Competition, Risk and Return in the US Grocery Industry

This paper studies competition and financial market performance of the US grocery sector over a period of almost 50 years (1960-2007), using the Sharpe-Fama-French-Carhart standard performance attribution methodology. Following Hou and Robinson (2006), investors in industries with strong (resp. weak) competitive pressures demand a positive (resp. negative) return premium commensurate with the competitive risk incurred. We examine whether such a Hou-Robinson premium exists in the US grocery sector. The authors find no statistical evidence of a Hou-Robinson premium for the sector as a whole. The sector thus appears to be correctly priced. When, however, the sample is separated into larger and smaller firms, the portfolio of larger firms exhibits a positive Hou-Robinson premium, while that of smaller firms exhibits a negative premium. This result supports the dual nature of competition in the US grocery sector. Furthermore, when the authors compare the risk-adjusted average return of the larger retail firms in the grocery portfolio with that of the larger manufacturing firms in the same portfolio, the authors find no statistically significant difference. The larger manufacturing and retail firms in the grocery supply chain seem to share the same level of competitive risk. However, the portfolio of smaller manufacturing firms does not exhibit the negative premium seen in the portfolio of smaller retail firms, indicating that the latter are able to shield themselves from competitive pressures in a way that their manufacturing counterparts are not.