According to a recently published report by TechSci Research -- "United States Organic Food Market Forecast & Opportunities, 2018"-- the U.S. organic food market is slated to grow at a compound annual growth rate of 14% from 2013 until 2018. The demand for organic food is increasing, with 81% of American families having shopped for organic food items according to estimates from Organic Trade Association.
It's no surprise that giants like Wal-Mart (NYSE:WMT), Kroger (NYSE:KR), Target (NYSE:TGT) and others are stepping up their game in the organic products landscape in order to unseat the undisputed king of natural- and organic-food retail -- Whole Foods Market (NASDAQ:WFM). Let's take a look at the recently reported quarter of Whole Foods and see how it is plans to counter the threats that it is facing.
The disappointment continues
Whole Foods has been through a series of disappointing earnings reports due to competitive pricing pressure from other grocery chains that are moving into the organic and natural foods market. As a result, its shares have dropped 40% from its peak in November last year. Does this drop provide an opportunity to grab more shares? Let's take a look.
Despite the competition, in the second quarter of fiscal 2014, Whole Foods' sales grew approximately $300 million to a record $3.3 billion. Its comparable store sales, or comps, excluding the Easter shift, increased 5% year-over-year, reflecting healthy market share gains. Quarterly earnings came in at $0.38 per share. However, it missed consensus estimates on both revenue and earnings.
The company opened three new stores during the quarter, taking the store count to 374, spread across 41 states in three countries. It plans to open 36 to 39 stores in fiscal 2014 and 38 to 45 stores in fiscal 2015. Moreover, it expects to end the year with around 400 stores and cross the 500-store mark in 2017. Over the long-term, it projects the need for 1,200 Whole Foods Market stores in the United States alone.
Besides the residential sector consumers, even the restaurants and education sectors have started offering organic food in the U.S. Whole Foods has provided a roadmap through fiscal 2018, and it hinted at attaining $25 billion in sales in the next five years. Given the projected market growth and a strong balance sheet, this does not look like an over-ambitious target. The long-term growth story looks promising.
Moves to counter the threats
Whole Foods has already moderated the average price per item growth from 3.3% to a three-year low of 1.7% last quarter. So, it is already responding proactively to increasing competition. As prices fall, it will attract more consumers. Also, it isn't scared of Wal-Mart. In a CNBC interview, Whole Foods co-CEO Walter Robb said --
"Wal-Mart's been in the organic space for some time so, that being said, they are an excellent competitor. And I will say historically that of all the competitors in the market their customers overlap the least with ours. In the end I think it's an affirmation that this organic food marketplace continues to grow. "
In April, Wal-Mart announced that it will be putting its muscle behind Wild Oats organic products. The new line of organic products will be 25% cheaper than other national brands. However, it remains to be seen how Wal-Mart implements such an aggressive price cut. Todd J. Kluger, vice president of marketing for Lundberg Family Farms, told Rodale News in an interview --
"I think it's a bit dubious, because there are many organic products in the marketplace that only enjoy a 25 percent premium over conventional food. There isn't much you can do to cut the cost of organic ingredients. Just certification and organic farming practices cost you more. That's already a 15 to 20 percent difference from conventional."
Kroger is also trying to make its presence felt in the organic food market. It is reducing prices of organic items on its shelves, and a move such as this will hit its margin. Kroger offers Simple Truth and Simple Truth Organic exclusive brands of natural and organic foods that are "Free From 101" artificial ingredients and preservatives. However, Kroger won't have smooth sailing in the organic and natural products market as it is facing a potential class-action lawsuit that will determine whether the Simple Truth brand lives up to the promises on the label.
The competition in the industry looks serious, and Whole Foods will need to keep prices in check if it to succeed. In addition, the company will have to expand its stores at a good pace in order to keep up with other big-box retailers. This is the reason why investors should wait on the sidelines and wait for Whole Foods' moves to bear fruit before buying the stock on the pullback.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.