlated asset classes helps investors increase returns for any given risk level. At Zacks Investment Management, we believe in the tenets of this theory as we build customized asset allocations for every client and chart a financial discipline to follow through. We recommend that you brush up on the main concepts of this very useful theory as it can help investors navigate the markets as conditions start to change. Get all the inside details with our guide, “Making Sense of Modern Portfolio Theory.” To get your free copy, click on the link below:

 

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