Organic Growth Opportunities for This Grocer
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Like other retailers, grocers have been deciding to either go upscale with organic and natural foods, or downscale to compete on cost. I wondered whether dollar stores could compete in the health food market. Organic products could help the dollar stores improve their margins, as these products sell for high prices at upscale grocery stores like Whole Foods (NASDAQ: WFM). I found out that Dollar Tree (NASDAQ: DLTR) has already received some praise from shoppers because of its organic and health food selections, which could help Dollar Tree maintain its relatively high margins.
Shoppers seem willing to pay higher prices for organic groceries right now. This trend has helped Whole Foods and other grocery stores that specialize in health food report rising revenue and earnings while other retailers are struggling to attract shoppers. For shoppers with limited budgets, buying organic food could mean giving up other retail goods like stylish clothing or home decorations, as organic food often sells for significant premiums. Some shoppers travel for long distances to visit natural food stores, so these stores are often termed destination stores.
The major dollar store chains already have better profit margins than many traditional supermarkets, including Whole Foods itself. Dollar Tree has a 7.39 percent profit margin, which is almost twice Whole Foods' 3.7 percent margin. Dollar Tree shoppers are looking for bargains, so improving Dollar Tree's profit margin further could be a challenge. Whole Foods reported 30.8 percent earnings growth for the quarter, more than double Dollar Tree's 15 percent figure, so Whole Foods looks like it could have more room to raise prices.
A visit to Dollar Tree's web site shows several products that stores like Whole Foods sell, including WestSoy organic soy milk and Good Health Natural Foods veggie sticks. The organic soy milk received the highest review score in Dollar Tree's food pantry category, and it got more than 3 times as many reviews as the next most popular product. The product brands are very important here, as the WestSoy and Good Health Natural Food labels show that a shopper isn't giving up quality in exchange for a discount. I have specifically visited natural food stores to get these veggie sticks before, because they aren't always available at traditional grocers even in California, so seeing them at a dollar store is somewhat surprising.
Dollar Tree's product review website could give the company a major advantage over other discount retailers in the health food market. Amazon.com (NASDAQ: AMZN) gets a lot of attention for its discounts, but one of Amazon's original competitive advantages was the wide variety of product reviews on its website. Many shoppers are wary about discounts on higher end products, especially health food. Shoppers visit specialty health food stores because they want to make sure that their food is safe. Dollar Tree, like Amazon, uses product reviews to show shoppers that familiar, trustworthy brands are available at low prices. As search engines place even more importance on social signals, Dollar Tree seems well positioned to maintain high visibility in search because of its review site. Dollar Tree also lets shoppers order organic groceries online, a convenience that some small discount stores don't offer. Amazon itself currently has 36,654 listings for natural and organic groceries on its own website, which shows that the online discounter is very active in this market.
Dollar Tree only offers a few organic and health food products, so a shopper who wants to fill up her entire cart with health food might still visit Amazon or Whole Foods. Health food could still give Dollar Tree an advantage over other dollar stores. Dollar Tree's customers seem happy about these groceries, and these listings do make Dollar Tree's web presence stronger, which could help it compete with online discounters like Amazon. Online product reviews also offer a fairly cheap way for retailers to advertise, which should help Dollar Tree keep its costs down. Dollar Tree looks well positioned to benefit from both the health food trend and shoppers' price sensitivity.
Eric Novinson owns shares of Whole Foods Market. The Motley Fool owns shares of Amazon.com and Whole Foods Market. Motley Fool newsletter services recommend Amazon.com and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.