One of the big challenges of selling natural and organic food
is convincing people to fork over the extra money for it.
Because organic food cost more to produce than nonorganic, it
carries a higher price tag.
That's been a bit of a hurdle for grocery retailers, such
asWhole Foods Market (
), that specialize in organic, natural and cruelty-free
But the hurdle might be getting smaller. In its 2012 Green
Mission Report, Whole Foods says it has made "important headway"
over the past three years on the prices of its organic
The company says it can offer organic items for the same price
as, and occasionally less than, conventionally grown
It expects to see the price differential continue to decline
in coming years as organic production becomes more widespread and
Whole Foods is able to source new organic products in other
countries with good organic agricultural practices.
"We anticipate that availability will continue to rise while
some prices, especially for in-season items, fall more in line
with conventionally grown produce," the report said.
More Organic Food
If so, that should bring in even more customers to Whole
Foods. The impact could be substantial, considering how well the
company has done with its current customer base. Sales and
earnings have grown in double digits for 10 straight quarters
despite a number of head winds.
"Even in the current economic environment, it appears people
don't want to cut corners on healthy, high quality food,"
Citibank analyst Gregory Badishkanian noted in a recent report on
the natural food sector.
He cites data showing that regardless of current food prices,
72% of adults said they "don't want to compromise" on the quality
of food they buy.
"On top of that, 73% of adults said that if prices are
comparable, they prefer to buy natural/organic foods over
conventional ones," added Badishkanian. "Also, 72% responded that
they would find ways to be able to buy natural/organic foods
within their budget."
Whole Foods is the nation's biggest organic and natural food
grocery, with 329 stores in the U.S., Canada and the U.K. The
company offers the usual staples, such as fresh produce, seafood,
canned and dry goods, meat and poultry, baked goods and prepared
It also offers nutritional supplements and vitamins, beer and
wine, body care and educational products, and various household
In the organic and natural food category, Whole Foods mainly
competes against smaller regional and local chains.
Among publicly traded companies, the grocery chain that most
resembles Whole Foods is probablyFresh Market (
), a Greensboro, N.C.-based specialty grocer with more than 120
stores in 24 states.
Like Whole Foods, Fresh Market has been on a strong financial
run, with six straight quarters of double-digit sales and
In an Aug. 29 note, JPMorgan analyst Ken Goldman said he
believes Fresh Market "makes a compelling case" for long-term
earnings expansion. "(But) we think there may be more short-term
earnings volatility with Fresh Market than with Whole Foods, the
latter of which is further along its growth story and has proved
its ability to beat earnings on a more consistent basis."
All of these companies still occupy a pretty small niche in
the overall food market.
Citi's Badishkanian estimates that the natural/organic food
segment represents only about 6% of the total food industry.
"It is still underpenetrated as a percentage of total food
purchases," he noted. "There is much more room for the industry
Badishkanian reckons the natural/organic food category will
expand by the mid- to high-single digits over the next three
Whole Foods should outpace that growth rate, thanks in part to
a rapid expansion plan. Analysts expect it to report annual
revenue growth of 16% for fiscal 2012 and 13% for fiscal
The company opened a record nine new stores, including one
relocation, during its fiscal third quarter, which ended in June.
It was due to open seven more stores during the fourth quarter
for a total of 25 stores opened during fiscal 2012. The company
projects 28 to 32 store openings next year and 33 to 38 in fiscal
"Our accelerated growth plans are on track, and we believe we
will continue to gain market share through further
differentiating our shopping experience, improving our relative
value positioning, and reinforcing our position as America's
healthiest grocery store," Walter Robb, Whole Foods' co-chief
executive, said in a statement following the company's fiscal
The company reported Q3 earnings of 63 cents per share. That
was an improvement from the 50 cents of the prior year's third
quarter and 2 cents above views.
Revenue rose 14% to $2.73 billion, in line with estimates.
Same-store sales gained 8.2%.
Whole Foods' stock price has been trending higher for nearly
four years. Its shares, which topped the 100 mark for the first
time in September, hit an all-time high of 101.87 on Oct. 5.
Whole Foods is slated to report fiscal Q4 and full-year
results in the next few weeks. Analysts polled by Thomson Reuters
expect it to post quarterly earnings of 60 cents a share, up 43%
from the prior year.
Full-year profit is seen rising 31% to $2.52 a share.