Will Stiff Competition Stifle The Fresh Market’s Growth?

The Fresh Market (NASDAQ: TFM  ) is a specialty grocery retailer that competes in the organic and natural food products market with the likes of Whole Foods Market (NASDAQ: WFM  ) and Sprouts Farmers Market (NASDAQ: SFM  ) . As demand for organic and natural products increases, competition in this sector could tighten further. For instance, other grocers and discount retailers are also adding organic sections to their stores in order to drive sales.

Strong so far
The Fresh Market has still done well despite being the smallest of the lot. It saw a 13.3% increase in revenue to $354.8 million in the second quarter as compared to the same period a year ago. The higher revenue was driven by a 3.4% increase in comparable store sales.

The Fresh Market managed to meet earnings expectations in the quarter. However, the company had to lower its earnings guidance for the fiscal year due to an increase in the cost of store operations. The revised earnings growth estimate for the rest of the year was largely due to higher store opening expenses as the company steps up the pace of store openings.

The need to step up
Aggressive store growth is indeed important for The Fresh Market if it is to capitalize on the organic food opportunity. The organic food industry has been growing strongly in the U.S. on the back of increasing awareness about food safety, health, environmental protection, and animal welfare reforms.

Even during the tough economic environment of 2009, the organic food market grew by an estimated 5.1%, which was more than the overall growth in the food industry. The organic food industry in the U.S. is expected to grow at a compound annual growth rate of 12.2% from 2010-2014.

In addition, the store count of The Fresh Market is pretty low at 139 stores. Whole Foods Market has more than 350 stores, and The Fresh Market's store count is lower than Sprouts Farmers Market's 169 stores as well. The company plans on opening 21-22 stores during the rest of the year, with 10-11 stores planned for the current quarter. This is line with the long-term growth objectives of the company as it intends to increase the store base by 15% every year.

In addition, as awareness about genetically modified food grows because of health concerns, the demand for organic and natural food items is bound to grow. This should help The Fresh Market increase sales further.

Ambitious competitors
However, The Fresh Market operates in a tough space. Industry leader Whole Foods Market is planning to increase its store count from 351 to 1,000, which sounds very ambitious. In addition, Whole Foods also aims to open stores in under-served communities to dispel the general perception that organic foods are only for the rich.

Whole Foods is planning stores in one of Chicago's most impoverished neighborhoods, and if this works well for the company it could result in many such stores across the nation. Stiffer competition in the space might create pricing pressure in the future as the number of stores grows.

Another worrying factor that needs to be tackled by The Fresh Market is low same-store sales growth in comparison with its peers. The Fresh Market's same-store sales growth of 3.4% in the previous quarter was pretty low, as this statistic was 10.8% for Sprouts and upwards of 7% for Whole Foods. Hence, Whole Foods' ambitious growth plan, and also the fact that Sprouts looks to aggressively grow its store count, are concerns for The Fresh Market.

Sprouts is aiming to increase its store count at a rate of 12% a year going forward. Management has planned 19 new stores in the ongoing fiscal year, with 17 openings already completed. Another 20 stores are planned for 2014. The company's ambition seems to be greater than Whole Foods, as management claims that it can open 1,200 stores in the long run.

Competition all around
In addition, big box retailers and grocers like Wal-Mart, Kroger, and SUPERVALU have also started boosting their organic product offerings in order to drive more consumers to their stores. With the organic food market getting more crowded by the day and The Fresh Market failing to rapidly increase its sales, it might become even tougher for The Fresh Market to succeed in the future.

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  • Report this Comment On October 15, 2013, at 12:25 PM, DavidTheJust wrote:

    Prabhat,

    Thank you for the article.

    It is important to remember that all the businesses that Wall Street lumps together in this category are not necessarily competing head-to-head.

    TFM is focused on high margin items such as beef and fish away from fresh produce. Produce is a much more important part of the Whole Foods and Sprouts business models. Furthermore, the small store size of TFM allows it to open stores in affluent towns of modest size while WFM needs a larger population.

    In the short term (the next 5-7 years) it is unlikely that competition will be a meaningful obstacle to growth for TFM. If you look out 15-20 years the picture changes. One of the questions that will need to be answered is what happens when a town has a Sprouts, TFM, a WFM and/or a Fairway Market in close proximity to one another.

    One encouraging thing about TFM is that they are making progress on their private label brands. Expanding TFM brands in their stores will allow them to maintain high margins even if competition causes them to have to lower prices.

    Best wishes,

    David

    long TFM

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