Over the past year, it's been hard to find a foodie or an investor who isn't raving about Whole Foods
The changing face of groceries
Before we get to specifics, let's talk about what's been happening to our groceries. In summary, it seems like the middle ground has disappeared. One the one hand you have companies like Whole Foods, with higher prices, higher quality, and strong growth. On the other you have companies more like Kroger
Nowhere is that more evident than when looking at SUPERVALU
So let's look at Whole Foods and compare it to Kroger and Safeway. Whole Foods' last quarter was excellent, with same-store sales increasing 8%, revenue up 13%, and its operating margin coming in at 7%. Same-store sales at Kroger were up 4%, while Safeway increased sales a mere 1%. Revenue growth at both of the lower-end grocers also lagged behind. Kroger grew revenue 6%, and Kroger again came in a distant third, increasing revenue by 2%. That quick comparison should highlight the fact that people are increasingly happy to pay for quality. While the older brands are growing, growth is slowing.
Whole Foods is clearly the brand leader of this new kind of grocery store, but The Fresh Market
What's more, it also has plenty of runway ahead of it. The company's regional focus means that it has plenty of room to grow, especially in California and the Pacific Northwest. Considering that at the end of last year, Whole Foods had 65 of its 299 stores in California, it looks like The Fresh Market is just starting to tap one of its most valuable locations.
Like every other company, The Fresh Market is likely going to feel the sting of higher corn prices later in the year, which could affect margins, but which shouldn't hurt overall sales growth. The company is also expanding its store base, and expects to feel those opening costs for a quarter or two before the stores start to generate sales. That's nothing to be worried about, although depending on when all those costs hit it could have an effect on the stock price.
I think the company is on pace for solid growth over the next few years, and the success of Whole Foods should only support that growth. As more consumers become interested in purchasing higher-end goods, the demand for products offered by The Fresh Market is only going to grow. This train is just picking up speed, and now looks like a great time to jump on board.
The bottom line
The Fresh Market is making big strides, but has ended up hidden behind the behemoth that is Whole Foods. The growth that it can generate once it expands to the West Coast is going to massively increase the value of this company, and now is the time to get in. While the strong growth means that it's not cheap, it's not much more than Whole Foods, and I see a lot more potential growth at The Fresh Market.
The grocery store business model is shifting, and the companies at the forefront of that shift are going to thrive. One of the biggest success stories outside of the U.S. inspired the Fool to name a Latin American company as its Top Stock for 2012. You can get all the details on how this brand is changing the way people shop in your free copy of our special report.