Whole Foods: Organic Opportunity, Customer-Centric Strategies, And A Robust Store Network Are Catalysts

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Summary

Organic food products account for only 4% of total food sales in the U.S., which means that there is a huge addressable market for Whole Foods to tap.

By differentiating its products and offering better services, Whole Foods will be able to tap a bigger share of the organic food market.

Whole Foods intends to triple its store base in the future, and it has the required resources to do the same.

After enduring a difficult time for most of the year, Whole Foods Market (WFM) is finally making a comeback. In fact, the stock has appreciated 30% in the last three months, and it looks set to end the year on a high. Even if we look at its long-term prospects, there is a good chance that Whole Foods will continue getting better as the organic food market is slated to grow at an impressive pace.

Organic food demand has a lot of room for growth

According to a report:

Consumer demand for organically produced goods continues to show double-digit growth, providing market incentives for U.S. farmers across a broad range of products. Organic products are now available in nearly 20,000 natural food stores and nearly 3 out of 4 conventional grocery stores. Organic sales account for over 4 percent of total U.S. food sales, according to recent industry statistics.

Thus, we can see that the organic food market still has a lot of room for growth, as it accounts for only 4% of overall food sales. In fact, analysts estimate that the market will grow at 18% annually over the next four years. Keeping this in mind, it is important for Whole Foods Market to continue expanding its portfolio of products, along with the number of stores.

The good thing is that the company is doing the same. For instance, in the fourth quarter, Whole Foods opened 13 stores and expanded its presence in 7 markets. But, at the same time, the company needs to differentiate its services and product offerings in order to counter the rising competition in the organic foods market.

As a result, Whole Foods has banned over 75 ingredients that are commonly found in other stores. In my opinion, its focus on improving quality standards and varieties will enable it to attract and maintain new customers.

Smart strategies to improve the customer base

In addition, Whole Foods has entered into a partnership agreement with Instacart for providing one-hour delivery in 15 key U.S. cities. This partnership is already reaping results, as Whole Foods is witnessing a stark improvement in order levels that are 2.5 times its average basket size. Hence, consumers will now have easier access to Whole Foods products, and once the company rolls out this service to more of its locations, it should be able to gain more customers.

Moreover, the company seems to be following the right strategy by giving seasonal offers. For instance, for the holiday season, Whole Foods has introduced its Wine Club. Through this move, the company will serve customers with high-quality wines at their doorstep. As a result, customers won't have to go out of their homes and they can easily avail the desired product from Whole Foods. More importantly, by way of such seasonal offers, Whole Foods will be able to increase its customer base, as those who buy wines from the grocer might return again in the future to buy other organic products.

It is evident that Whole Foods is undertaking efforts to improve customer service. When coupled with an expanding store base, its focus on delivering a better service will act as a key growth driver in the long run as the organic food market improves.

The store opportunity

Additionally, Whole Foods is following a smart strategy of opening stores of different sizes. Its new store openings this year comprise of sizes ranging from 20,000 to 60,000 square feet. As such, the company is looking to optimize its store productivity by opening differently-sized stores depending on the expected demand in a particular area. Looking ahead, Whole Foods plans to expand into six new markets, including Canada, and further expand its reach into older markets such as New York City, Boston, and Houston with new flagships stores.

In fact, Whole Foods sees the potential for 1,200 new stores going forward, triple of its existing count, in the U.S itself.

Now, the expansion of the store base and an improvement in customer service are key to Whole Foods' long-term performance, as both conventional grocery stores and other organic retailers are also stepping up their game in the market. For example, The Fresh Market (NASDAQ:TFM) intends to open 70 new stores in the next three years, while Wal-Mart (NYSE:WMT) is offering low-priced organic food products. As such, it is important for Whole Foods to continue focusing on delivering a cutting-edge service to attract more customers.

Final words

By focusing on customer-centric strategies, Whole Foods has been able to make a comeback after struggling earlier this year. Going forward, the company has enough resources to invest in its business as it has a strong net cash position of $681 million. Also, the company's operating cash flow is also robust at $1.09 billion. This means that Whole Foods can continue investing in more customer-centric initiatives and store expansion. Thus, there is a good probability that Whole Foods' newly-gained momentum will continue in the future.

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.