Whole Foods and the Organic Movement: Bigger Than You Think

 

This past month, Whole Foods (NASDAQ: WFM  ) co-CEOs John Mackey and Walter Robb went on CNBC's Mad Money and made a surprising announcement: Instead of stopping at 1,000 stores, Whole Foods now sees itself growing to 1,200 locations nationwide.

With just 362 sites currently open, and growth occurring at a moderate pace, how could the company's leaders make such an audacious goal? By taking a quick look at Whole Foods' past, and the changing relationship we have with the food we eat, you might be surprised at the strength of both the organic movement in general and the Whole Foods brand in particular.

Don't underestimate this trend
When I first heard about "organic" foods as a teenager, I thought it was a sham that allowed grocers to charge outrageous prices. Fifteen years later, my wife and I moved onto a tiny organic coffee farm in Costa Rica and saw what a difference organic practices can make. Not only is the final product usually superior, but such forms of farming are also better for the health of those working in the fields as well as local ecosystems.

Apparently, we aren't alone. Over the last 15 years, the trend toward organic foods has been one of the strongest, most sustained shifts in eating habits since World War II.

Year

Total Food Sales

Organic Food Sales

Organic Penetration

1998

 $454,140

 $4,286

0.9%

2000

 $498,380

 $6,100

1.2%

2002

 $530,612

 $8,625

1.6%

2004

 $544,141

 $11,902

2.2%

2006

 $598,136

 $16,718

2.8%

2008

 $654,285

 $22,900

3.5%

2010

 $673,324

 $26,708

4%

2012

 $679,070

 $29,200

4.3%

       

CAGR

2.9%

14.7%

 

Sources: Organic Trade Association and The Packer; figures in millions

The most amazing thing about this growth is that sales of organic goods still account for a measly 4.3% of all money spent on food in the United States. That means that, despite 15 years of enormous strides, the runway is still set for more than a decade of continued expansion.

Don't underestimate this brand
For years, Whole Foods has been dubbed "Whole Paycheck" for its expensive price tags. And by looking at where the company decided to locate its 19 Chicago-area locations -- more than 5% of all stores -- one couldn't be blamed for thinking that. Here are the six most- and least-wealthy neighborhoods of that cohort:

Community

Zip Code

Median Household Income

% Below Poverty Level

Hinsdale

60521

 $163,000

3.5%

Deerfield

60015

 $125,000

3.1%

River Forest

60305

 $121,000

5.6%

Chicago

60642

 $65,000

15.3%

Schaumburg

60173

 $64,000

10.8%

Kildeer

60074

 $62,000

13.3%

Source: U.S. Census Bureau; number reflect 2010 census data, median incomes rounded to nearest thousand.

Taking all 19 locations into account, the average median household income is $87,000 and, on average, 9.6% of the population lives below the poverty level.

But recently, competitors have entered the fray and caused Whole Foods to lower prices. Safeway (NYSE: SWY  ) has done an excellent job at offering organic goods for affordable prices with its "O" brand organics. Meanwhile, Kroger (NYSE: KR  ) just announced that it is the second largest organic seller in the nation -- behind Whole Foods -- on the strength and success of its Simple Truth Organic brand.

One big advantage Safeway and Kroger have over Whole Foods is that they have well over 1,000 locations apiece. And their stores offer both conventional and organic goods, meaning that organic goods can be offered in both upper-class neighborhoods as well as lower-to-middle-class ones.

But Whole Foods has been opening locations where one might not suspect. As The New York Times recently wrote, Whole Foods is now finding "success in smaller cities." It should also be noted: It's finding success in less wealthy neighborhoods. Specifically, the article mentions two locations that have performed better than expected. Here's what their demographics look like.

Community

Zip Code

Median Household Income

% Below Poverty Level

Boise, Idaho

83702

 $46,000

15.4%

Lincoln, Nebraska

68510

 $44,000

16.5%

Source: U.S. Census Bureau; numbers reflect 2010 census data, median incomes rounded to nearest thousand.

