Organic and natural foods are entering the mainstream of the grocery market. That's a mixed blessing for Whole Foods (NASDAQ:WFM), which now sees a much bigger store footprint potential than the 1,200 supermarkets it had pegged as an upper limit until just recently.
They make up less than $100 billion of the $650 billion grocery food market, but organic items are the fastest-growing category -- rising by double-digits compared to 3% growth for the industry. But to keep a large piece of that growing pie, Whole Foods is finding itself competing against food retailers like Kroger (NYSE:KR) that operate on lower profit margins. And after recently stealing market share with its Simple Truth organic brand, Kroger seems to be aiming at Whole Foods' shoppers with another company-owned brand called HemisFares.
Sticking with what works
Kroger used the Simple Truth brand to dive into the organic and natural food segment two years ago. The results of that strategic move have been stellar. Simple Truth accounted for over $1.2 billion in annual sales by the end of last year, making it the grocer's most successful brand launch yet. Kroger says that over 20 million households have purchased at least one of its nearly 3,000 Simple Truth products. The brand is consistently growing by double-digits and is helping Kroger post industry-thumping sales growth, particularly over the last year. And corporate brands have become a major competitive advantage for this grocer, accounting for almost one-third of its sales.
The HemisFares initiative seems like a small step in the same direction. It's a product line composed of international flavors and ingredients that are imported directly from other countries -- "a guided tour of the best tastes on Earth," as management describes it. Kroger believes HemisFares will satisfy untapped demand from shoppers who are looking for higher-quality cooking experiences. "We think it will appeal to millennials, foodies and ultimately all cuts of our customers," CEO Rodney McMullen said in a recent conference call with Wall Street analysts.
It's clearly aimed at the upper end of the grocery market, where Whole Foods currently operates. The HemisFares launch will be part of a two-week national "Taste of Italy" event at Kroger stores. And the rollout will feature the kind of touches you often see at a Whole Foods market, complete with demonstrations on how to professionally crack a 78-pound wheel of Parmigiano Reggiano cheese.
Not a real threat -- yet
Sure, at just 27 items to start, this launch isn't going to pose a threat to Whole Foods' market share. Yet the HemisFares introduction shows how determined Kroger is to move up the value chain into targeting the premium shopper demographic that Whole Foods has traditionally owned.
Unfortunately for the organic grocery king, Whole Foods can't as easily move down the market without hurting its brand. "We can continue to be aggressive in gradually lowering some of our prices, but the Whole Foods Market brand stands for the highest quality, the best selection, the highest degree of service," an executive told investors this summer. "That brand can bend a little bit, but we can't break it. We're not willing to break it," he said.
That's why the company opted to create an entirely separate store concept, 365 by Whole Foods, to go after those more value-conscious shoppers. In the meantime, Kroger will keep working to expand its appeal at the higher-income demographic through a strategy that's worked well recently: Offer premium products at aggressive prices through a company-owned brand.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Whole Foods Market. The Motley Fool owns and recommends 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.