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Why ASX 200 supermarket shares are a long-term buy in this bear market

The social measures and restrictions imposed by the government has forced the closure of many pubs, clubs and restaurants. As many of these, mostly small businesses, struggle to cope with the COVID-19 pandemic, Australian supermarkets could stand to benefit from the vacant market.

How have the ASX 200 supermarkets performed?

Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW) and Metcash Limited (ASX: MTS) have seen sales soar in the past month. Consumer panic buying and stockpiling has fuelled a surge in demand, which has forced major supermarkets to hire more staff and even impose purchase restrictions on certain items.

Initially, consumers restricted panic buying to essentials and dry goods. However, as the pandemic has evolved, consumers have expanded their purchasing hysteria by hoarding alcohol as well. According to research from the Commonwealth Bank of Australia (ASX: CBA), consumer spending on alcohol from bottle shops has increased by 86% compared to a year ago.

A reflection of this change in consumption was seen recently, when Coles offered to buy stock from wine, beer and spirit makers that were originally destined for restaurant and hotel trade. The surge in demand has forced supermarket-owned liquor stores like Liquorland (owned by Coles) and Woolworths’ Dan Murphy’s and BWS to extend their buying restrictions to alcohol products.  

How will supermarkets benefit?

According to the same research from Commonwealth Bank, spending on alcohol at clubs and pubs is down 49% following government restrictions. The shift in demand to bottle shops could be a long-term trend as supermarkets inch into a new market share.

A recent article in the Australian Financial Review (AFR) highlighted that analysts estimate Australian supermarkets could take over market share from the restaurant and café sector. According to the AFR piece, analysts estimate that approximately $9 billion in sales from the café, restaurant and takeaway sector could shift to the supermarket and grocery sector.

Although panic buying and hoarding may offer a short-term boost to sales, supermarkets could also benefit in the long-term as a result of a change in consumer behaviour. Analysts estimate that a 50% switch from the café and restaurant sector could add a 4% boost to supermarket sales.

Foolish takeaway

The coronavirus pandemic could have a lasting impact on how consumers shop and where they spend their disposable income. With people having to deal with job losses and uncertainty, consumers may opt to more cautious behaviour such as cooking and drinking at home rather than going out.

In my opinion, supermarket shares offer great potential for a long-term buying opportunity. The impact of the coronavirus pandemic will not be brushed off quickly and essential services like supermarkets are preparing to adapt to changing consumer behaviour. In addition to new avenues of growth, these stocks also provide the potential for defensive earnings.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.