Vitacost.com Is The Amazon Of Whole Foods

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Online supplement seller Vitacost.com (NASDAQ: VITC) expanded its health food offerings to attract shoppers who want Whole Foods Market (NASDAQ: WFM) quality without paying Whole Foods' prices. Carlotta Mast, at New Hope 360, reported that Vitacost.com announced a plan to become the Wal-Mart (NYSE: WMT) of Whole Foods. Vitacost.com and Whole Foods both sell health food, so that part of the analogy works. A look at Vitacost.com's financials shows a company more like online discounter Amazon.com (NASDAQ: AMZN) than Wal-Mart, though. Vitacost.com and Amazon.com's business models work well enough together that the retailers already teamed up to sell health food online. As an online retailer that could disrupt the hot health food sector, Vitacost.com is worth a look.

Low Price Strategy

Vitacost.com's operating margin definitely makes the online supplement seller look more like Amazon.com than Wal-Mart or Whole Foods. Amazon.com's aggressive discounts result in a .9% operating margin. Vitacost.com goes a step further with its discounts, running in the red with a -6.3% operating margin. Natural Grocers by Vitamin Cottage, (NYSE: NGVC) another rapidly growing small cap supermarket that sells health food and vitamins, reported a 3.9% operating margin. Wal-Mart has a much stronger 5.9% operating margin itself, while Whole Foods reports a 6.4% figure. Vitacost.com's competitors do have economy of scale advantages to consider; although Vitacost.com could gain additional economy of scale benefits if these discounts result in more rapid growth.

Rapid Growth

Discounts already helped Vitacost.com achieve a high growth rate recently. In its latest quarter, 3Q 2012, Vitacost.com reported $82.2 million revenue, a 29.6% gain over 3Q 2011. Health food's popularity definitely helped here, but Vitacost.com also managed to beat other health food stores' figures. Whole Foods reported 23.6% quarterly revenue growth for 4Q 2012. Vitacost.com also surpassed Natural Grocers by Vitamin Cottage, which reported 28.3% quarterly revenue growth for 4Q 2012. Vitacost.com even beat Amazon.com's 26.9% 3Q quarterly revenue growth figure.

Balance Sheet

Vitacost.com does have some cash reserves to sustain its expansion strategy, as the company reported $35 million cash and zero long term debt. Natural Grocers by Vitamin Cottage earns profits, but its $3.3 million cash balance and $26.4 million long term debt still come out worse than Vitacost.com's figures. Whole Foods' $1.22 billion cash hoard greatly surpasses these smaller grocers though, and its $24 million long term debt isn't an issue. With $5.25 billion cash and zero long term debt, Amazon.com wins the balance sheet comparison with the grocers easily.

Amazon.com Partnership

Vitacost.com lists web visibility as a risk factor in its 2011 annual report, but the online grocer did find one way to reduce its dependence on traffic from Google, by setting up an Amazon.com storefront. Shoppers who visit Amazon.com directly can find Vitacost.com because of the web retailers' partnership, which reduces Vitacost.com's need to buy ads on other advertising channels.

Vine.com and the Vitacost.com storefront at Amazon.com do offer many products from the same health food suppliers, such as Annie's Homegrown and Hain Celestial. Amazon.com could use its size to negotiate better deals with third party health food suppliers and undercut Vitacost.com on price, although Vitacost.com gains some security from its private label brands. Vitacost.com's annual report mentions that its own brands provided 23% of its 2011 sales, including organic food sales from its Best of All brand and organic juice sales from its Smart Basics brand.

Takeaway

Amazon.com's Vine.com launch shows that Vitacost.com's approach has potential. Web companies in other sectors, like the online jewelry seller Blue Nile, realized that brick and mortar stores remain vulnerable to price competition. Vitacost.com also made a good decision when it made a deal with Amazon.com, since the online retail giant shares many of Vitacost.com's strengths and has less vulnerability on price than physical grocers. An investment in Vitacost.com could take a while to pay off, but Amazon.com has demonstrated that investors will invest for the long term if a company has an appealing long term plan.


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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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