Whole Foods Market (NASDAQ: WFM) is essentially synonymous with organic food.
Founded in 1978, the grocer has grown to over 400 stores today, leading the nationwide movement toward organic and natural eating. Its mission is to "promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available," devoting itself to "organically grown foods, healthy eating, and the sustainability of our entire ecosystem."
At the stock's peak in 2013, it had a market cap of nearly $25 billion. But it's fallen since then, as its success in the field attracted competition. The big mainstream grocers like Wal-Mart and Kroger have jumped on the bandwagon, while smaller players like Trader Joe's and The Fresh Market have proliferated, and all of them are taking market share away from Whole Foods. Now, according to a recent report, it seems Whole Foods has lost its No. 1 position in organic sales.
The surprising new leader: Costco Wholesale (NASDAQ:COST).
The research, published by BMO Capital Markets, found that the warehouse retailer was on track to hit $4 billion in organic sales this year, up from just $3 billion less than a year ago, while Whole Foods is expected to reach just $3.6 billion.
Why Costco got crunchy
Though Costco is known for its rock-bottom prices, its customers aren't exactly penny-pinchers. The average Costco customer has a household income of $100,000 a year, putting it in direct competition with Whole Foods, which has earned the moniker "Whole Paycheck" because of its high prices.
For all the hype about organic food, perhaps the best-known distinction it carries from conventional goods is the price tag. Organic food can be as much as twice as expensive as the conventional equivalent, which makes it a luxury that lower-income consumers are most likely going to skip. But the rapid growth of the category means it's a huge opportunity for Costco, the nation's second-largest retailer.
Focusing on millennials
In addition to being wealthier than the average American, Costco's customers are also older. The membership, bulk-purchase nature of the business attracts families rather than young singles, but Costco is making efforts to change that.
The gap is already narrowing, thanks in part to Costco's increased sales of organics and a partnership with LivingSocial to offer a discount on membership. In the company's recent earnings call, CFO Richard Galanti said the gap between the average Costco customer and general retail had narrowed in part because of the LivingSocial connection and the move into organics.
For Whole Foods, the emergence of Costco as a threat only confirms that the company is losing its grasp on the industry it popularized.
Perhaps Whole Foods' best hope for reclaiming leadership is the company's soon-to-come lower-priced chain of stores targeted at millennials. The stores will have smaller footprints, making it easier for Whole Foods to add them in neighborhoods where it doesn't already have a store.
Last year, Whole Foods' comparable-store sales grew just 4%: its worst performance since the recession year of 2009. Same-store sales have been slow this year as well. Meanwhile, organic food sales continue to march higher, climbing 11% to $35.9 billion in 2014, and growth is expected to stay strong. Thus, a sister chain may be exactly what Whole Foods needs.
As Costco takes the torch from Whole Foods and the organic grocer's overall sales growth falls to single digits, below the organic-food industry average, investors may have to look elsewhere for consistent growth. With its solid track record, strong membership model, and penetration into organics, Costco presents an appealing option.