Organic food is one of the fastest-growing segments of food retailing today. Growing legions of health-conscious and environmentally conscious consumers propel the industry. It's no doubt, then, that salivating retailers want in. Whole Foods Market (Nasdaq: WFM) has positioned itself as the indisputable leader in this space. The company spends truckloads of dollars each year on its commitments to quality and community. But aside from bolstering a healthy reputation, do these efforts buoy the bottom line?

A growing industry
Organic-food sales have grown by 17% to 20% per year for the past several years and are expected to continue this pace. Compare this with sales of conventional food, which have grown at only about 2% to 3% per year.

Whole Foods co-founder and current co-CEO John Mackey identified this trend more than three decades ago, when his company became America's first national Certified Organic grocer. Now a $15 billion retailer with a presence in three countries, Whole Foods operates 300 stores in the U.S. -- everywhere from New York City to Carmel, Ind. Whole Foods plans to ultimately open three times this number of stores in the United States.

Whole lotta good stuff

What distinguishes Whole Foods from competitors is its commitment to revolutionizing standards in the organic marketplace and building its brand. The company has shown a spotlight on more mindful consumption and transparency regarding "farm-to-fork" traceability. Whole Foods has introduced, among other things, color-coded rating systems to help consumers make more informed, clearer choices and in-store Wellness Clubs.

Whole Foods furthers its commitment to brand-building by its pledge of at least 5% of after-tax profit -- this translates into 0.17% of revenues -- annually to charitable contributions. It donates millions of dollars each year to other efforts, including 1% of sales of exclusive Whole Trade products to the Whole Planet Foundation to help alleviate world poverty. The company has pledged millions of dollars to programs that encourage healthy eating in our nation's schools.

As an investor, I'm skeptical at the prospect of seeing big dollars fly out of the checkout lines, but can this socially conscious spending benefit the shareholder?

Secret sauce
More people are shopping at Whole Foods and stretching their wallets even further. The formula for success in any retail environment is the combination of price increases, higher store traffic, and a larger average ticket. Over the past 10 fiscal years, Whole Foods' identical-store sales growth has averaged approximately 7%.

All the while, Whole Foods has managed to control costs and pay down debt. During fiscal 2011, Whole Foods repaid the $490 million outstanding balance on the term loan as a result of its acquisition of Wild Oats.

Whole Foods' management team makes smart decisions, even at its own expense. Salary caps for management are in effect, and Mackey has voluntarily set his annual salary at $1 and receives no cash bonuses or stock options.

Growth coupled with cost controls, and management that values the longevity of the business -- and the industry as a whole -- over the size of its own portfolios, make for a happy shareholder. Whole Foods' dividend increases probably don't hurt, either.

Hungry competition
Grocers Safeway (NYSE: SWY) and Kroger (NYSE: KR) recognize the higher-margin organic-food business, and both companies now sell private-label organic-food products. Here's how those grocers look now in comparison with Whole Foods:

Company

Sales -- 5-Year Growth Rate

Gross Margin

Pre-Tax Profit Margin
Whole Foods 18.20%             38.00% 6.00%
Safeway 5.70% 19.20% 4.40%
Kroger 10.01% 20.90% 0.90%

Sources: The Motley Fool, Yahoo! Finance.

Big-box retailer Wal-Mart (NYSE: WMT) has made a more concentrated move into this space. An Arizona State University study found that organic prices started to fall as soon as Wal-Mart announced its foray into the organic-food market. One can't underestimate Whole Foods' tireless brand-building commitment, which continues to be its competitive advantage.

If customers are to abandon the Whole Foods ship, it won't be to jump the docks to a big-box store. People shop at Whole Foods because of a commitment to high-quality organic goods. A more direct competitor is regional grocer The Fresh Market (Nasdaq: TFM), which has been in business since 1981 and operates 116 stores in 21 states.

The Fresh Market sources local products from the communities it serves, and its stores convey a similar atmosphere and shopping experience to Whole Foods. The Fresh Market is expected to grow sales 22% annually during the next five years.  If Whole Foods sees further explosive growth, The Fresh Market will surely benefit.

A critical eye
Once the big-box boys and smaller, regional players make concentrated moves into the organic-food market, Whole Foods will face tough decisions. Does it slash prices and possibly sacrifice margins? Or does Whole Foods stay true to its brand integrity, and its reputation as an industry game-changer, and keep prices as they are? I'll be watching this in the future.

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