I'm Liking Roundy's

On any given day if you were to ask me what I thought about grocery store stocks, I'd respond with a yawn. Especially considering that the latest analysts projections, which only expect to see 1% growth in the domestic grocery market, leave much to be desired when you consider so many other companies, and so many other sectors that are expected to see much higher growth. Why would you mess with a grocery store?

But then there's Roundy's.

While Roundy's is a relative newcomer to the stock market, only having begun trading in February of 2012, it is not a newcomer to the domestic grocery market. Although the company has changed hands several times over the past few years, the company remains strong. They do have a few challenges in their bigger markets like Milwaukee where several years ago much of their competition left town. Stores like Jewel-Osco, Cub Foods, Sentry, and Kohl's Foods were no more, and the one that remained was Pick 'Save, a Roundy's store. They could operate with relative ease. These days other players have entered the Milwaukee market like Piggly Wiggly, Woodman's—a privately held family owned business that has been expanding rapidly—and of course Walmart has been moving in on Roundy's territory as well, opening more superstores, and adding neighborhood market stores.

But it's not the Pick 'N Save stores, nor Roundy's other brands like Copps or Rainbow that have my interest. It's their Mariano's stores which are the gorilla in the room.

Part of what separates Mariano's from the regular, and rather boring domestic grocery market, is its concept. Think Whole Foods, and the massive growth this sector, and of course Whole Food's stock has enjoyed over the past few years. As people trend toward healthier food choices, and organic foods, Whole Foods has capitalized big time on this trend.

Enter Mariano's.

Mariano's is still targeting consumers who want quality, and aren't as concerned about paying higher prices. But, they are managing to offer an alternative to the more expensive Whole Foods. So while Mariano's may not be the cheapest shopping trip compared to discount grocers, the bill will still be lower than Whole Foods, and the emphasis is again on value and quality.

For now Mariano's is only in the Chicago area, currently with 9 stores. But Roundy's thinks that the Chicago market can support up to 30 stores, and they plan to aggressively expand and open around 5 new stores per year.

Considering the massive growth in this sector of the domestic grocery market, and considering that there's a ton of room for growth, especially if Mariano's can expand into other markets and steal away some market share from other stores like Whole Foods and Outpost Natural Foods, Roundy's stock could be worth quite a lot more than what it is currently trading at.

Disclaimer: Jim Bauer currently holds shares in RNDY. He does not currently have any shares in Whole Foods, or any other domestic grocer.