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Is Whole Foods Still Relevant?

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Every year for Thanksgiving, I find myself going to multiple stores to get the items I need. I head first to Whole Foods (Nasdaq: WFM  ) , where I buy my free-range turkey, quinoa, organic produce, and the like; and then head to Safeway (NYSE: SWY  ) or Kroger (NYSE: KR  ) to buy canned goods, paper products, and the traditional fare favored by my non-foodie friends. For years, it's seemed a fact of life: You just couldn't get everything in one place.

But with companies like Target and Safeway carrying more organic items, and healthy lifestyle brands like SmartBalance (Nasdaq: SMBL  ) available at both places as well as a score of others, it appears those days are disappearing. When they're gone, will Whole Foods still be left standing?

Organic growth
If imitation is the highest form of flattery, Whole Foods spends a lot of time blushing. More and more traditional grocery stores are offering in-house organic lines or sub-lines, including Stop N Shop's Nature's Promise, Safeway's O Organics, Target's Archer Farms and Kroger's Naturally Preferred and Private Selection Organic. Whole Foods also offers its own in-house organic line, 365 Organics, in addition to a wide variety of brand-name organics. 

Traditional grocers are also attempting to mimics the Whole Foods shopping experience. Safeway has been remodeling its existing stores into "lifestyle" stores, with wood-like flooring, relaxing earth-toned decor and subdued lighting with spotlights on featured products. Several locations include expanded deli, floral, and bakery departments, with sushi bars, Starbucks (Nasdaq: SBUX  ) kiosks, and seating. Some offer free Wi-Fi.

Target remodeled 341 stores in 2010 and is continuing that trend in 2011, with revamped and expanded grocery and produce sections in many stores. But is it enough to steal Whole Foods' niche market share?

Apples and oranges and bananas
Sure, it's tough to compare a wholesale store with a traditional grocery with a niche market. But let's try anyway, shall we?

  Number of Stores Same-Store Sales Revenue P/E
Whole Foods 310* +8.7% 2.4b 32.83
Safeway 1,681 stores** +1.5% (excludes fuel) 10b 12.29
Target 1750 (includes 240 w/grocery) +4.3% 16.1B 12.07
Kroger 2400 +5.3% 20.9B 11.37

*Includes six U.K. stores. **U.S. and Canada. (All numbers for most recent quarter, comparisons to same quarter last year.)

In size alone, Whole Foods can't compete, and its P/E is multiple times higher than the competitors here. But Whole Foods customers have always been willing to pay a little more.

Shopping for values
Whole Foods was one of the first non-independently owned markets to promote its sustainability and corporate responsibility initiatives. Now, it's become nearly commonplace. SUPERVALU (NYSE: SVU  ) , the retail and distribution giant based out of Minnesota, owns 2,500 retail locations including Acme, Albertons, Farm Fresh, and Hornbachers. Under the "About Us" section of the company's website are prominent links to its policies on its animal welfare policy, corporate social responsibility report, sustainability initiatives, and carbon footprint, available to any customer for whom such things are a factor.

But is such awareness on the part of customers and retailers enough to put Whole Foods out of business?

Free-range copycats
I asked Libba Letton, a national media representative for Whole Foods, if the company was worried about its competitors encroaching on its turf. Letton's answer? Not especially. "I think folks have been trying to copy us for a while, and we're aware of it. We spend a lot of focus and energy on it. We spend a lot of time on what's fresh and new, finding what our customers want and giving it to them."

But it's a tactic Safeway and Target are also taking. Take SmartBalance (the company that makes buttery spreads, mayonnaise, peanut butter and other items without hydrogenated or partially hydrogenated oils or trans fat). A few years ago, SmartBalance products were difficult to find at traditional grocers. Today, I ran a search on the company's product locator, and turned up more than 100 locations within 25 miles of my home, at stores including Walgreen (NYSE: WAG  ) , Giant, Safeway, Harris Teeter, and Target. I suspect there are more, but the list seemed to cap at 100. 

Soup to nuts
The availability of organic and health-conscious goods will continue to expand, which is a great thing for customers and pricing. But I don't believe Whole Foods isn't in any immediate danger. The changes to Safeway, SUPERVALU, and Kroger will allow them to be more competitive with each other for customers who see their stores as interchangeable. And while organic and healthy eating is becoming more mainstream, it's not the mainstream. Whole Foods will keep its current share, even if it means additional shopping trips for its customers. Foolish colleague Alyce Lomax says, "Don't Panic About Whole Foods." I have to agree. I've given it a thumbs up in CAPS.

Want to keep tabs on how Whole Foods will continue to fare against traditional grocers? Add these companies to My Watchlist.

Do you shop at Whole Foods, your local supermarket, Target, or all? Let me know below. I may use your comments for an upcoming article.

Despite all those kitchen fires, Molly McCluskey is a hell of a cook, but she doesn't own stock in any of the companies mentioned. The Motley Fool owns shares of Starbucks, Whole Foods Market, and SUPERVALU. Motley Fool newsletter serviceshave recommended buying shares of Starbucks and Whole Foods Market. Motley Fool newsletter serviceshave recommended buying calls in SUPERVALU. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 23, 2011, at 3:51 PM, stevewwong wrote:

    Whole Foods is the most relevant store. First, we all need to eat to live. Since I have just retired. Now I can finally eat like my doctor has recommended for twenty years and Whole Foods is it. Yes, I can now buy my organic turkey from Costco or from Raleys but out of loyalty and incredible service, I purchase from Whole Foods. But, I also buy the pies and the deserts. I also purchase the ingredients for the stuffing, and when I can afford it the upgrade to the organic turkey --- Heidi Hen.

  • Report this Comment On November 23, 2011, at 5:35 PM, dtpnyc wrote:

    I think Whole Foods will grow tremendously in the next few years. I agree other big chains are starting to carry more healthy brands and that's great but Whole Foods has the idea of fresh and healthy food as their core and everything revolves around those philosophies. I could see new chains starting trying to mimic Whole Foods but not companies like Target and the like being able to compete with Whole Foods as a place you shop with the sole idea of eating healthy. Thanks.

  • Report this Comment On November 25, 2011, at 10:11 AM, harrisob22 wrote:

    Whole Foods is ultimately doomed because of its labor policies. If it doesn't unionize it will fade away. 40% of all the food in the grocery industry is sold by by employees who are members of unions. Whole Foods is expensive and their employees have no job security in a flat economy. All of its offerings can be (and will be) commoditized, and customers, when prices are the same, will always choose the retailers who offer sustainable livings for their employees.

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