Why The Fresh Market Leaves a Sour Taste In My Mouth

My family is currently in the process of moving back to my native Wisconsin, and right now, that involves a week-long stay at my parents' house. While here, my wife and I have wanted to buy our own groceries, and the closest store is a new Fresh Market (TFM).

Source: The Fresh Market.

After shopping there, we both left perplexed. It was about six in the evening -- rush hour for most grocery stores -- yet there was almost no one there; our bill was much higher than we expected.

Most important, we couldn't answer this simple question: What is that store trying to be? A name like "Fresh Market" invokes thoughts of whole, organic foods and a healthy lifestyle. And while that type of food was available, so was a mind-boggling array of candy.

Though I could tell the store wanted to be folksy, it seemed forced and sterile. No freshly cooked, delicious aromas greeted us as we entered the store. And the overall selection was limited, at best.

When in doubt, ask the company
In an effort to figure out how such a business could ever survive, I went straight to The Fresh Market's SEC filings. As it turns out, many of the things I noticed were intentional.

The Fresh Market clearly states that it differentiates itself by constructing stores that are a half to a third of the size of traditional grocery stores. The company states that with this smaller size, it "focus[es] on higher-margin food categories." This explains both the limited selection and our surprisingly high bill.

The company also attempts to set itself apart from the competition by "provid[ing] a differentiated shopping experience that generates customer loyalty and favorable word-of-mouth publicity." I can't disagree that --on the whole -- it was a much more intimate, less-stressful shopping experience than what I regularly encountered at my local Safeway-owned Dominick's in Chicago. So, on both fronts, the company is executing these objectives.

And yet, I still don't plan on going back
In the grocery business, there seems to be two distinct camps that are fortifying their positions.

On one end are the legacy grocers -- companies like Safeway and Kroger -- that are improving in-store experiences, but focused highly on low-margin, everyday goods. On the other end are companies like Whole Foods (WFM) and Trader Joe's, which have doubled down on the organic movement, offer slightly higher-priced products, and create unique shopping experiences that clearly resonate with customers.

My problem with the Fresh Market is that it's trying to offer a dispassionate shopping experience that doesn't clearly differentiate itself, yet charge prices higher than you'd find anywhere else. For example, look at how the store compares to a previous field test that I conducted earlier this year with Whole Foods, Dominick's, and Roundy's Mariano's Fresh Market.

Source: Author visit to store locations on May 8, 2013, and August 2, 2013.

It's tough to highlight enough just how surprised I was that the Fresh Market didn't carry any organic chicken, especially when specialty meats are one of the areas in which the company hopes to differentiate itself. Based on the organic products that it did have, prices were about in line with the competition, but I'm using a limited subset based on previous visits to other chains.

More important, the strategy simply doesn't seem to be producing the kind of results that justify a price-to-earnings ratio of close to 40. Because of the average store's smaller footprint, and the stock's expensive price tag, you'd expect sales per square foot and comparable-store sales to be sky high. In the end, though, Fresh Market can't hold a candle to what Whole Foods has done.

Source: SEC filings for most recent quarter.

Combine all of these facts, and I'm willing to bet my All-Star CAPS profile on Fresh Market underperforming for years to come by giving the company a red thumb.