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Wal-Mart Is Hungry For Some Whole Foods

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From Wal-Mart News website

Today Wal-Mart  (NYSE: WMT  ) announced a new partnership with an organic food supplier called Wild Oats, LLC. Wal-Mart will sell 100 Wild Oats-brand pantry items at 2,000 of its locations. According to Wal Mart's Executive VP of Grocery "customers will be able to purchase organic items at non-organic prices". Does Wal-Mart's new partnership mean investors in Whole Foods (NASDAQ: WFM  ) should run for the hills? 

Good for Wal-Mart 
The partnership may be good for Wal-Mart. Offering affordable organic products could bring new customers to the massive retailer famous for competing on price.

Wal-Mart did its research before sealing the deal with Wild Oats. An internal study found that 91% of Wal-Mart customers would consider purchasing affordable organic products at its stores. 

Organic and non-organic products are substitute goods i.e. people usually buy one or the other. Since the new organic products will be comparably priced to Wal-Mart's non-organic items, it's safe to assume Wal-Mart believes the partnership will attract new customers to its stores.  

Bad for Whole Foods 
It appears the organic lifestyle, once considered outlandish, is quickly becoming mainstream. According to the industry tracker Penton, the organic industry is poised to grow 50% by 2018--a trend that may help Whole Foods grow its earnings. 

While pioneering the organic market in the United States, Whole Foods has enjoyed juicy margins compared to its non-organic counterparts. But if Wal-Mart continues expanding its selection of cheap organic products, Whole Foods may be forced to lower prices or lose customers to Wal-Mart. 

Whole Foods currently has a price-to-earnings ratio of 34.45 times trailing earnings. That's  nearly twice the P/E ratio of the S&P 500 This suggests that Whole Foods investors anticipate significant earnings growth for the organic retailer.

If Whole Foods is forced to slash prices, its earnings and stock price may suffer. 

So, should Whole Foods investors panic?
At this point, it's difficult to predict how the partnership will affect Whole Foods. But it's probably safe to assume that the executives at Wal-Mart know what they're doing. They wouldn't have forged the partnership if they weren't confident the deal would bring in new customers. It just so happens that a lot of the market share targeted by Wal-Mart currently belongs to Whole Foods.

Some believe the deal will have no effect on the profitability of Whole Foods. They argue that organic eating is a way of life not a shopping decision. Although there is some validity to their argument, it's hard to believe Wal-Mart's efforts won't have some effect on Whole Foods. 

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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 April 17, 2014, at 10:46 AM, spworkman wrote:

    Let's see, WMT has one product line it bills as organic. WFM has an entire store that caters to that niche. So far, I don't think they have much to worry about, especially considering the type of customers each markets to and draws from. I would think WMT would have to expand its organic product line a lot more to do serious damage to WFM's market share.

  • Report this Comment On April 17, 2014, at 7:44 PM, MichaelPNielsen wrote:

    WMT has more than one organic product line. The significance of the new Wild Oat line is its cheap price.

    It seems like the market might be worried about WFM's ability to protect its margins/market share. It's down over 6% since the WMT Wild Oat partnership was announced.

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Michael Nielsen

Michael is a full-time MBA student and certified stock market junkie. For the Fool, he writes articles about the telecom industry. To see some of his market-beating investment ideas, follow him on twitter

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Related Tickers

8/28/2015 4:00 PM
WFM $32.85 Down -0.29 -0.88%
Whole Foods Market CAPS Rating: ****
WMT $64.94 Down -1.14 -1.73%
Wal-Mart Stores CAPS Rating: ***