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When I look back at the whole Whole Foods (WFMI) run up, I kick myself.

Like Peter Lynch’s “Buy what you know” mantra, I look back to my college years in Boston (Go Crimson!), and remember less fondly all of the money that I spent at the Whole Foods in Brookline.

Whole Foods was amazing — a clean, friendly supermarket with the most beautiful looking produce I’d ever seen outside of Israel. Whole Foods was the grown-up big sister to your local produce market, and just ran circles around other supermarkets in terms of quality and experience. Its margins were better, revenues ramped, and investors were rewarded handsomely. Between 1995 and 2005, investors would have seen a 2700% gain in their investments.

That's not too shabby.

Now the game is a bit harder. Most supermarkets have a “Green” section of the store, and other chains have emerged.

I think that today, the health food industry in Israel is where the health food industry in America was in 1995, pre- the massive Whole Foods thing.

Now, enter Blue Square-Israel (NYSE:BSI), one of the leading food (and non-food) chains in the country. As of the end of 2006, BSI owned 175 supermarkets under the brand names, Mega, Super Center and Shefa Shuk. As of December 31, 2006, Blue Square operated 39 Mega Stores, consisting of approximately 160,500 square meters space, 95 Super Center stores, consisting of approximately 96,200 square meters space, and 41 Shefa Shuk stores, consisting of approximately 66,600 square meters space.

I happen to shop at Mega (prices are good enough to make my colleague, Aaron “Instant Rebate” Katsman, take note) , so I read with interest a Globes article with the scoop that Blue Square may begin rolling-out a big-box health food chain based on their 51% investment in Eden Teva Market Ltd. ($22.5 million) a month ago.

I guess if I had been paying the attention required at a Cambridge-based school, I would have noticed Blue Square-Israel telegraph the same info about a month ago in a Press Release. (See that press release here). In the Press Release, BSI itself said that it “intends to extend the Eden Teva Market brand quickly throughout Israel, leveraging its greater financial and organizational resources with a goal of opening 8-10 stores in the next 3 years.”

BSI sniffs an opportunity to consolidate the fledgling organic market. With less than 250 outlets of organic food in the entire country (most of them micro mom-and-pops), Eden Teva, and more specifically, Blue Square-Israel, is putting its money where other peoples’ mouths are. Dropping off my kids today for the first day 0f nursery school, and primary schools, I was overwhelmed at the amount of healthy food (organic and macrobiotic) some of these kids carried with them (I am not convinced they ate any of it).

So much for a Snickers bar.

Anyway, Blue Square may be worth a look. BSI is launching a three-pronged approach to continue on a new growth trajectory:

  • In-Town Discount Shopping: Instead of making people drive out to the boonies to save a shekel or two, BSI’s Mega brand will be repurposing a number of in-town stores to begin discounting products for the price-sensitive Israeli shopper.
  • Expansion of the Non-Food Properties: Through its Kfar Ha’shaashuim subsidiary, BSI currently controls 73 toy stores, 45 dollar stores, 45 homeware stores and 21 baby supply outlets, most of which are operated via franchise. To take its Non-Food activities to the next level, Blue Square has begun carrying out an aggressive acquisition of Non-Food retail chains including interest in Vardinon, an Israeli company with 30 home textile shops, and another in Naaman Porcelain, an Israeli company with 20 houseware shops.
  • Health Food Expansion: As I mention above, BSI is getting serious about taking the lead on big-box health food retailing. Israel Today suggests the current market for organic and health food in Israel totals about $600M.
  • BSI has a market cap of $550M, so it flies under most radar screens. It has a trailing 12 month P/E of 11.22, and a Price/Sales ratio (NYSE:TTM) of .34. Both ratios are lower than its larger cap competitors. It looks pretty interesting here, and if any of the strategic initiatives pan-out, BSI could perk up.

    Disclosure: The author’s fund does not have a position in any of the stocks mentioned here as of September 2, 2007.

    BSI 1-yr chart:

    Source: Is Blue Square-Israel Positioning Itself to Enter the Health Food Business?