Growing Organically

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

The constant buzz these days around healthier lifestyles, took my focus on to the Organic Food industry. With rising health care costs and increased awareness about wellness, the US Organic Food industry has seen a tremendous growth in the last few years. I was reading this report - 'US Organic Food Market Analysis' by the RNCOS Institute which expects this industry to witness ~12% CAGR by 2014. This was among the few sectors which performed well during the recovery phase of the economy in 2010 with ~7% y/y growth, much ahead of the total food sales growth.

In the US food industry, I have researched about the three major players which include Organic products in their portfolio at good levels. Among these three companies Whole Foods Market, The Fresh Market and Safeway, I am placing my bet on Whole Foods Market, Inc. 

Company

Stock Returns in last 1 year (~)

Whole Foods Market (NASDAQ: WFM)

41.00%

The Fresh Market (NASDAQ: TFM)

44.00%

Safeway (NYSE: SWY)

-11.00%

Source: Yahoo Finance

The Fresh Market recently posted its 3Q12 results with its net income increasing by ~19% y/y to ~$10.9 million. The company is on an expansion mode and is all set to enter the Texas market with four new stores in Houston. Apart from this, it has also signed the lease papers for additional eight new stores in different states of the US. These stores are expected to be operational in 2013. The company's stock price has seen a massive growth in last one year with a return of ~44%. And, with its expansion plans in place the stock price is all set for another upside movement.

Moving on to Safeway we find that its stock performance is lagging behind its competitors with a negative return of ~11% in the last year. In order to stem the tide the company launched a loyalty program 'Just for U(TM)' in the first half of 2012 to help its customers shop more and save more. It is a unique mobile shopping tool which gives the customer an access to lots of coupons and deals along with increased savings. This program has helped the company to improve its volume of sales and also to increase the customer’s confidence in the brand. I expect this to be further helpful for the company in the long run.

Coming back to Whole Foods, the company is a leading name in the Natural and Organic foods supermarkets as compared to its smaller rivals such as The Fresh Market and Safeway. To further enhance its leading position, it is undertaking various steps to retain its customers’ loyalty. Let us have a look at some of these steps in detail.


Getting Ambitious

1. The Expansion Plan -

The company in its 4Q12 results posted an increase of ~23% in its sales to ~$2.9 billion. This was a result of the company's continuous efforts to open new stores to increase the overall sales. To leverage on this in the future, Whole Foods is targeting to triple it store count to 1000 in the US from its 335 stores currently operating. The company is mainly focusing on smaller markets, as well as on the areas which do not have access to large grocery stores. Whole Foods is also eyeing Canada as a huge opportunity in natural and organic products. It announced four new stores to be opened in Canada in the next two years. The company expects ~$1 billion revenue from its Canada's stores in the next ten years. I see this expansion strategy to provide Whole Foods with an edge over its competitors and opening up new market opportunities for the company in the long run.

2. Pricing Policy -

Whole Foods have always been known for its expensive products as compared to its competitors. However, the company has adopted a new technique in last few years – 'Lowering its Prices'. In its last quarter it focused heavily on reducing its prices to be more competitive in the industry and as a result it gained ~22% new customers in 4Q12 against 3Q12. The company reduced the price gap by 1% on ~700 items which are common with its competitors, which was the highest drop in three years. With this initiative the company is trying to revamp its image as an affordable provider in the market. Whole Foods is already known for its superior quality products and now with its competitive prices, it is all set to capture higher market share and increase its revenue.

Looking at the above aspects I think Whole Foods has a robust growth outlook and it will continue to increase its revenue in the next few quarters. The ongoing consumer shift towards organic products would speed up the sales in the industry and with these initiatives around Whole Foods is in a strong position to capture the market. I recommend a buy for this stock.

 

 

 

 

 

 

 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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