Mariano's Fresh Market Doesn't Justify Buying Roundy's and Its Dividend

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When it comes to grocery stocks, there's no more appealing dividend than Roundy's 5.2% yield. The company has a dominant share of its home turf, and a promising new brand -- Mariano's Fresh Market in the Chicago area -- that promises to drive future growth.

Yet I think investors are better off looking elsewhere if they want a solid investment. Read on to see why the company's market position isn't what it seems to be, and why Mariano's won't be enough to really make a difference in the coming years.

A dying giant?

Source: Roundy's. 

Currently, Roundy's operates 161 grocery stores, 75% of which are located in Wisconsin, many under the Pick 'n Save banner. Though it currently has a dominant 42% market share of the greater Milwaukee area, that number doesn't tell the whole story.

As recently as three years ago, Roundy's had a 58% share of the Milwaukee market. Then Wal-Mart and other large grocers began making aggressive moves to offer lower prices to shoppers. Because Roundy's doesn't offer a fundamentally different shopping experience, it was thought, consumers would be more likely to gravitate toward the lower prices.

Three years later, it appears that this theory has played out. Not only has Roundy's lost 16% of its home market in such a short time, but Wal-Mart has also gone from a 6% to a 16% share.

Just as alarming, sales at the flagship stores have been in a downward spiral ever since the company went public in 2012. Just look at how, even after adjusted for shifts in the reportable calendar months, the company has lost traffic in droves.


Comparable Store Sales

Q1 2012


Q2 2012


Q3 2012


Q4 2012


Q1 2013


Q2 2013


Source: SEC filings.

Though CEO Bob Mariano says his company is aggressively spending to provide a differentiated shopping experience for customers, it's clear that the strategy isn't working. Speaking from experience (I live right in the middle of Roundy's home market), I can tell you that there's nothing special about what Roundy's core stores offer, and it's just as easy to find competitive prices elsewhere.

A new brand to the rescue?
If there has been one silver lining to Roundy's life as a public company, it has been in the form of its Mariano's Fresh Markets, which are taking hold in Chicago. These stores -- again, speaking from personal experience -- are much more akin to what one would experience if one shopped at a Trader Joe's: a quirky and vibrant atmosphere with differentiated product offerings.

These stores have been a huge hit. Mariano said that, as of the most recent quarter, the 11 Chicago stores are averaging more than $1 million per week in sales. That's well above the company's stated goal of $750,000. Realizing that it might have captured lightning in a bottle, management plans to invest aggressively and open five new stores per year until it hits 30 in the greater Chicago area.

The problem, for bullish Roundy's investors comes when you look at what a small portion Mariano's Fresh Markets makes up of Roundy's base.


Source: SEC filings. 

Even if Mariano's continues to outperform, the eroding businesses in Wisconsin and Minnesota will continue to drag on the company's stock.

Kenneth Goldman, an analyst at JP Morgan Chase, realizing this scenario, asked during the most recent conference call if Roundy's management would be willing to sell off all of its non-Mariano's business if the right buyer came along. Mariano said the question "painted a wonderful picture, but the reality is that there's no such offer" existing.

Until an offer like that comes along, I think there are much better options out there for investors.  For instance, there's one grocer that I've invested a whopping 7.5% of my real-life holdings into. To find out which grocer that is -- as well as two other promising plays -- check out "3 Companies Ready to Rule Retail." Uncovering these top picks is free today; just click here to read more.

The article Mariano's Fresh Market Doesn't Justify Buying Roundy's and Its Dividend originally appeared on

Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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