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Geetanjali Gamel's  Instablog

Geetanjali Gamel
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I am an individual, self-taught investor with a Masters in Economics. I like playing with data and mostly focus on finding companies that are undervalued and provide good opportunities for investment, but at times will also look into high growth companies with compelling stories despite their... More
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  • Did The Restaurant Business Just Get Harder?

    The Food and Drug Administration (FDA) announced new rules today that will require chain restaurants with twenty or more locations to post calorie information on their menus. The guidelines also cover establishments such as movie theatres, convenience stores and even individual items at grocery stores. Food establishments in cities such as New York and Seattle have already been displaying calorie counts on their menus for some time. But so far study results on the impact of such an effort mixed. So is this likely to have any impact on the restaurant business and its customers?

    Restaurants such as Panera, McDonald's and Starbucks have the led the way in this regard by voluntarily disclosing calorie information on their menus. While all have maintained that the change did not hurt their business (and in fact, pleased customers), Panera actually reported that they have witnessed some shift from higher to lower calorie items on their menu. Different studies have indicated varying degrees of change in food choices based on available calorie information. According to some reports only about 30% of customers notice calories listed on a menu. And how many of those actually change their original choice for a healthier one is open to further debate. Data on total sales, and sales by menu item, from restaurants would be a better gauge of the impact compared to surveys - since what consumers actually do is more important that what they might say.

    While in many cases listing calorie information may not cause much change in the total sales of food establishments, it does add to their regulatory burden and compliance costs. Also if customers resort to decreasing the size of their orders rather than substituting it with lower-calorie options available at the same restaurant, then it could be a setback for the business. But such a short term pull-back would be more harmful for smaller businesses. For large restaurant chains, it would be a sign to update their menus according to customer preferences for better growth in the future.

    From the point of view of a customer having calorie information on the menu card (whether or not one decides to use it) is a welcome option to have. It is unlikely to matter to those who may eat out only when wanting to indulge, or those who are driven by price considerations, or have very specific food choices, etc. But it could help those who may be picking a higher-calorie salad over a lower-calorie burger only based on the name. Also it is a signal to restaurant owners of growing attention on wellness - something that could lead them to offer more lower-calorie choices to customers. A study by an associate professor at Johns Hopkins indicates a similar trend.

    What impact this particular measure will have remains to be seen, but a greater commitment to healthy food habits is good for both customers and businesses.

    Nov 25 3:55 PM | Link | Comment!
  • Walgreens: Not Leaving On A Jet Plane

    The price of Walgreens (WAG) shares plummeted after the company announced that it had no plans to shift its headquarters overseas as part of its acquisition of Allianz Boots and take advantage of the "inversion loophole". The company's management cited reasons like the burden of IRS scrutiny as well as public and media backlash as drivers of the decision. The move may be considered patriotic by some, but did not get the stamp of approval from disappointed shareholders. Wall Street expectation was that Walgreens would follow the footsteps of several other corporations that have acquired companies located in countries with lower corporate tax rates primarily for the benefit of slashing their U.S. tax burden. But Walgreens was not alone in forgoing the overseas tax advantage and retaining its headquarters in the homeland. Agricultural giant Archer Daniels Midland (NYSE:ADM) also decided to move its headquarters to the Chicago area despite rumors of a possible move overseas associated with its recent purchase of Swiss food ingredient producer Wild Flavors.

    While these companies refrained from this lucrative but ethically ambiguous option, there are many others who have leveraged it. A recent article in the Wall Street Journal reports that this has been the chief motivation for approximately 66% of international deals announced this year. Corporations such as pharmaceutical company AbbVie have initiated mergers with foreign counterparts in the recent past that could result in large tax dollar savings. So I have been wondering if this was a smart move or a missed opportunity for Walgreens.

    Anyone reading the news will see that this topic is heating up in Washington. President Obama has expressed his resolve to tackle this loophole and prevent U.S. companies from "gaming the system". Although any substantial executive action may be easier said than done in the near term, the issue is definitely on the radar. So for a business that is estimated to earn a sizeable chunk of its revenue from Medicare and Medicaid program prescription sales, picking a fight with Washington may not be the greatest idea. Since Walgreens is such a universally recognizable brand, there is greater awareness and somewhat higher exposure to backlash from the government and general public compared to other companies that may not have as much direct consumer recognition. So in the case of a possible inversion investigation, large PR costs would likely be piled on top of legal costs.

    Additionally inversion deals could lead to greater burden of corporate gains tax on shareholders even without selling any shares when they receive shares of the new corporation. There are ways to mitigate this impact, but it is another case in point that this route may not be an obvious win for shareholders as it appears to be initially.

    The debate over whether it is justified for companies to evaluate the option of inversion deals or not, and what would be the optimal way to dissuade them from it, is not likely to be resolved easily. In the case of Walgreens, while the initial shareholder response to the decision was negative as manifest in its stock price decline, for the long term investor the focus should remain on fundamentals and growth.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research and is not professional investment advice. I am not being influenced or paid by any organization to write this article.

    Aug 07 7:03 PM | Link | Comment!
  • Going Organic

    Walmart recently announced that it was partnering with Wild Oats to sell organic foods in their stores at prices 25% below other organic food brands. If successful this could be a game changer in the organic foods world, typically understood to be a niche market for a premium paying customer. In this regard Walmart has a potential goldmine of untapped customers who shop on a budget and have been keeping away from organic foods due to the cost factor.

    The opportunity that lies open before Walmart is a market that currently makes up about 4% of total grocery sales in the United States and is expected to grow to 5% by 2019. The largest components of these sales are produce and dairy. In the case of dairy, the share of organic to total milk sales ratio in the United States has grown from 1.92 in 2006 to 4.38 by 2013. Interestingly during this period, except for the year 2009, there has been a decline each year in total milk sales while sales of organic milk have been increasing. Since around that time consumers were feeling the direct hit of the Great Recession on their personal finances, it may be possible that it led to a cutback in the purchase of higher priced organic milk. However the fact that every other year the consumption of organic dairy has increasing might suggest that the status of organic foods as "luxury" grocery may be changing. And Walmart could benefit by taking it even further in affordability to a growing number of customers who are willing to try it. In fact Walmart's own survey indicates that 91% of their customers would be willing to buy organic foods if they were available at more reasonable prices.

    But the question is whether the reduction of this price premium by Walmart will pose a threat to the Natural foods stores that have so far been out of reach for a majority of customers. The typical customer who shops at such stores is already willingly paying a higher price not only for their grocery, but also for the ambiance, the healthy cuisine in-store restaurants, and so on. So natural food stores can probably keep this group of customers even if Walmart offers a more competitive price. However, it is the potential "converts" who are not buying organic foods at present but would try it at a more reasonable price that could open up a still largely untapped market with great growth potential.

    Tags: WMT, organic food
    Apr 21 12:50 AM | Link | 3 Comments
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