Organic profits, aisle 12

Written by Brian Hicks
Posted October 26, 2005

About 10 blocks from the Wealth Daily office, beyond the comfort and safety of the mid-town business district with all its power-washed, pre-war architecture and rehabilitated mansions, sits another side of Baltimore that you only see in reruns of Homicide or in magazines that identify ‘Charm City’ as one of the top three contenders for “most dangerous city in America.”

Typically this is an area often avoided by most law-abiding and clear-headed Baltimoreans.

Often looking like neo-ghost towns reserved for sci-fi movie sets, these neighborhoods are pretty desolate. It’s a wonder how the few retail outlets operating in this place even stay in business.

There is, of course, a wide selection of liquor stores, corner bars and check cashing kiosks. Not to mention the predictable Burger King and random pissed-off Muslim selling bean pies and copies of the Final Call newspaper on the corner.

And there’s also the one, warehouse-like grocery store with bullet-proof glass and shell casings in the parking lot.

Yeah, it’s that bad!

So last weekend, on my way to a wedding, I had to drive through this particular area to get to the highway. Unfortunately, my normal highway route was closed for construction.

As I was running late, knowing I didn’t have time to search for a convenience store, I decided to (against my better judgment) run into the ominous ghetto grocery store for a bottle of water and a pack of gum.

Now this isn’t the first time I’ve been in a place like this.

Years ago, right after college, I lived pretty close to this neighborhood. And while I didn’t do my regular shopping at this particular grocery store, I had been in there once or twice for batteries or film.

It brought back some memories, as very little had changed.

The produce was still withered and old, the meat department was still offering up ground beef beyond its expiration date and the evidence of rodent infestation could still be found in the form of mouse droppings underneath the bread racks.

Yes, not much had changed here at all!

Except for one thing.

And I knew from the moment it caught my attention, I’d have to share with you today.

In the dairy case, next to the gallons of whole milk and generic coffee creamer, were two rows of organic soy milk.

And in the same case – Stonyfield organic yogurt.

Now crossover into conventional supermarkets is nothing new for the organic and natural food industry.

In fact, we’ve talked about it a number of times in our Green Chip Stocks, Daily Updates.

But to find organic soy milk and organic yogurt in a place like this – well, it was certainly a shock.

Listen, I’m not saying that we should expect to see inner-city gang members drinking quarts of chocolate soy milk from paper bags anytime soon. But to even stock such items in this part of town is certainly proof that conventional crossover could be even more staggering than we thought.

Conventional crossover in organics proves profitable

Over the last few years conventional supermarket chains have been aggressively seeking organic and natural food alternatives for their customers.

After watching shares of Whole Foods Markets (WFMI:Nasdaq) go through the roof (as well as watching Whole Foods Markets crush the likes of Safeway and Kroger in sales and revenue growth), conventional supermarket CEOs could no longer ignore the potential of organic and natural food demand.

Today, you’d be hard-pressed to find one conventional supermarket in the U.S. or Canada that’s not pushing some kind of organic or natural food product.

Take a look at Giant Food, Inc., for instance.

Giant Food, Inc. is the largest supermarket chain in Maryland and D.C.

Last year, Giant Food launched its own line of natural and organic foods called, Nature’s Promise, which included organic and natural milk, butter, cookies, frozen vegetables and cereal.

Now before this particular product line even came into existence, Giant had already been selling outside organic and natural food brands, like Amy’s Organics and Silk organic soy products.

But with its own, fully-developed brand of organic and natural food, Giant can now cut the price premiums often attached to these products while still maintaining higher profit margins.

Back in 2003, Kroger Co. and Wegmans Food Markets, Inc. also introduced their own private-label organics.

Conventional Cohabitation

Another way conventional food retailers are getting in on organics is through cohabitation projects with well-established organic and natural food retail chains.

Last May, Wild Oats (OATS:Nasdaq), the number two organic and natural food retail competitor in the U.S. opened its first of five ‘store-within-a-store’ boutiques with leading northeastern supermarket chain, Stop & Shop.

The boutique is a state-of-the-art holistic health center where customers can choose from a variety of vitamins and supplements, homeopathic remedies and natural and organic body care products.

The deal has worked out quite well for both chains.

Stop & Shop is able to provide organic and natural health and body care products to its customers without the added cost of developing their own brands, while Wild Oats is able to bring their natural and organic products straight to conventional consumers who would otherwise not shop at an organic and natural foods store.

