Why The Fresh Market Leaves a Sour Taste In My Mouth

My family is currently in the process of moving back to my native Wisconsin, and right now, that involves a week-long stay at my parents' house. While here, my wife and I have wanted to buy our own groceries, and the closest store is a new Fresh Market (NASDAQ: TFM  ) .

Source: The Fresh Market.

After shopping there, we both left perplexed. It was about six in the evening -- rush hour for most grocery stores -- yet there was almost no one there; our bill was much higher than we expected.

Most important, we couldn't answer this simple question: What is that store trying to be? A name like "Fresh Market" invokes thoughts of whole, organic foods and a healthy lifestyle. And while that type of food was available, so was a mind-boggling array of candy.

Though I could tell the store wanted to be folksy, it seemed forced and sterile. No freshly cooked, delicious aromas greeted us as we entered the store. And the overall selection was limited, at best.

When in doubt, ask the company
In an effort to figure out how such a business could ever survive, I went straight to The Fresh Market's SEC filings. As it turns out, many of the things I noticed were intentional.

The Fresh Market clearly states that it differentiates itself by constructing stores that are a half to a third of the size of traditional grocery stores. The company states that with this smaller size, it "focus[es] on higher-margin food categories." This explains both the limited selection and our surprisingly high bill.

The company also attempts to set itself apart from the competition by "provid[ing] a differentiated shopping experience that generates customer loyalty and favorable word-of-mouth publicity." I can't disagree that --on the whole -- it was a much more intimate, less-stressful shopping experience than what I regularly encountered at my local Safeway-owned Dominick's in Chicago. So, on both fronts, the company is executing these objectives.

And yet, I still don't plan on going back
In the grocery business, there seems to be two distinct camps that are fortifying their positions.

On one end are the legacy grocers -- companies like Safeway and Kroger -- that are improving in-store experiences, but focused highly on low-margin, everyday goods. On the other end are companies like Whole Foods (NASDAQ: WFM  ) and Trader Joe's, which have doubled down on the organic movement, offer slightly higher-priced products, and create unique shopping experiences that clearly resonate with customers.

My problem with the Fresh Market is that it's trying to offer a dispassionate shopping experience that doesn't clearly differentiate itself, yet charge prices higher than you'd find anywhere else. For example, look at how the store compares to a previous field test that I conducted earlier this year with Whole Foods, Dominick's, and Roundy's Mariano's Fresh Market.

 

Whole Foods

Dominick's

Mariano's

Fresh Market

1 lb. Organic Chicken

$7.64

$8.99

$7.49

N/A

Dozen Organic Eggs

$3.79

$3.79

$3.99

$3.99

Half Gallon, Organic Milk

$3.99

$3.79

$3.99

$3.79

1 lb. Organic Strawberries

$4.99

$3.49

$4.99

$3.98

1 lb. Organic Carrots

$0.99

$0.99

$0.99

$1.25

Total

$21.40

$21.05

$21.45

N/A

Source: Author visit to store locations on May 8, 2013, and August 2, 2013.

It's tough to highlight enough just how surprised I was that the Fresh Market didn't carry any organic chicken, especially when specialty meats are one of the areas in which the company hopes to differentiate itself. Based on the organic products that it did have, prices were about in line with the competition, but I'm using a limited subset based on previous visits to other chains.

More important, the strategy simply doesn't seem to be producing the kind of results that justify a price-to-earnings ratio of close to 40. Because of the average store's smaller footprint, and the stock's expensive price tag, you'd expect sales per square foot and comparable-store sales to be sky high. In the end, though, Fresh Market can't hold a candle to what Whole Foods has done.

 

Sales/Sq. Ft.

Net Income/Sq. Ft.

Comparable-Store Sales

Whole Foods

$230 

$10.52 

7.5% increase

Fresh Market

$131 

$7.90 

3% increase

Source: SEC filings for most recent quarter.

Combine all of these facts, and I'm willing to bet my All-Star CAPS profile on Fresh Market underperforming for years to come by giving the company a red thumb.

As you might have guessed, I'm a big fan of Whole Foods, both as an investor and customer. So it was no surprise that the company was selected as one of 3 Companies Ready to Rule Retail in The Motley Fool's special free report. If you'd like to see why Whole Foods was chosen, and what the other two companies are, you just need click here to read more.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On August 11, 2013, at 3:38 AM, Captaindory wrote:

    wow - I am of the totally opposite opinion. I am so excited that Fresh Market moved to Palo Alto. It;s a great store, beautiful produce and meat department, tons of take home options and a great spice section...nice bakery too. I bought a huge container of Cajun seasoning for less than $3 and pluots for 99 cents a pound - I haven't seen them that inexpensive anywhere all summer. Fresh Market was in another city I lived in and I was thrilled to see it here. I like the other local stores, but this one has items I haven't seen anywhere else and I much prefer the compact size to the overwhelming Whole Foods, where I can never find anything. I have no idea why someone would complain about it ,,, maybe to influence the stocks......?

  • Report this Comment On December 16, 2013, at 8:25 PM, Borisbmx wrote:

    ur fortunate to have this new store close by. They specialize in fresh foods and freshly prepared foods. The produce, meat counter, deli, and bakery are all superb. The core customer comes in 3 or 4 times a week and makes smaller basket purchases, probably a better value then some eateries. They know their customer well, They know what they are doing b/c they have been refining their concept for 30 years.

  • Report this Comment On January 02, 2014, at 6:51 PM, ElCid16 wrote:

    It's been years since I've been to a Fresh Market, but I finally ventured to one in Atlanta today. I agree with the two comments listed more so than the article. I got a sashimi tuna steak, some fresh veggies, a cold-pressed juice, and some whole coffee beans. My experience led me to drive straight home and do some research.

    I think your article highlights a couple interesting facts about the store, but I think TFM mostly knows what they are doing. This isn't a fly by night company. It's been around for 30 years. Their Operating Margins, Net Margins, Return on Assets and Return on Equity are all higher than Whole Foods (they don't even compare to other grocers). They might not have exactly what you, are looking for in a grocery store (you mention frequenting a Safeway's, I think), but they seem to have gotten something right in terms of getting the most out of their investments.

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