A strange thing happened on the way to the grocery store, namely young people stopped buying their food there. Demographic shifts are highlighting the rapidly changing landscape of traditional food retailers. From 2012 to 2015, only one demographic group, those 55-64, increased their purchasing of food at grocery stores. Every other group decreased their food purchases at grocery stores.
What accounts for the demise of grocery shopping? Two trends: food prices at the grocery store declined faster than they did at restaurants and younger generations increased their restaurant visits. Food prices declined 1.6% in 2016, the largest decline since 1959. Lower food prices and increased competition from discounters resulted in consumers spending less at the grocery store than in previous years. The proliferation of fast casual and other restaurant options, as well as a perceived lack of time, has younger generations opting to forego cooking in favor of take-out or restaurant eating as can be seen by the rapid drop in grocery spending the past 3 years by the youngest demographic cohorts. This increased appetite for dining out reduces the need for grocery store visits.
The timing of this drop in grocery purchasing couldn’t be worse, as the industry has been expanding rapidly over the past 30 years. The nation’s largest food seller, Walmart, doubled its store count in the last decade to 4,645 stores. The boom couldn’t last, and in 2016 Walmart closed 154 stores. Still, Walmart has an outsized share of food retailing, with a market share of 27% compared to the next closest competitor, Kroger, with a 10% market share.
Our own Tim Rich, CFA, comments that the problem of over-saturation of stores isn’t limited to the grocery industry. After decades of physical footprint expansion, many U.S. retailers were not positioned for the advent of the internet and online shopping. “As a nation, we are over-stored in general and demand for all that square footage is waning.” Next quarter, we’ll examine how retailers are coping with these challenges.
“The market rallied, so why did the value of my bonds go down?”
Bonds are an important tool in an investor’s portfolio. Obviously bonds provide income, typically in the form of a coupon where the rate paid to you the lender is “fixed” at the time of the bond’s issuance – hence “fixed income.” Additionally, because market values for bonds often increase when stock markets stumble, bonds can provide an important diversifying element. However, diversification works both ways. As we experienced in the most recent quarter, the reverse can also be true – when stock markets rally, the bond market may go down. Bond prices move in the opposite direction of interest rates. When interest rates go up, the price of bonds generally go down.
While the value of your bond holdings may have gone down, that does not necessarily mean that you have “lost money.” Why? Because the market value of a bond has a distinctly different meaning that it does for stock.
When an investor buys a stock, he or she is making an investment that may exist beyond their lifetime, and the lifetime of a few future generations. Consider Consolidated Edison, which first traded on the NYSE over 190 years ago in 1824. A stock investment represents a promise by the company to share all future earnings with its investors. As long as that company continues to profitably provide marketable goods and services, that promise has no expiration date. That enduring promise is a source of wealth for the investor. One option for an investor in a viable company is to pass that promise onto heirs or other beneficiaries. Another option is for an investor to decide to convert that promise into spendable cash. In an equity investment, the only way to do that is to sell that promise in the stock market. The market value of a stock represents the only way to exit a stock investment in a going concern.
A typical bond investment is also a promise, but one with an expiration date. A bond has an automatic exit mechanism built into the investment: maturity at par. Some bonds, such as callable municipals, may have a few options for when that maturity will be, but unlike stocks, your investment in a company’s or a municipality’s debt will end without you taking any action whatsoever. In addition to the interest income that has been paid to the investor over time, the borrowing entity will return the amount of the original investment, usually denominated in increments of $1,000. If the company or municipality does not honor that promise at maturity, bondholders have the ability to take over the assets of that entity. Therefore, the market value of a bond more accurately represents for you, the investor, a potential course of action today, NOT your only exit strategy. Whether you hold a bond directly or through a fund, a bond’s market value merely represents what dollar amount you would receive if you (or the fund’s portfolio managers) needed to transform that wealth into spendable cash today. Therefore, you have not “lost money” unless you need to sell your fixed income holdings at the current, lower market value.
We structure client portfolios with an overall financial plan in mind that provides for your liquidity needs – where we convert your wealth into spendable cash – without requiring that we sell your bond investments today. When we buy a bond, we are buying the stream of interest payments for the life of the bond and return of principal at maturity, nothing more. Fluctuations in the value of the bond, while interesting, are fairly immaterial to the investor who plans on holding the bond to maturity. Here at Denver Investments, we have always believed that long-term total return is the goal of bond investing. We feel our clients’ best interests are served by creating a portfolio that has frequent maturities to take advantage of reinvesting at higher rates while providing a stable stream of income.