What Coca-Cola's Past Can Teach Us About Whole Foods' Future

If you've bought Whole Foods Market  (NASDAQ: WFM  )  stock anytime in the past two years, you're probably not very happy about what's happened. In a nutshell, one of the great growth stocks of the past 15 years has been an absolute dud, unless you decided to sell out last October:

WFM data by YCharts.

While the rest of the market was on a tear, Whole Foods' stock has fallen, as much as 41% if you bought at the peak. Instead of telling you why you should hold your shares -- I have no intention to sell mine -- I want to share an investing parallel from almost 40 years ago. A little context about the importance of patience and time will serve us all well in the interim.

Let's talk about The Coca-Cola Company  (NYSE: KO  ) , and 1975. 

Selling the world a Coke, but Mr. Market wasn't buying it
Back in the '70s, Coca-Cola was already all over the world, but it was still relatively early in its expansion. Most of the world was much poorer than today, and consumer goods like Coca-Cola weren't either affordable or readily available to the masses. This is the Coke of the 1970s:

 

However, the stock market wasn't buying it:

KO data by YCharts.

We're talking about almost five years of being handily outperformed by by the market. This is by far a worse beating than Whole Foods investors like me have taken, and for a much longer period of time. 

The Whole Foods/Coca-Cola parallel
On the surface, these don't seem to be very similar businesses at all -- I get that. But when you peel back the layers, there are a handful of characteristics that today's Whole Foods shares with 1975 Coca-Cola. 

  • Very high-quality businesses
  • A stock that is perceived as "expensive" based on price-to-earnings valuation.
  • Serious competitive challenge on the rise.

Warren Buffett didn't invest in Coca-Cola -- one of his signature investments -- until a century after its creation by John Pemberton. Source: public domain.

The market sentiment for Whole Foods right now is that the company's growth days and fat margins are long gone. Wal-Mart is making a big push into organics; Sprouts and other upstarts are all trying to take a slice from what has been a relatively unchallenged market for Whole Foods over the past 20 years. All of a sudden, it seems that the worst is happening. 

In 1975, PepsiCo launched its "Pepsi Challenge" marketing campaign, and actually started taking market share from Coca-Cola. At one point in 1978, Pepsi's stock had actually gone up almost 50% while Coke shares were basically flat. However, Coca-Cola the business would continue to sell its trademark product, produce profits, and expand sales both domestically and internationally over the half-decade that its stock was a loser.

Here's what Coca-Cola stock has done since 1980:

KO data by YCharts.

In short, we're talking about one of the best stocks to own over the past 35 years. An investment of $1,000 turned into $56,200, before dividends. With dividends, we are talking about turning a grand into more than $101,000. It gets even better: That $1,000 investment in 1980 would be paying about $1,600 in annual dividends today. 

Think about that for a second: paying back 160% of your original investment to you, every single year!

Whole Foods' advantage goes far beyond just fresh organics. 

The long view is really hard to take
The thing is, we're hard-wired to think that what's happening right now will keep happening. The result? It's hard to imagine that Whole Foods -- much like Coca-Cola back in 1975 -- is still a best-of-breed company, with raving fans of the brand and what it stands for. Businesses face competition all the time. Think about today: There's arguably more competition in most industires today than there has ever been. Yet corporate profits are higher than ever. 

The point? Competition isn't always (or even usually) a death knell; especially for the excellent business with real advantages, like the power of its brand, the quality of its product, and the loyalty of its customers. And just like Coca-Cola for the past 120 years, Whole Foods Market has an enduring brand that engenders loyalty from its customers. 

Foolish final thoughts 
Am I telling you that Whole Foods will be the once-in-a-generation stock that Coca-Cola was 35 years ago? Maybe not in so many words. But what I most certainly am saying is that -- even with increased competition -- Whole Foods is an undeniably well-run business with some very real -- and very durable -- advantages that its price-driven competitors won't be able to erode as easily as it seems. 

If you've bought Whole Foods stock in the past couple of years, relax. It's been only a couple of years, and you still own the same portion of the same great business. Don't mistake Mr. Market's reaction for an indication that the business is failing. Plenty of investors did that with Coca-Cola, and you see what they missed. 

Warren Buffett just bought nearly 9 million shares of this company
Buffett once said, "Someone's sitting in the shade today because someone else planted a tree a long time ago. His ability to focus far into the future -- as he did with Coke 30 years ago -- led him to buy 8.8 million shares of this company that's right in the middle of an industry that exploding. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click here to discover more about this industry-leading stock, and join Buffett in his quest for the next great stock. 

 


Read/Post Comments (9) | Recommend This Article (14)

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 May 19, 2014, at 4:14 PM, Charlotte49er wrote:

    Great article and very well said!

  • Report this Comment On May 19, 2014, at 6:17 PM, jpat34721 wrote:

    Consumers are wising up to the organic scam and are no longer willing to pay the premium, especially when every supermarket on the block provides organic for less. The analogy to Coke is silly. WFM is not a global brand and the business model won't scale well in developing markets. Not a fan

  • Report this Comment On May 19, 2014, at 7:44 PM, TMFMattyA wrote:

    Nice work, Jason. Articles like this do the Fool proud. And I love the comparison you're making. Very compelling.

