6 Reasons to Invest in This Grocer
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As part owner of a publicly traded business you should want to own shares in a company that possesses an edge over competitors. The organic food and natural products provided by Whole Foods Market (NASDAQ: WFM) gives this business an edge in the commoditized grocery store arena. Whole Foods Market represents a good investment for the following six reasons.
Whole Foods Market caters to a growing niche where health conscious consumers pay a little extra for healthier foods. This resulted in relatively stronger fundamentals for the company overall. Safeway (NYSE: SWY) by contrast still operates in the heavily discounted traditional grocery sector where the commoditized nature of the business breeds customer loyalty based solely on price.
Kroger (NYSE: KR) not only operates grocery stores but also jewelry stores, convenience stores, and medical express facilities. Kroger faces the responsibility of several different types of retailers, making it difficult for management to focus on any one type of business.
In 2012, Whole Foods’ net profit margins clocked in at 4%, nearly double the 2% of Kroger and quadruple the 1% of Safeway. Kroger and Safeway also harbor a great deal more debt, with long term debt to equity ratios coming in at 146% and 179% respectively, versus just 1% for Whole Foods.
Whole Foods Market possesses $1.2 billion in cash and investments on its balance sheet, roughly the equivalent of Kroger even though Kroger exceeds the Whole Foods Market store count by nearly seven times.
Trends favor the company
Consumers increasingly want a healthier diet. Rising healthcare costs and increasing health awareness serve as incentives for this shift in collective thinking.
Whole Foods Market sells organic and natural merchandise which means, for the most part, that these foods lack the artificial chemicals that could prove detrimental to your health. This means it stands fully ready to capitalize on the slow change in consumer preference for organic and natural products.
Whole Foods Market founder and co-CEO John Mackey believes in “Conscious Capitalism” where companies can profit from maintaining moral principles and the desire to change the world around it. Whole Foods Market’s commitment to employee and customer health education represents an example.
Seeks to make the world healthier
With good management comes a good philosophy. Whole Foods Market wants to make the world a healthier place. Whole Foods Market even made that belief part of its core values. This core value resonates with health conscious consumers encouraging them to continue shopping in Whole Foods. The Whole Foods philosophy also appeals to consumers who are weary of companies seeking profits alone.
Treats employees well
Good treatment of employees or “team members,” as Whole Foods Market likes to call them, represent another company core value. Employees receive all kinds of incentives geared toward increasing production and lowering costs.
One interesting program called “shared fate” aligns the interest of team members with shareholders. When employees in a particular department come in under budget then a portion of the surplus gets divided among the team members. This encourages efficiency, productivity, and salesmanship.
In addition, team members can participate in extra store discounts if they meet certain biometric criteria. Health incentives such as these actually decreased health claims for Whole Foods Market. This also demonstrates the company’s leadership in the healthy lifestyles arena where it wants to maintain an edge.
According to Whole Foods Market’s latest earnings announcement, it believes the marketplace can support up to 1,000 stores in the U.S.; a far higher number than the 355 stores it currently operates. It plans to accelerate store expansion in 2014, opening 33-38 stores versus the 32 it has planned for 2013.
By contrast larger supermarkets such as Kroger and Safeway face heavy market saturation with roughly 2,400 stores and approximately 1,641 stores respectively. Kroger’s recent purchase of Harris Teeter added 212 stores to that count. Safeway’s store count actually declined from 1,739 in 2008 to 1,641 in 2012.
Companies like Kroger and Safeway will need to find ways to cater to the growing organic market or risk falling even further behind. Kroger's rewards card and Safeway’s fuel rewards program may not provide enough catalyst for future growth.
Whole Foods Market with its stakeholder-friendly philosophy, growing demand for natural and organic products, and accelerating expansion should serve shareholders well over the next 10-15 years. In the highly competitive grocery market, Whole Foods Market leads the way.
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William Bias has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of 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!