An Organic Tidal Wave

 | Nov 12, 2013 | 12:36 PM EST
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You could feel the collective shudder when Whole Foods (WFM), the best supermarket operator in the world, cut its forecast last week. Clearly, the response seemed to indicate, the natural and organic move has now peaked, and is now finished or at least slowing.

That was the way all of the stocks in the group, everyone from rival chains to suppliers, instantaneously reacted to the news. Suddenly this once super-hot industry was on its heels, floundering, a high-growth, double-digit category hitting a wall. It was a trend -- no, worse -- a fad. Sell, sell, sell.

Now a few days have gone by, and we are beginning to realize that such a conclusion was the exact wrong takeaway. That's because the category of natural and organic isn't peaking. It's flooding. In other words, every outlet with a register seems to be selling natural and organic -- and that's the root cause of the problem at Whole Foods, that is, if there is a real problem at all.

Costco (COST) CEO Craig Jellinek told me as much in an interview at the company's beautiful Harlem store a few weeks ago. He said natural and organic -- which had been perceived as a fad, good for an aisle or two -- is now here to stay and growing. Everyone, including Costco, which has a gigantic food business, has had to adjust to this tsunami that has overtaken the food chain. It's not just Costco, either. It's Kroger (KR) and Target (TGT) and even convenience stores, for heaven's sake. That's how pervasive the movement has become.

Of course, that kind of competition is not good for Whole Foods, whose management team admitted that both cannibalization and competition have hurt the company's outlook. I think Whole Foods will solve the cannibalization issue. The company is too good an operator not to figure how to beat that. But the competition? That's here to stay.

In part this is because the pure plays, like Sprouts (SFM), Fairway (FWM) and Fresh Market (TFM), just got capital from initial public offerings. It's also because stores such as Target, Costco and Kroger, as well as Trader Joe's, have too much at stake not to stake a claim in natural and organic products. Wal-Mart (WMT), so late to the game, is going to get there, too. Gone are the days when you could go to a Wal-Mart -- as I did with my daughter in North Adams, Mass., five years ago -- and ask for rice cakes and be sent to an aisle of Rice Krispie bars.

So, in that sense, these market-share warriors are on the losing end of the movement. But who is benefiting? I can think of three clear-cut winners.

First, and most obvious, is Irwin Simon's Hain Celestial Group (HAIN), the most aggressive worldwide in the category. Simon is buying up anything and everything that's natural and organic because he, and he alone, recognizes that this is the exquisite moment for the industry. He's the only one who really knows that every register of every retailer might need natural and organic product to sell, and he's going to have the one they need.

Second is WhiteWave (WWAV). Here's a company that excels in plant-based drinks, notably those based on soy and almond -- and the latter one is about the fastest-growing out there. People like plants because they either don't trust the food chain, as my kids don't, or they don't want the calories that anything bovine-derived is going to give you.

Finally, there's Clorox (CLX). People ask how Clorox, with its 1%-to-3% growth, can be worth $90 a share. How can we pay 20x earnings for bleach? First, we know consistency and big dividends matter. Clorox has got both. But, second, it's got Burt's Bees. Now, at one point Clorox was roundly criticized for paying too much for a property that seemed more hype than numbers. No one is thinking that now, though, as this double-digit grower is taking drugstore space more rapidly than any other entity I can recall.

Hain, White Wave and Clorox are among the winners in this war, giving these retailers something to sell that's honestly natural and organic. They all seem expensive, based on near-term earnings, but I bet they'll turn out cheap in the outyears because of this long-term trend that's very much here to stay.

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