  • Report this Comment On May 19, 2014, at 8:57 PM, TMFVelvetHammer wrote:

    jpat,

    That's like saying that BMW is in trouble because of Hyundai.

    Spend some time in a Whole Foods (I've been in Whole Foods stores in at least 3 states) and maybe you'll have a better appreciation of what it offers.

    A traditional grocer adding even a few hundred packaged organic products, and dedicating maybe three six-foot long shelves to some organic produce isn't even close to what Whole Foods offers. Even Sprouts and other similars just aren't the same.

    You can't buy anything in a Whole Foods that doesn't meet a very high standard, while a Kroger or Wal-Mart will place their "better for you" and organics right next to the mass-produced "factory foods" that a larger and larger number of consumers are specifically trying to avoid.

    More consumers are more concerned with how their food is grown, prepared, and packaged, than ever before. This is a huge trend that points towards Whole Foods' success, not its demise.

    Matt,

    Thanks for the comment! You're a Fool I've long admired, so it means something to hear that from you!

    -Jason Hall

  • Report this Comment On May 19, 2014, at 9:35 PM, ChicagoMary wrote:

    Good article. There are some excellent WFM competitors, like Marino's here in Chicago and Wegman's in Philadelphia, but Whole Foods does have a range of products and an great staff that few can match. Maybe a time to buy.

  • Report this Comment On May 20, 2014, at 8:31 AM, thehoffmancrew wrote:

    As we obtain greater transparency into our food sources and the labor practices employed to provide a meal for under $1, more and more people will find it difficult to support (shop at) businesses who subscribe to these low standards. The transparency will naturally grow as media, technology, and passionate people push for it, as has been the trend for a couple of decades now. Not saying everyone will change, but businesses who support and advocate for quality in our food supply and the lives of those who provide it will no doubt be positioned to benefit from this increased transparency and conversion of consumer priorities.

  • Report this Comment On May 20, 2014, at 1:49 PM, TMFVelvetHammer wrote:

    thehoffmancrew,

    I think that's it. Looking at the success of Chipotle as another parallel to the shift in consumer's relationship with food sourcing, and the ethical treatment of growers, suppliers, and employees, points to how this trend is about much more than just cheap groceries.

    That's what I think people and the market are missing today.

  • Report this Comment On May 22, 2014, at 8:19 AM, tessa wrote:

    Hi Jason

    Thanks for the article and all thanks for the comments it really helps to hear all the different perspectives.

    I have only been a member (and an investor) for a few months and the very first stock I bought was WFM at 51. 96 in March

    I bought WFM then because of the saying (not quite sure who to attribute it to) that you should invest in companies you believe in and are a customer of.

    Now, I know WFM is not a 'global brand' in the sense that they currently operate in the USA but I want to put in my 2 cents here and say that I do not live in the USA, nor have I lived in the USA.

    I travel there about once or twice a year for work and every time I do I make sure that my first stop is the nearest Whole Foods Market.

    I have celiacs disease and it is hard to get gluten free food in my home country so I head straight for their gluten free range to stock up on food that I can't get at home (especially gluten free beer) to pack in my suitcase as well as enough snacks to tide me through the trip.

    More importantly, it is a sanctuary where I know I can get some peace between a long plane flight and whatever intense conference I am about to embark on.

    Of course my case is niche and fly-in customers like me cannot provide enough business alone but I understand they have strong brand loyalty locally too.

    I think there is the potential for them to be very successful if they ever do decide to expand internationally, especially in the growth markets Asia where there is a growing trend towards 'copy cat' stores who try to replicate the atmosphere but don't quite get it. It's no longer just Western Expats in these markets who are interested in organic produce, better quality foods or have special dietary requirements. There is an increased interest from locals as education about food increases and disposable income grows.

    Admittedly I have been pretty worried with the price drop since WFM was my first stock but fortunately I have purchased a a few others since then and your article has helped to remind me that I decided to commit to this as a long term investment and that nothing has fundamentally changed about the company since I decided to invest in it except for the stock price itself. So I am going to hold.

  • Report this Comment On May 22, 2014, at 11:55 AM, TMFVelvetHammer wrote:

    Hi Tessa,

    Thanks for sharing your perspective, and good for you for being patient. While Coca-Cola may not be a perfect comparison, the reminder that it spend more than half a decade both a loser, and a market underperformer -- and this was almost 40 years ago -- should give any investor pause before selling the great business too early.

    I have a friend with a young child with celiacs disease, so I've seen how rough that can be at times. It's interesting that you bring up how Whole Foods needs more than just a niche of the market, and the interesting thing is, it actually doesn't need the huge numbers one would think.

    I did some calculations based on the growth goals, and the company only needs about 5% of grocery shoppers to shop there to reach its 1,200-1,300 store target.

    It's wild ambitions are actually pretty modest, compared to the size of the market.

    Fool on!

    -jh

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