Please ensure Javascript is enabled for purposes of website accessibility

3 Natural and Organic Foods Stocks That Cratered in 2015

By Asit Sharma - Jan 17, 2016 at 8:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

2015 wasn't kind to companies in the natural and organic foods sector of the grocery industry. We take a look at three notable stock price meltdowns and look forward to the current year.

What: Shares of Whole Foods Market (WFM)The Fresh Market (TFM), and Hain Celestial Group (HAIN 0.30%) fell 33.6%, 43.2%, and 30.7%, respectively, in 2016, according to data from S&P Capital I.Q.:

WFM Chart

WFM data by YCharts

So what: 2015 marked the first year in which it became indisputably clear that natural and organic foods pioneer Whole Foods was finally beginning to lose revenue momentum courtesy of mammoth competitors such as The Kroger Co. (KR -0.34%), which has steadily increased its competitive offerings in this sector of the grocery industry. Ironically, as Whole Foods' comparable=store sales weakened during 2015, and turned flat during the company's final reported quarter of the calendar year, Kroger's "comps" remained robust, reaching 5.4% in its own final reported quarter.

While Kroger is a much larger and more diversified business than Whole Foods, investors nonetheless realized that some of its growth last year was built on gaining incremental amounts of Whole Foods' market share. Let's return to the preceding chart, with an overlay of Kroger's performance:

WFM Chart

WFM data by YCharts

At $108 billion in annual revenue, Kroger is seven times the size of Whole Foods Market, a $15 billion business. But everything's relative: Intensifying competition between these two giants is impacting niche players such as The Fresh Market, which has grossed just under $2 billion during the past trailing 12 months.

Last year, The Fresh Market struggled to gain sales traction as it battled not only larger peers, but also smaller, conventional grocers in local markets. In the last reported quarter of 2015, the company's comps declined 3.7% -- a red flag for an organization, which, given its size, should be positioned for unit growth.

Considering the aforementioned dynamics, you might wonder why Hain Celestial Group didn't prosper last year, since it's primarily a supplier to natural and organic grocers. The company counts Whole Foods, The Fresh Market, and Kroger all as customers. Yet investors homed in on potential negative repercussions for Hain, such as the potential for price competition among retailers with massive purchasing power to drive the company's margins down, should retailers attempt to lean on their supply chains for an edge in the fight for market share.

Now what: The prescription for rebounding in 2016 is fairly straightforward for Whole Foods Market. As I've written recently, the company intends to promote the differentiated customer experience which brought it to prominence in the first place, while marketing what it believes to be core advantages over all competition: its high-margin prepared foods, its unmatched sourcing standards, and what is still an industry leading breadth of natural and organic products available in any given Whole Foods store.

Hain Celestial has promised to expand the number of channels in which its products are available, thus decreasing its reliance on natural foods retailers. Impressively, its business selling products directly via Amazon.com grew 39% last year. Company management has also signaled a willingness to grow the company through acquisitions, such as Hain's 2015 purchase of Canadian natural products manufacturer Belvedere International, which owns 200 brands, including the popular eco-friendly "Live Clean" line of personal care products.

For The Fresh Market, the path to redemption in 2016 is a little less clear. Newly appointed CEO Rick Anicetti, a veteran of the retail grocery industry, observed on his first quarterly conference call with analysts in November that The Fresh Market had, over the years, become too much of a margin-focused business, versus a customer-oriented business.

Anicetti promised to reveal specific strategies in the coming quarters to reset the company's revenue growth, and improve profits. In the meantime, he's outlined four focus areas for company management: operational effectiveness (in order to gain 200 to 300 basis points of margin improvement), a more effective customer value proposition, brand differentiation, and higher customer engagement.

These four broad initiatives should help The Fresh Market regain its footing, given proper execution. But unlike Whole Foods, which already has clear points of differentiation to market and thus improve sales, and unlike Hain, which has a clear outlet to growth via acquisitions, The Fresh Market doesn't have a single "go-to" advantage in order to reverse its current fortunes. While The Fresh Market has lost the most of the three companies in terms of stock price, investors should wait for a clearer plan from the company's new CEO before diving in, enticing as these shares may appear. 

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Hain Celestial, and 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
The Hain Celestial Group, Inc. Stock Quote
The Hain Celestial Group, Inc.
HAIN
$23.07 (0.30%) $0.07
The Fresh Market, Inc. Stock Quote
The Fresh Market, Inc.
TFM
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$139.41 (-0.99%) $-1.39
The Kroger Co. Stock Quote
The Kroger Co.
KR
$47.09 (-0.34%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.