Grocery stores, convenience stores, and even full service gas stations are on every corner nowadays. With the market so saturated, how can anyone make money? Well, on paper Whole Foods Market
The average net profit margin in the grocery industry currently sits at 1.5%. This means for every $100 in sales, the average grocery store only makes $1.50. In contrast, Whole Foods pockets $3.39! By looking at this information, you might want to go out and mortgage the house in order to buy as much stock as you can. But let's take a little deeper look.
Profit Margin Shown in %
|Whole Foods Market||3.39%||33.96||10.11 B|
The Fresh Market
Source: Yahoo! Finance.
Compared to its peers, Whole Foods is overpriced. With a current P/E of 33.96, that's almost three times what Kroger or Safeway are currently selling at. Let's not forget this is an industry that is not normally known for huge leaps in sales.
Size does matter!
Whole Foods is a relatively small company with only 311 stores. Compare that to Safeway with more than 1,702 grocery stores or even Wal-Mart
Whole Foods current market cap is $11.78 billion, while Kroger's is $13.31 billion. Whole Foods is priced only $1.53 billion less than a company in the same industry that has nearly nine times higher sales and net income almost three-and-a-half times higher. About 15% of Kroger's sales come from fuel, which is another revenue stream that Whole Foods hasn't entered, and practically won't be able to given the layout of many of its stores.
Whole Foods current brand image is great, but competitors are eroding its niche market. Grocery stores such as Safeway are rapidly remodeling their stores by adding hardwood floors, less fluorescent lighting, and just plain mimicking Whole Foods' store layout. Safeway also carries its own in-house brand, O Organics. Many other grocers have already started adding organic and other natural food items like Stop N Shop's Nature's Promise. As these competitors continue to expand on the trends that Whole Foods started, consumers might not express the same brand loyalty they once had for Whole Foods.
My Foolish opinion
Wall Street has set some very high expectations for Whole Foods. In my opinion, I think it may be possible to meet these expectations, but not for a long time. Maybe not even until Whole Foods has completed the 1,000 stores it is projecting to build in the U.S. This sort of growth could take two decades, even with ambitious growth rates. Looking that far out, will Whole Foods still realize the same sales growth of today? Will their brand still resonate as strongly? I'm skeptical. Having said that, I don't think Whole Foods can build enough stores and raise revenue fast enough in the near future (three to five years) to sustain the growth rate that the stock price currently has built in.
Not everyone here at the Fool is as bearish as I am about Whole Foods. Check out these articles to see another point of view: "Is Whole Foods Still Relevant?" by Molly McCluskey or "Don't Panic About Whole Foods" by Alyce Lomax. Add any of the stocks mentioned in this article to your watch list by clicking on one below.