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Whole Foods’ Impressive Growth Looks Set to Continue

By Anup Singh - Sep 12, 2013 at 1:47PM

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Expansion into under-served communities should lead to further growth for Whole Foods.

Whole Foods Market (WFM) had a strong third quarter, yet again outperforming its peers Supervalu (SVU) and Safeway (NYSE: SWY). Whole Foods has been on a good run, and a look at its metrics over the last five years clearly proves that:

WFM Revenue TTM Chart

WFM Revenue TTM data by YCharts

Whole Foods is operating in a market where growth is driven by consumer trends toward healthier living. With an aging, affluent, and health-conscious population moving toward the concept of organic and natural food for healthier living, Whole Foods certainly has some tailwinds.

What next?
The global food retail market is estimated to grow at a compound annual growth rate of 5.5%  for the period 2011-2016, reaching a market size of approximately $7 trillion by the end of 2016. In comparison, the global organic food market is expected to grow at an estimated CAGR of 12.9%, and is expected to be worth $104.7 billion in 2015.

So, even by conservative estimates, the organic food market would still be a minuscule 1.5% of the entire food retail market by the end of 2016 if these growth projections are correct. This leaves a huge potential for growth.

Whole Foods is also working to shed its image of being only for affluent shoppers. Stores are opening up in lower-income areas and in smaller markets, ranging from 20,000 square feet to 70,000 square feet in size.

It has announced plans to build an 18,000 sq ft store in Englewood, one of Chicago's most impoverished neighborhoods. This store will be operational in 2016. If its low-cost stores manage to do well, we can expect to see Whole Foods stores in many of the under-served communities in the rest of the country.

The company's sales strategies also include "flash" sales on specific items promoted on social media that run for a few hours, like a five-hour sale on ice cream, where customers can buy one item and get one free. Customers can also expect to see more one-day sales on specific items.

Money-saving tips using coupons and via information on its website have also been offered to shoppers. The discounts have not had much of an impact on gross margins, which have held steady at around 36.6%, 60 basis points higher than the same quarter a year ago.

Looking around
Safeway, the second largest grocer in the country after Kroger, is relying on multi-pronged strategies like implementing loyalty programs and investing in new or replacement stores to push up sales going forward. "Just for U" has been reported to be a success: It is estimated that this loyalty program could end up with over 6 million members. These customers are frequent visitors to stores, and about 50% of its top-line is being attributed to this category of shoppers.

Safeway is venturing into the idea of building apartments over the store at new locations. It is also spending on store remodeling, replacement and new stores. Safeway also is in the "Organic food" markets through its own O Organics brand.

Supervalu has done well after shedding some flab by selling off almost 900 assets for $3.3 billion as a part of a restructuring exercise. A leaner organization, with diminished infrastructure costs, has enabled the company to focus effectively on core operations.

Many grocery stores have started loading their shelves with organic and natural food items. Supervalu should also follow Kroger's move to add more organic and natural food items, an area of increasing demand from customers, both old and young. This would certainly help Supervalu grow sales. Also, offering organic food items would be in line with its initiatives, such as arranging its merchandise in ways that drive sales and advertisement through weekly newspaper inserts.

Conclusion
Whole Foods has a good track record of performance, and there is significant opportunity in the organic food market. The company is looking to capture even more of it by opening stores in areas it doesn't serve yet, making it worth a look.

ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Supervalu and 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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