Economies of Kale 2: Don’t Forget About Costco and Kroger

The organic food industry’s real winners may not actually be household brand names like Wal-Mart or Whole Foods, but rather middle-of-the-road food retailers like Kroger and Costco.

Mar 8, 2014 at 1:46PM

Economies of Kale Part 1 pitted Wal-Mart (NYSE:WMT) against Whole Foods Market (NASDAQ:WFM) in the battle for organic food's $30-billion market and 20% annual growth.

However, what about lesser-known, low-key grocers like Kroger (NYSE:KR) and Costco (NASDAQ:COST)? Although they lack Wal-Mart's purchasing power or Whole Foods' bourgeoisie branding, could these grocers stand poised to deliver the greenest organic returns to shareholders?

Yes.

Second place: Costco
While Wal-Mart sold the most organic groceries in America as of 2011, Costco came in second. Costco may also have some organic-selling advantages hidden in its warehouses.

Costco's customer base more closely resembles that of Whole Foods than that of Wal-Mart. With annual incomes of $85,000 and Costco club memberships, Costco customers are not only well-off suburban shoppers -- they like being part of an exclusive group. These consumer attributes have "Whole Foods customer" written all over them.

Not only does Whole Foods risk losing organic grocery shoppers to Costco -- Wal-Mart does, too. Costco offers competitively low prices, and Costco has a social-welfare branding edge over Wal-Mart. While many middle-class shoppers eschew Wal-Mart because it's perceived as bullying the little guy, Costco treats its employees famously well.

Perhaps Costco should play up its employees' living wages and health care benefits in future public relations -- that may give middle-class shoppers yet another reason to leave Whole Foods and Wal-Mart to shop at an organic retailer that competes on both price and social welfare.

Third place: Kroger
After Wal-Mart and Costco, all-American grocery chain Kroger sold the most organic foods in 2011. That still places Kroger well above Whole Foods, which ranked sixth on that list.

You never thought Whole Foods' bourgeoisie atmosphere could be recreated at Kroger -- but that's exactly what Kroger's doing. After acquiring higher-end grocer Harris Teeter last year, a chain that specializes in hot-bar foods like those at Whole Foods, Kroger's even opening new stores which have "a sushi bar, bakeries, a cheese shop and a large prepared foods section."

Adding insult to Whole Foods' profit-bleeding injury, Kroger champions its own popular natural and organic foods brand: Simple Truth. However, Kroger may have to improve Simple Truth's branding after getting sued in 2013 for allegedly mis-promoting its natural poultry.

Kroger's far from conjuring visions of organic sugarplums dancing in shoppers' heads. Yet Whole Foods should watch its back: while Whole Foods just saw below-benchmark first-quarter comps growth of 5.4%, Kroger's natural and organic foods department has been the grocer's fastest-growing department in 2014. Kroger sees green and plans to expand its organic offerings.

Foolish bottom line
Wal-Mart and Whole Foods are grocery goliaths on opposite ends of the spectrum: Wal-Mart flexes its might to secure the lowest possible prices for customers; Whole Foods tries to do right by selling wholesome foods and treating employees well. However, two other grocers, Costco and Kroger, could be slowly stealing away organic food's profitable growth.

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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 Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale 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.

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