Economies of Kale: Wal-Mart vs. Whole Foods

Organic food, Whole Foods, and Wal-Mart -- which one doesn’t belong? Surprisingly, organic food profits may taste better with Wal-Mart than with Whole Foods. Find out why Wal-Mart wins the organic game here.

Mar 1, 2014 at 7:33AM

For grocery chains looking to squeeze concentrated profits from their industry's un-sexy, low margins, relying on market power demands a strong brand or economies of scale. Whole Foods Market (NASDAQ:WFM) associates itself with a socially conscious brand -- and charges customers more for the feel-good luxury of shopping in Whole Foods stores. At the spectrum's other end, Wal-Mart Stores (NYSE:WMT) leverages its titanic company scale to buy massive food quantities at low prices -- and passes along those savings to consumers.

Which of these strategies will capture the organic food industry's cash-conjuring 20% annual growth? The answer may surprise you: Wal-Mart beats Whole Foods and other grocers.

First place: Wal-Mart
Wal-Mart wins at selling organic food from a sheer numbers approach: Sam Walton's billion-dollar baby sold the most organic food in America in 2011. Organic food has become a $30 billion industry. Since Wal-Mart alone accounts for 25% of America's grocery buying, the company's decision to push organic products in 2006 was all but guaranteed to pay off. 

By merely participating in the organic food industry, Wal-Mart has altered its structure and eroded competitors like Whole Foods' edge. As the company's chief marketing officer John Fleming said: "Typically, organic products can cost 25[%] to 30[%] more against competitive products. [Wal-Mart is] able to get those prices down to about 10[%]."

By encouraging industry consolidation, Wal-Mart has lowered organic food prices across the board. When prices fall, customers see less reason to distinguish once-luxury organic foods from their weekly bulk-grocery shopping. Indeed, the stereotypical Berkeley, CA organic food consumer proves less Wal-Mart averse than expected: in a month-long 2007 industry study, a market-whopping 29% of organic shoppers in San Francisco had bought organic groceries at Wal-Mart in the past week.

Sixth place: Whole Foods
That's right: Whole Foods doesn't even place second in the organic foods arms race. Wal-Mart, Costco, Kroger, Super Target, and Safeway sold more organic groceries than Whole Foods in 2011. Keep in mind, of course, that size isn't everything when it comes to the organics industry.

As alluded to earlier, Whole Foods can remain a leading contender for organic-clamoring investors if it maintains superior branding. As Apple has proven to Microsoft, great branding seduces consumer desires and can obliterate lower-priced industry Goliaths like Wal-Mart.

Yet with Whole Foods' first-quarter sales growth at 5.4% -- below a company-set benchmark of 7% -- and its once-abounding stock price stalling over the past six months at 0.4% returns, Foolish Whole Foods investors like myself must question whether Whole Foods' brand is faltering, or its margins, or both.

Foolish bottom line
With Wal-Mart's gargantuan scale and buying power, its bottom line will benefit from the market's rising demand for organic foods. As organic prices fall, whether Whole Foods will continue capitalizing from its brand-induced market power is another matter.

While Wal-Mart accounts for a quarter of America's grocery sales, Whole Foods sells 2%. Perhaps instead of trying to compete with Wal-Mart on price, Whole Foods should consider retaining a price premium and eking even more sales from America's wealthiest shoppers.

But what happens if Wal-Mart collapses? 
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Glenn Singewald owns shares of Whole Foods Market. The Motley Fool recommends Waste Management and Whole Foods Market. The Motley Fool owns shares of Waste Management and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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