The American food industry has gone through an enormous paradigm shift over the past 20 years. Where once we were satisfied to feed our families a steady diet of soda and McDonald's, sales of organic goods are now exploding, and the prevalence of farmer's markets has increased almost five-fold.
We are in the process of learning about how important it is to eat healthy foods, and that has serious consequences for the supermarkets you invest in. While an astounding one-fourth of all food purchased in America comes from Wal-Mart (WMT 0.46%), I think there are three better companies that benefit from this trend.
The undisputed leader
No grocery chain has done more in educating consumers about the food they are eating than Whole Foods (WFM). The company has been able to grow revenue by an healthy clip over the past five years, a testament to how much the store's key values resonate with customers.
The company came under serious fire last year, when Wall Street started to question whether or not Whole Foods could compete with entrants in the natural/organic market. If it didn't lower prices, people would flock to other stores. If it did, it would lose profitability.
Co-CEO and founder John Mackey didn't think such a dichotomy accurately reflected the company's choices. Since then, Whole Foods has continued to cut prices primarily on its fruits and vegetables in an effort to drive more traffic. That, combined with the company's first-ever national marketing campaign and an acceleration to new store openings, have helped the stock once again gain favor.
While shares currently trade for an expensive 32 times earnings, it's worth noting that the growth of organic sales shows no signs of stopping, and Whole Foods believes it can grow to 1,200 locations in North America -- from its 408 locations today.
The surprising stalwart
Since this focus on natural and organic foods began, traditional grocers have largely been pinched. While Wal-Mart has taken most of the low-end shoppers, places like Whole Foods and other up-starts have taken the rest.
That's why it's so impressive what Kroger (KR 1.80%) -- one of the nation's largest traditional grocers -- has been able to accomplish. As fellow Fool Dan Caplinger put it: "Kroger has taken the best bits of Whole Foods' strategy and integrated them into its own business model." The grocer has become -- by its own account -- the second-place provider of organic goods in America. And its private-label brands have been taking off.
The most impressive thing about the past few years for investors is that Kroger has been able to expand margins and drive more comparable-store sales, all while not having to worry about spending money on expansion the same way Whole Foods is.
Trading for a much more reasonable 22 times earnings and offering a 1% dividend, Kroger can balance out some of the valuation risk associated with Whole Foods.
The under-the-radar play
No list would be complete without an underdog. For that, I turn to SunOpta (STKL 1.02%). This Canadian company focuses on sourcing, processing, and packaging natural, organic, and certified non-GMO products for its customers.
The company operates in two segments: raw materials -- which includes soy, corn, sunflower seeds, animal feed, fruits, vegetables, coffee, cocoa, coconuts and sweeteners -- and consumer packaged goods, under the Sunrich Naturals, Nature's Finest, and Pure Nature brands.
As you can see, while revenue has increased at an impressive clip since 2010, the same cannot be said for earnings. That's because following the Great Recession, SunOpta went on a buying spree in renewable energy and minerals. While the minerals are still part of SunOpta's portfolio, the same can't be said for renewables.
I'm hopeful that the leadership team of Founder/Chairman Jeremy Kendall and CEO Steve Bromely learned from this mistake and can continue to make inroads in the booming organics industry. The company trades for 30 times earnings.
This is certainly a risky play, but it could turn a tidy profit if the company can capitalize on its opportunity.
