Analyst Corner
Natural foods supermarkets looking at healthy growth
By Colleen Bazdarich, CBS MarketWatch
Last Update: 10:40 AM ET Jul 9, 1999
SAN FRANCISCO (CBS.MW) -- If you're looking for a Tombstone pizza and a six-pack of Coke, Whole Foods Market is not your place. But if you're craving freshly made sushi or free-range roast chicken, you've hit the jackpot.
You can wash it all down with Blue Sky Natural Cola. Apparently, more Americans are developing an appetite for natural foods.
Natural food supermarkets have been growing at a very healthy rate since their inception less than a decade ago, according to analyst Laura Richardson of Pacific Crest in Portland, Oregon. Whole Foods and Wild Oats supermarkets are not only building more stores and posting annual earnings gains of 20 to 30 percent, but their same-store sales are also expanding nicely.
Colleen Bazdarich of CBS MarketWatch talked with Richardson about the impressive progress of alternative supermarkets and what they have to look forward to.
When did these markets first become popular?
They are fairly new to the public environment. Whole Foods has been around a little longer as a public company, since '92. I would say the birth of the natural foods category killer format was probably around 1992, just before Whole Foods went public.
How have these companies been doing lately?
Wild Oats and Whole Foods are fundamentally performing very well with very robust growth in terms of the number of sales. Both are generating very strong same-store sales growth as well, so it is a sign they are not just throwing up stores; they are continuing to generate healthy sales increases in stores that have been open for a year or more.
How have the stocks been doing?
Both of their stocks hit lows earlier this year. In the case of Whole Foods it had to do with some internal issues, like expenses and industry issues. People tend to lump these stocks together with a lot of the natural product companies and the vitamin companies and whenever there is bad news for those companies it is assumed to be bad for Wild Oats and Whole Foods as well, although usually that isn't the case.
How have they been performing compared with the more mainstream grocery stores like Safeway?
In terms of top-line growth, Wild Oats and Whole Foods are growing much more rapidly than the conventional stores' growth. That is in terms of new stores as well as same-stores. The natural supermarkets are doing high single-digit same-store sales right now and the conventional markets are lucky to do 2 percent same-store sales growth. We are talking strong same-store sales growth.
In earnings growth, the natural foods superstores are also growing much faster. Wild Oats is growing at 30 percent-ish, Whole Foods at 25 percent-ish. Partly it is just because they are a newer format.
Conventional supermarkets have been around for decades and the country had as many conventional supermarkets as it needed five or ten years ago. Those companies have grown primarily by consolidation. They have to be much more aggressive in merchandising to generate same-store sales growth.
Do you attribute the growth to any particular trend?
There are a number of trends driving this, I would say. One is that these types of stores are relatively new to this country. They are not in every market yet. Just being new can drive up same-store growth.
I think also these stores serve a couple of demographic niches that are growing and are probably under-served. One of them is the upscale niche. You would think a natural foods superstore would attract mostly granola-type people but they actually also attract higher income people.
It is a big yuppie market, isn't it?
You could call it that. It is a big gourmet market if you wanted to use a more judicious word, I guess. There is a lot of overlap between the products that natural food stores might carry and what an upscale market might carry. The natural foods stores are also very heavy in the prepared foods -- lasagna, salads and other entrees you can take home -- that require little or no prep time for your busy dual-income households.
They also attract the more health conscious population. If you think about the aging population, we are all getting a little more health conscious as our waistlines expand and we get gray hairs.
Plus, there are psychological trends. All the bad news about pesticides and chemicals polluting the environment ... there is something appealing about shopping at stores where things are good for you. You could even argue that as health care costs rise, more consumers are taking their own health into their own hands and they may rely on herbs and supplements and good food, more than just going to the doctor -- like preventive techniques.
Do you think this is just a trend?
Well, I would say it is a long-term trend. I don't think it is a fad at all.
Is there a geographic consumer niche? Higher customer concentration in California?
I did a study on this and the markets are actually mostly penetrated in Colorado, not California. California has a ways to go.
If the whole country had the same number of these stores per capita as Colorado, which is the birthplace of Wild Oats, we would have like six times the number we do today. (Wild Oats is) in the East Coast largely by acquisition. Whole Foods is there more than Wild Oats.
They are competing against a lot of independents and regional players in natural foods retailing. It is the conventional supermarkets to an extent as well. You could argue it is restaurants too, as in the prepared food business that they do a healthy volume in.
Do you see any problems for these companies in the future?
I am bullish on both these companies in the long term.
I would say bad news for any of the natural food makers, vitamin makers, like GNC, is always presumed to be bad news for these companies.
But generally long term they are well positioned because there aren't that many of them in the country. My estimate is there could be six times the number of these stores that there are today. The aging population trend bodes well for them and so does the long-term polarization of income trend. I think aging baby boomers and even seniors are growing markets segments for these stores. It is a health and a quality of life, quality of eating-driven phenomenon.
Colleen Bazdarich is a personal finance reporter for CBS MarketWatch |
