The organic and natural foods are gaining traction as a result of a new generation of health-conscious consumers looking for transparency in the food chain. Therefore, apart from The Fresh Market (TFM, Financial) and Whole Foods Market (WFM, Financial) which are pure-play organic and natural food retailers, but even supermarket giants such as Kroger (KR) are also giving shelf space to organic and natural food in order to attract more customers. The market is bound to become more competitive with more and more players joining the trend. Investors should have to look out the right place for investment.
A look at The Fresh Market
The Fresh Market continued its promotional strategy in the third quarter of fiscal 2013 to drive more traffic to its stores and promotions have become commonplace in a competitive landscape. Further, during the quarter it also opened a record number of 10 new stores. These initiatives increased comps by 3.1% and traffic increased 2.8% year-over-year. This quarter was the third consecutive quarter of traffic increase even in a tough economic environment. The consolidated sales jumped 13.1% year-over-year due to positive comps and new store openings.
The strategically designed promotions properly suited the target customers, thus pushing growth in customer transactions and leading to a gross margin expansion of 40 basis points. The earnings per share presented at $0.23 on the back of revenue growth and gross margin expansion. However, still the Fresh Market couldn’t meet analyst expectations and hence, the stock dropped on the Street. The stock has picked – up almost 25% in the last one year and both pure-play organic- and natural-food retailers couldn’t match the market expectations.
Falling behind others
However, moving ahead, Fresh Market has made plans for growth, which include promotions, advertisements, and a solid lease pipeline. Currently, Fresh Market has announced leases for 27 sites and is further negotiating for additional sites. This paves the path of growth for Fresh Market in fiscal 2015. The Fresh Market has a Senior Vice President of Real Estate and Development to focus on new site selection which emphasize for its growing footprint.
The Fresh Market witnessed a deceleration in consumer activity during October and this is expected to continue in the fourth quarter as well. Therefore, the company was forced to downgrade the financial outlook for the year. The comps growth by Fresh Market are expected to be in the range of 3% to 3.5% and full year earnings are expected to be in the range of $1.42 to $1.47 per diluted share. Further, severe winter season across most of the U.S. further dampened the shopping behavior. Hence, the fourth-quarter results could be at the lower end of guidance.
Whole Foods also feeling the heat
Severe winter across much of the U.S. has severely impacted Whole Foods also with customers making fewer trips and buying more items each trip. Moreover, with the organic food landscape becoming more competitive with more players joining the game, pricing pressure is expected to take its toll on pricing power reflected in the moderation of 106 basis points in average price per item.
But, comps were comparatively healthier at 5.4% year -over-year; however this was not enough to help earnings match up to what analysts had expected, and due to this the shares soared. However, the company is on the way to open approximately 33-38 stores in 2014 and 38 to 45 stores in fiscal 2015 despite a poor quarterly performance.
The new entrance of Kroger, Wal-Mart, and others into the organic- and natural-food business has put pricing pressure on the performance of both Whole Foods and Fresh Market. Kroger serves a far larger demographics as it is not just restricted to organic and natural food products.
Kroger is expanding and investing in digital growth plans and has recently acquired assets of leading digital coupons and promotions company, YOU Technology Brand Services. The acquisition will help Kroger broaden its digital reach and also enable it to challenge stiff completion from brick-and-mortar mass retailers like Wal-Mart.
Conclusion
The severe weather conditions in the previous quarter made both Whole Foods and The Fresh Market struggle. However, both companies have their expansion plans and could benefit from growth in the organic food market in the future. Analysts are positive on this possibility as The Fresh Market’s earnings are estimated to grow at a CAGR of 20% in the next five years and Whole Foods to grow at 17%. Hence, investors are advised to look on these two companies for investment in the future and use the recent drop in price to buy shares.