If Whole Foods can succeed in neighborhoods like this, there's really no telling how successful the chain can be in everyday communities. And it clearly isn't worried about entering Safeway's or Kroger's turf.

This helps explain why the company feels like it's ready to enter more neighborhoods that don't fit the "Whole Paycheck" stereotype. The following three locations will be opening soon:

Community

Zip Code

Median Household Income

% Below Poverty Level

New Orleans

70119

 $28,000

36.1%

Austin, Texas

78758

 $42,000

24.1%

Jackson, Mississippi

39211

 $59,000

15.5%

Source: U.S. Census Bureau; number reflect 2010 census data, median incomes rounded to nearest thousand.

A confluence of factors have led to the surprising results: Younger consumers are willing to pay up for organic goods, folks are moving to these communities from places where Whole Foods was already established, and -- in general -- people are getting more educated about what they're eating. And if ever there were a good sign for a company, the more educated the populace becomes, the more likely they are to shop at Whole Foods.

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Read/Post Comments (7) | Recommend This Article (15)

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 December 30, 2013, at 3:21 PM, drdtucker wrote:

    Surprised to see the disclaimer at the end, and not have the topic featured more prominently in the discussion- potential conflicts of interest?

    John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors.

  • Report this Comment On December 30, 2013, at 6:02 PM, cmalek wrote:

    Pretty soon WFM will run out of well-off neighborhoods to site their stores in. If they want to continue expanding, they will have to go into less afluent areas. Once there, they will have to lower their prices to get customers. When they lower the prices, their profits will go down. Profits go down, do not meet Wall Street expectations, stock price takes a dive.

    BTW - how do supermarkets justify the higher prices of "organic" foods? Are these foods more expensive to produce or is it the cachet of the word "organic"?

  • Report this Comment On December 30, 2013, at 9:48 PM, pfennig1 wrote:

    It costs more to produce on a per unit basis and people are willing to pay for a perceived benefit.

  • Report this Comment On December 31, 2013, at 4:57 AM, The1MAGE wrote:

    I live in Lincoln, where Whole Foods (WF) just opened. (And was mentioned above.)

    I went there on their grand opening, and they were quite busy that day. There are a few other organic stores here, so they will do fine.

    As organic grows in popularity, the price will drop. Already you can find organic sources in WalMart, and HyVee. But there are people who don't like to shop at those big stores, and will see WF as a trusted alternative, with more options.

    I recently found I like hummus, and found some at WF at a lower price then other stores.

    But I see organic as a luxury, not a necessity. I also think GMO worries are overblown, but it feeds into WF's business model.

    And yes I am an investor in WF. With their plans of growing 230% larger, I see expect this stock to grow.

  • Report this Comment On January 03, 2014, at 2:55 PM, cmalek wrote:

    @pfennig1:

    "It costs more to produce on a per unit basis and people are willing to pay for a perceived benefit. "

    Do you know for a fact that it costs more to produce "organic" or are you just repeating what you've been told by the "organic" sellers? Heck, if I was growing organic veggies and the elitist fools were willing to pay more for them, I would not disappoint them. I would charge all that the traffic would bear.

  • Report this Comment On January 03, 2014, at 3:17 PM, greytop13 wrote:

    Non-organic farmer here. Yes, organics cost more for several reasons but chiefly because the organic farmer gets lower yields per acre. I can push up yield by using pesticides and chemical fertilizers not available to the organic farmer. Others are free to use GMOs, hybrids and methods an organic farmer would consider unethical and unsafe.

    It costs more to grow so it costs more for the consumer.

  • Report this Comment On January 03, 2014, at 8:28 PM, crystrr wrote:

    Problems may arise for WFM expansion plans based on supply side limits for organic foods. I try to grow my own. One must also question how many university towns other than Austin are available for WFM expansion.

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