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Heads -- Whole Foods Wins, Tails -- the Competition Loses

Brian Stoffel
April 28, 2011

I admit it: I wasn't always an ideal role model for my younger brother.

When it came time to do the dishes at home, I took advantage of my brother's age (he was 4). The deal I made with him? "We'll flip a coin. If it comes up heads, I don't have to do the dishes. If it comes up tails, then you have to do them." Believe it or not, this actually worked for more than a year.

On a much larger scale, Whole Foods (Nasdaq: WFMI  ) has been able to play the exact same game when it comes to the grocery industry. Unlike me, it'll be able to keep playing the game for years to come.

Heads: Organics are here to stay
The move toward healthier, organic foods is an undeniable, long-term trend that is here to stay. The market for groceries is attractive for two fundamental reasons:

  1. This is an enormous market -- everyone needs food.
  2. The product is always in demand -- hopefully, three hearty meals a day for everyone.

From this large and sustainable market, organic foods have started to take up a larger slice of the pie.


Total Food Sales

Organic Food Sales

Organic Penetration

1998  $454,140  $4,286 0.9%
2000  $498,380  $6,100 1.2%
2002  $530,612  $8,625 1.6%
2004  $544,141  $11,902 2.2%
2006  $598,136  $16,718 2.8%
2008  $654,285  $22,900 3.5%
CAGR 3.7% 18.2%  

Source: Organic Trade Association. CAGR=compound annual growth rate. Food sales in millions.

While the table above shows the strides that have been made so far, organic food still had just a tiny piece -- 3.5% -- of the entire food industry pie in 2008. That slice of the pie will undoubtedly grow as consumers educate themselves on where their food comes from.

Tails: Competitors have to eat their margins
But what happens when the cost of food rises suddenly? Flooding in Pakistan, droughts in Australia and Canada, and wildfires in Russia are putting a serious strain on the availability of food worldwide.

Because traditional grocers essentially offer the same products, the store with the lowest prices usually wins. No one is willing to pass the majority of the costs onto the consumer, in fears that they'll lose traffic. Whole Foods, however, can stand apart from the competition, as its customers have always been willing to pay a premium for quality food.


4Q 2009 Gross Margin

4Q 2010 Gross Margin

Basis Point Change

Whole Foods 34.34% 34.57% 23
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