This introduction to the organic and naturals market has also provided an excellent gateway to other natural and organic products as well – such as outside organic and natural brands like Hain Celestial (HAIN:Nasdsaq) and Cascadian Farms.

Stop & Shop operates 365 stores throughout Massachusetts, Connecticut, Rhode Island, New Hampshire, New York and New Jersey.

If you can’t beat ‘em, copy ‘em

Last week, Supervalu, Inc. (SVU:NYSE), operating food retail chains like Cub Foods, Sav-A-Lot and Shoppers Food & Pharmacy, announced its plans to enter the organic and natural foods market with the launch of its own Sunflower Market – a value-priced organic foods retail outlet.

The new stores will stock between 8,000 and 12,000 store keeping units (SKUs) of natural and organic products. And more than 100 will be under the newly launched, “Nature’s Best” brand; a SuperValu private label.

The “Nature’s Best” product line will also be made available to consumers shopping at almost 2,200 other independent retailers.

Conventional supermarkets vs. organic retailers

With all the momentum that has pushed conventional supermarkets to offer their own versions of organic and natural products, is it possible that the few, well-established organic and natural food retailers could begin to lose market share?

Not likely, say industry experts.

The consensus seems to be that organic and natural product offerings from conventional supermarkets are accomplishing two goals at the moment:

1.) They’re providing potential crossover solutions for non-organic food consumers.

2.) They’re providing a convenient alternative for those organic and natural food consumers who may only need one or two items at a time. As there are clearly less organic and natural food retail outlets compared to conventional supermarkets, it’s easier for these consumers to go to the closest store to pick up the basics – organic eggs, milk, oil, etc.
This is certainly great news for organic and natural food manufacturers that have already penetrated the conventional food retail markets.

Of course, don’t expect conventional supermarkets to put the few profitable organic and natural food retailers out business either.

For many LOHAS consumers, the experience of shopping in a strictly organic and natural food store is half the appeal.

That’s what got them there in the first place!

LOHAS consumers are extremely loyal. And these consumers will continue to do their shopping at the retail outlets that have provided them with their organics for the last ten years.

Your typical organic food consumer doesn’t even want to see non-organic or non-natural food…much less shop somewhere that offers the stuff.

Many of these established organic and natural food stores also offer organic “high-end” prepared foods product lines that most conventional supermarkets could never match in regards to both quality and quantity.

There’s no denying that prepared foods from conventional supermarkets are much cheaper. But in the LOHAS world, where price is rarely a concern, there is zero appeal to non-organic prepared foods – despite the deep discounts in price.

Mark my words, organic and natural food markets will continue to maintain profitability and exceed sales and revenue growth well into the next decade.

It took them thirty years to get to this point. Conventional supermarkets are not going to be able to duplicate the same results with their own organic brands in five years.

And investors know that even as conventional supermarkets offer up more and more organic and natural food choices, their stock prices will not increase at the same record-breaking rate as the younger and smaller organic and natural food markets.

In fact, the crossover potential to organic and natural foods, thanks to conventional supermarkets, will only continue to introduce new consumers to the full-scale organic and natural food retailers.

Most conventional supermarkets will never crossover completely. So for those who seek to further immerse themselves into organic and natural food diets, their only alternative is the closest Organic market.

And let’s face it, how many conventional supermarket chains are trading below $4.00 per share too?

Right now there are three major organic and natural food retail chains in North America.

One, Whole Foods Markets, has already validated the potential of these outfits as its delivered gains of nearly 600% in less than five years.

The other two are younger, but are following in the footsteps of Whole Foods – mimicking its growth strategies and profiting year after year for the last five years.

You’ve heard me mention one of these before. A Canadian organic and natural food retailer that has been nothing short of amazing – putting some Green Chip investors up 254% since the beginning of the year.

And take a look at the chart. This company has been maintaining its gains for more than a month after its stock price spiked…not once, but twice.

Instead of the predictable adjustment that often occurs after such a spike in stock price, our Canadian organic retailer is sustaining, and gaining even more momentum.

This particular company will be releasing its annual numbers on Friday. And I already know they’re going to announce a 125% growth in sales since last year.

I also know that their rate of new store acquisitions over the course of the next two years is going to further solidify their position as the dominant organic and natural food retail chain in Canada.

Just as Whole Foods Markets did in the U.S.

And I’m sure you’re well-aware of the profit-taking on that one!

Until next time…

Jeff Siegel
Editor, Green Chip Stocks