People are itching to buy Whole Foods (WFM) now that its stock has a $41 price tag, an 18% off sale for the year. They are asking about Sprouts Farmers Market (SFM), the boutique version of Whole Foods with its small store and homey feel, that's down 10%. Those who like to shop at some of the prettiest Fresh Markets, and they can be dazzlers, are intrigued by scooping some of that one up, as it is now down 21% for the year.
And for all bottom-fishers in the natural and organic space, may I direct your attention to what Target (TGT) CEO Brian Cornell emphasized last night on Mad Money, notably that the company wants to get bigger and bigger into "wellness" and says he is just getting started in the expansion of the food aisle to include more natural and organic foods.
I say, welcome to the most crowded area of the supermarkets and discounters these days, because it is a double-digit growth category where you have low-single-digit to no growth center of store merchandise at supermarkets and heavily discounted apparel and electronics at the big-boxers.
Sure, natural and organic sales are growing 11% and are said by some counts to be up to almost $40 billion in sales. So you could argue that there's room for all comers. However, you have to recognize that you are playing with some chains that simply insist on winning the space, including Costco (COST), which, at a $4 billion run rate in this category, is now neck and neck with Whole Foods. Quite a change from when management of Costco admitted to me just a few years ago that they thought it was a fad that would go away. Now even Wal-Mart (WMT) recognizes its importance -- and I say even Wal-Mart because this is a store where clerks sent me to Rice Krispies bars when I was looking for rice cakes just five years ago.
It's not just these companies that want to dominate. Kroger's (KR) Simple Truth natural and organic food line's doing $1 billion in sales and going higher. Who the heck knows how much business the private Trader Joe's is doing? And Amazon's (AMZN) got plenty of runway, too, with its sales of so many natural and organic products that it's become a major driver of natural and organic king Hain Celestial (HAIN) sales.
Into this breach comes Target's Cornell, and natural and organic has become integral to his world view of capturing millennials and nabbing young moms as part of a 360-degree attempt to start them at Target when they create their new households.
He can't afford to lose this battle and he can't afford to cede ground to anyone in the category, including the once most powerful force in the industry, Whole Foods.
Now we know from our interviews with co-CEO Walter Robb that Whole Foods isn't taking these challenges lightly. The founder of the movement is working on a new concept store that's meant to appeal directly to millennials. The issue I have, again, though, is that when you have this kind of price war, it is going to hurt the margins of all involved and it is easier for a Costco with its profits coming from membership cards to come in and dominate almost as a loss leader. As we know, there is a shortage of natural and organic product in the country, which means higher prices to the consumer, prices that Costco may not feel like passing on. It makes enough money on the cards that it can get away with keeping prices lower than everyone else, hence its amazing sales numbers.
So I come out and say, be careful here with bottom-fishing in the narrow-focused natural and organic stocks. When you wade into the natural and organic aisle, you are wading into a battlefield with the newest combatant, Target, determined to win, and I do not want to doubt the resolve of a company playing catch-up in this most important category.
