Commodity Inflation Stalls Organic and Natural Foods Growth

Increasing commodity costs is having a negative impact to the growth of organic and natural foods. As commodities increase consumers are being more selective and price sensitive in their grocery shopping. This trend does not bode well for retailers like Whole Foods (WFMI) and the manufacturers that supply items to the leader in the organic and natural foods segment.

Organic and Natural food items already command a hefty price premium vs. their regular food counterparts.As all items increase by 10-20%, consumers are beginning to trade down to lower cost branded and private label items. They are also reducing the number of grocery trips to the high end retailers like Whole Foods.

For manufacturers like Hain (Hain) and United Natural Foods (UNFI) that get a large percentage of their sales from Whole Foods, this spells trouble for their sales growth. In addition, key retailers like Super Valu (SVU) have just announced the introduction of their own Wild Harvest line of Organic and Natural foods. While the timing may not be optimal for Super Valu, they nevertheless will siphon off some sales from Whole Foods by offering items that are 10-15% less in price and more readily available using the more plentiful locations of their stores. For Hain and United Natural Foods the key to offsetting the lower growth in Whole Foods is through gaining sales at traditional grocers like Super Valu and Kroger (KR).

Longer term the positive trend for growth in the Organic and Natural foods will continue. However, for 2008 I would expect tough sales comparisons for Natural Food manufacturers as consumers watch their wallet when shopping for food.

Disclosure: None

Comments

[User 180128]

would be nice if some factual support for the first sentence was provided.

[likestofocus]

Historically consumers trade down by cutting back on eating out and switching to shopping at Whole Foods.

Many of the Whole Food 365 brand items are cheaper then major conventional brands carried by regular grocers.

But you won't catch me paying $35 a lb for wild caught salmon at Whole Foods. I focus on the 365 brands and whatever produce, seafood, and meats are on sale.

[kowalski]

"[C]onsumers are beginning to trade down to lower cost branded and private label items."

*

Who are those ominous consumers that trade down? I have yet to meet one.

[youngredwood]

have you been in whole foods at columbus circle lately? or in london?
truth is this company has enormous growth possibilities in Europe alone. They've done a masterly job on the flagship in London.
it may not be the time to buy the stock, but have no doubt--these guys are going to win the game (and I'm NOT on their payroll!)

[Groceryman]

A one time visit to a Walmart will send the Whole Foods customer running back to Whole Foods. The customer at Walmart and the customer at Whole Foods are from different planets.
If you want your produce from China's toxic chemical soil or fish from their polluted ponds that they have to add chemicals so they fish can breath, you can trade down to whatever price point your body can take for the near term but you'll need to increase your life insurance and there goes the savings.

Also, the author used no links to any facts. It was just blah,blah poorly written. Where are the numbers? A good source for facts for the author would be The N.G.A's website for grocery facts.

[ciz]

Im buying up as much UNFI and OTGO that I can. I see the organic and natural food markets sky rocketing in the near future moving west to east and to europe, and want to get in early. We'll see how I do....

[Itsonlymoney]

My understanding is that groceries actually enjoy a higher margin on their own store brands so consumers trading down to private label may actually improve the store's bottom line. If you are an organic food customer, like I am, there really is little choice in most communities other than Whole Foods. Safeway's organic offering is lackluster, for example, and indicative that they do not really want to serve this customer. Will this translate into a higher stock price for WFMI? With this new low I'm almost ready to find out?

[ManicOrganic]

I already own stock in WFMI, and Ive thus far lost money. This does make me nervous. I had bought the stock pre-merger and did not approve of the idea. Personally, I thought it would simply discourage real competition in the natural grocer niche. As Groceryman put it, visiting a traditional grocer -- especially Walmart -- "will send the Whole Foods customer running back to Whole Foods."

I think there are two things to consider: 1) The shopping experience at dedicated natural/organic grocers like Whole Foods, Trader Joes, and food coops is completely different, and 2) The market for "healthy" living in general is (hopefully) not just a trend, but a fundamental change in consumer consciousness/conscien...