As the competitive landscape heats up for Whole Foods Market (WFM +0.00%), it is important to pay attention to both conventional grocers and the smaller up-and-comers retailing organic and natural food. Whole Foods has been joined by Natural Grocers by Vitamin Cottage (NGVC +3.14%), The Fresh Market (TFM +0.00%), and Sprouts Farmers Market (SFM +1.31%) in recent years on the public stage. These businesses are considerably smaller than Whole Foods --Sprouts is the largest of the three with a market cap of approximately $4 billion -- but are nonetheless competing for consumer dollars with Whole Foods.
A background of the competitors
Natural Grocers by Vitamin Cottage was founded in 1955 by Margaret and Philip Isely and remains under the control of the Isely family today. Until the second generation of Isely's took over in the late 1990's, the company did not focus on expanding outside of Colorado, but has since opened a total of 72 stores in 13 states. Each Natural Grocers store is only 12,300 square feet on average, less than a third the size of a typical Whole Foods and the smallest of the grocers evaluated here.
The Fresh Market was founded in 1982 in North Carolina and operates 151 stores in 26 states. The company's largest market is Florida, where it had 33 stores at the close of the 2013 fiscal year. The average size of a Fresh Market is roughly 21,000 square feet.
Sprouts Farmers Market opened its first store in 2002 and has since opened 170 stores in nine states (most of which are concentrated in the Southwest U.S.). This makes Sprouts both the youngest and the largest of these three competitors. Each Sprouts location averages 27,500 square feet in size.
Whole Foods Market was founded in Austin, Texas, in 1980. At the close of its 2013 fiscal year, Whole Foods operated 362 stores in 40 U.S. states, the District of Columbia, Canada, and the United Kingdom. Only 15 of those stores are outside of the U.S., and each store averages approximately 38,000 square feet in size.
Leading where it counts: free cash flow
What really counts for grocers is free cash flow -- operating cash flow less capital expenditures -- because it measures the cash retained by a business after making capital investments to maintain current stores and open new locations.
Over the course of 2013 Whole Foods produced a total of $472 million in free cash flow or $1.3 million per store. Sprouts Farmers Market produced $73.13 million in free cash flow or $430,000 per store. Fresh Market produced $18 million in free cash flow or $119,000 per store.
Natural Grocers was free cash flow negative for the year, posting free cash flow of negative $13.99 million or ($194,000) per store. This means that the Natural Grocers business is not producing enough cash flow to finance expansion. Natural Grocers' chairman and co-president Kember Isely says that the company will be free cash flow neutral in fiscal 2014, although the company is still free cash flow negative through the first two quarters of this fiscal year.
Whole Foods generates and retains more cash per store than these three smaller competitors combined.
Let's take it a step further
Looking at per-store numbers only gives us a piece of the picture, because these grocers have different store sizes and strategies. We can really see how efficient each business is when we compare the free cash flow generated per square foot of store space.
But free cash flow is really where our attention should be focused. Because of its negative free cash flow, Natural Grocers produced ($15.78) in free cash flow per square foot. Fresh Market produced $5.68 in free cash flow per square foot. Sprouts Farmers Market produced a respectable $15.68 in free cash flow per square foot, but it is still less than half the $34.31 in free cash flow per square foot produced by Whole Foods.
| Company | Stores | OCF/Store | FCF/Store | Avg. Store Size (SqFt) | OCF/SqFt | FCF/SqFT |
| Whole Foods | 362 | $2.79M | $1.3M | 38,000 | $73.42 | $34.31 |
| Kroger | 2,640 | $1.28M | $398,000 | 61,000 | $24.09 | $6.52 |
| Safeway | 1,335 | $928,000 | $357,000 | 47,500 | $19.56 | $7.52 |
| Natural Grocers | 72 | $357,000 | ($194,000) | 12,300 | $29.04 | -$15.78 |
| Fresh Market | 151 | $930,000 | 119,000 | 21,000 | $44.26 | $5.68 |
| Sprouts Farmers Market | 170 | $945,000 | $430,000 | 27,500 | $34.35 | $15.64 |
OCF=Operating Cash Flow. FCF=Free Cash Flow. SqFt=Square Feet. Sources: 10Ks, Google Finance, author's calculations.
Foolish bottom line
Whole Foods is redefining success in the grocer space. Whether you are comparing Whole Foods to conventional grocers like Kroger and Safeway or smaller up-and-comers like Natural Grocers, Sprouts Farmers Market, and The Fresh Market, no conventional or alternative grocer is yet to come close to the cash flow efficiency of Whole Foods.
With a record number of stores in the development pipeline along with a probable market capacity to open two to three times more stores in the U.S. in the coming years, I am confident in my recent investment in Whole Foods. This will likely be a business for Foolish investors to hold for the next 10 years and beyond.
