Wal-Mart Stakes Its Claim in the Organic Marketplace. Should You Buy?

Last week Wal-Mart announced a strategic alliance with Wild Oats to offer consumers more organic food products. However, it remains to be seen what effect this will have on the organic grocery sector.

Apr 17, 2014 at 4:00PM

Wal-Mart (NYSE:WMT) plans to stake its claim in the organic grocery market place by reviving the Wild Oats line of organic goods. Wal-Mart is widely known as the nation's largest grocer. Some analysts believe this deal will pressure other companies like Whole Foods Market (NASDAQ:WFM) and The Fresh Market (NASDAQ:TFM) to lower their prices.

While the effect of Wal-Mart's entry into the organic sector remains to be seen, the company believes it can sell its organic goods at a discount in comparison with those of its premium competitors.

"We know our customers are interested in purchasing organic products and, traditionally, those customers have had to pay more," said Jack Sinclair, executive vice president of grocery at Walmart U.S. "We are changing that and creating a new price position for organic groceries that increases access."

The organic alliance at a glance
Wal-Mart will introduce nearly 100 Wild Oats products this year as part of the line. The leading grocery store claims prices will be at least 25% lower than those of national-brand organic products. Wal-Mart already offers its customers an array of fresh produce, dairy, meat, and packaged goods.

In addition to beefing up its organic buffet by offering Wild Oats products, the big box food retailer is expanding other categories like yogurt, produce, deli, and bakery. In particular, some of the organic products that will now be available include canned tomatoes, various spices, and Wild Oats' ready-to-prepare skillet meals.

Wild Oats will have an opportunity to reintroduce its brand. The company was founded in 1987 in Boulder, CO and it had grown to 110 stores which operated across 24 states and Canada at its peak. Whole Foods gobbled up Wild Oats in 2007, but by 2009 it was forced to spin the business off in the face of antitrust challenges.

In short, Wal-Mart hopes to use its massive size to push organic food prices down and make these products more affordable to its customers. The company believes it will be able to do this by making longer-term commitments with producers like tomato growers so they will have an incentive to grow more.

"Prices are going to have to come down," Sinclair noted.

What this means for the organic grocery sector
Wal-Mart aims to stake a bigger claim in the organic market as consumers of different income levels become more health-conscious. Given its scale, with more than 4,000 stores operating in the U.S., the company has the ability to drive prices down in the organic grocery sector.

However, the question remains as to whether or not Wal-Mart will be able to capture market share by harvesting customers from its competitors in the green grocer sector. Customers who frequent these organic shops do not fit into the same demographic as the customary Wal-Mart shopper.

That being said, some analysts believe that this could prompt a green grocer like Whole Foods to lower its prices. On the one hand, lower prices could manifest in tighter margins for an outfit like Whole Foods. However, the company may also become more attractive to consumers who believe that the prices are a bit out of reach.

Whole Foods is still a good buy
Whole Foods is still the leader in the organic market in the U.S. However, prior to the Wal-Mart announcement, Whole Foods had already revised its guidance for 2014. The company anticipates that its sales will grow in a range of 11%-12% for the year -- down from the previous guidance of 11%-13%. Whole Foods also foresees earnings per share in the range of $1.58-$1.65 per share -- down from its previous expectations of $1.65-$1.69 per share.

However, Whole Foods remains strong in a number of ways. The company continues to pay a dividend, and it intends to continue with stock repurchases this year to the tune of $300 million which will support its earnings growth. The company currently has more than 100 stores in its development food chain and it believes that demand would support 1,200 stores in the U.S.

Another challenge for The Fresh Market
The Fresh Market had a tough year in 2013 as it experienced a slowdown in sales across its store base. While the company attributed this to changing economic conditions and falling consumer confidence, competition from other organic grocers might have affected the company's same-store sales numbers.

The Fresh Market ultimately posted earnings per share of $0.39 -- a 9% decline year-over-year. It blamed the sales decline on weaker sales and margins. Looking ahead into 2014, the company anticipates lower earnings than what it had called for in its previous guidance -- it gave a range of $1.56-$1.66 per share. Finally, the Fresh Market had already announced a restructuring plan that called for closing four underperforming stores in California and Texas.

 In other words, Wal-Mart's push into the organic grocer sector may add to the stiff winds The Fresh Market is already facing.

The last green word
Wal-Mart stands to gain from its venture with Wild Oats as well as other recent initiatives aimed at boosting its sales. Meanwhile, Whole Foods will continue to maintain its niche and it is poised for future growth. Ultimately, Wal-Mart's green alliance with Wild Oats is a trifecta. The green grocer sector can benefit from competition, and this is green news for consumers and investors alike who look to go long on the green.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of 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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