Whole Foods and the Organic Movement: Bigger Than You Think

This past month, Whole Foods (WFM) co-CEOs John Mackey and Walter Robb went on CNBC's Mad Money and made a surprising announcement: Instead of stopping at 1,000 stores, Whole Foods now sees itself growing to 1,200 locations nationwide.

With just 362 sites currently open, and growth occurring at a moderate pace, how could the company's leaders make such an audacious goal? By taking a quick look at Whole Foods' past, and the changing relationship we have with the food we eat, you might be surprised at the strength of both the organic movement in general and the Whole Foods brand in particular.

Don't underestimate this trend
When I first heard about "organic" foods as a teenager, I thought it was a sham that allowed grocers to charge outrageous prices. Fifteen years later, my wife and I moved onto a tiny organic coffee farm in Costa Rica and saw what a difference organic practices can make. Not only is the final product usually superior, but such forms of farming are also better for the health of those working in the fields as well as local ecosystems.

Apparently, we aren't alone. Over the last 15 years, the trend toward organic foods has been one of the strongest, most sustained shifts in eating habits since World War II.

Sources: Organic Trade Association and The Packer; figures in millions

The most amazing thing about this growth is that sales of organic goods still account for a measly 4.3% of all money spent on food in the United States. That means that, despite 15 years of enormous strides, the runway is still set for more than a decade of continued expansion.

Don't underestimate this brand
For years, Whole Foods has been dubbed "Whole Paycheck" for its expensive price tags. And by looking at where the company decided to locate its 19 Chicago-area locations -- more than 5% of all stores -- one couldn't be blamed for thinking that. Here are the six most- and least-wealthy neighborhoods of that cohort:

Source: U.S. Census Bureau; number reflect 2010 census data, median incomes rounded to nearest thousand.

Taking all 19 locations into account, the average median household income is $87,000 and, on average, 9.6% of the population lives below the poverty level.

But recently, competitors have entered the fray and caused Whole Foods to lower prices. Safeway (NYSE: SWY) has done an excellent job at offering organic goods for affordable prices with its "O" brand organics. Meanwhile, Kroger (KR -0.50%) just announced that it is the second largest organic seller in the nation -- behind Whole Foods -- on the strength and success of its Simple Truth Organic brand.

One big advantage Safeway and Kroger have over Whole Foods is that they have well over 1,000 locations apiece. And their stores offer both conventional and organic goods, meaning that organic goods can be offered in both upper-class neighborhoods as well as lower-to-middle-class ones.

But Whole Foods has been opening locations where one might not suspect. As The New York Times recently wrote, Whole Foods is now finding "success in smaller cities." It should also be noted: It's finding success in less wealthy neighborhoods. Specifically, the article mentions two locations that have performed better than expected. Here's what their demographics look like.

Source: U.S. Census Bureau; numbers reflect 2010 census data, median incomes rounded to nearest thousand.

If Whole Foods can succeed in neighborhoods like this, there's really no telling how successful the chain can be in everyday communities. And it clearly isn't worried about entering Safeway's or Kroger's turf.

This helps explain why the company feels like it's ready to enter more neighborhoods that don't fit the "Whole Paycheck" stereotype. The following three locations will be opening soon:

Source: U.S. Census Bureau; number reflect 2010 census data, median incomes rounded to nearest thousand.

A confluence of factors have led to the surprising results: Younger consumers are willing to pay up for organic goods, folks are moving to these communities from places where Whole Foods was already established, and -- in general -- people are getting more educated about what they're eating. And if ever there were a good sign for a company, the more educated the populace becomes, the more likely they are to shop at Whole Foods.