Don't Underestimate Whole Foods


Organic vegetables. Image credit:Davidson|Read Associates

It's hard to believe that Whole Foods Market (NASDAQ:WFMI) was trading in the $50 range just one year ago. Today, the stock is struggling to stay above $10 a share. Of course these days, few stocks are immune from the global economic implosion we're dealing with now. But Whole Foods has become that one company that I can't help but to defend. You see, when Whole Foods first went public, it was a punching bag for every armchair analyst and media blowhard that took some kind of sick pleasure in the fact that in the first nine months of its IPO, the stock had dipped more than 30 percent. Of course, we cheered (and profited), after the stock enjoyed a meteoric rise in the years that followed. But now that the stock has been beaten back down again, the naysayers are back with a vengeance.Now I won't dispute Whole Foods' less-than-stellar short-term outlook for investors. Though this has a lot more to do with overall market conditions than the company itself. But in an effort to rush to take a swing at the Whole Foods pinata, too many analysts are supporting questionable arguments against the organic retail giant.

A Revolutionary Tipping Point

A few months back I read an article in which a very well-known analyst stated that Whole Foods Market could suffer as companies like Wal-Mart and Costco expand into the organic food space. I believe this line of thinking is flawed and highlights the reason that those who analyze green markets from outside (as an observer, rather than an active participant), will always be confused.

As I just mentioned, when Whole Foods first went public, the stock was heavily bashed after it didn't soar in its debut. There were dozens of articles that were essentially the equivalent of a child screaming "I Told You So" over and over again. But what many of these analysts did not take into consideration was the overwhelming long-term potential of the organic food market — and its largest major retailer in the U.S.

This wasn't about an obscure supermarket catering to a few dozen hippie throwbacks from the 60s. The day Whole Foods went public was the day we witnessed the tipping point for a revolution that had been building momentum for more than 40 years — without any major retail presence. At that point, the retail food landscape was about to change for millions of organic food consumers, as well as for millions more who would soon transition their eating habits to include more organics.

Investors that took the time to see the big picture early on — instead of relying on little more than personal prejudices and an inability to even step foot in an organic food market — did quite well with the stock. But now that Whole Foods has been beaten down to levels few thought we'd ever see at this point, some are assuming that the company is losing market share to big box retailers. This is not a safe assumption to make.

Despite the appeal of discounted prices and bulk-order deals, you won't find a wealth of organic consumers roaming through warehouse retailers just to save a few bucks. And even with price premiums (which aren't nearly as overwhelming as some would suggest), most organic consumers want to shop at stores that cater to their healthy, responsible and sustainable lifestyles. This is something the big box retailers can't deliver. I took a trip over to Costco and found no fair trade coffee or non-toxic dishwashing detergent. I took a trip over to Wal-Mart and found few natural alternatives to common pharmaceuticals or biodegradable trash bags. Now understand, I'm not trying to bash these stores. I'm merely pointing out that they simply cannot provide me with what I want as an organic and responsible shopper. And I am one of millions.

My friends, although there's little data to back either side of this argument, I have seen no real evidence that organic consumers are flooding the aisles of Costco or Wal-Mart to get the best deals on free range chickens and organic produce.

Of course, I'm not saying Whole Foods is going to skate through one of the worst markets in recorded history because of customer loyalty. In fact, it was recently announced that Whole Foods had the biggest drop in spending per store visit (compared to other conventional food stores), from January to October. This is not surprising, and I suspect this won't look much better in the first half of 2009. However, tough economic times will not last nearly as long as the overwhelming and continued demand for healthy, organic food. And that's why we can't shrug off the potential of Whole Foods Market. Moreover, the $425 million infusion the company just got from Leonard Green & Partners should not be ignored either. We believe that this will help Whole Foods get through this global economic downturn, while allowing the company to continue its growth. As long as this recession doesn't linger around for more than a year or two, Whole Foods should come out of all of this a lot stronger, and a lot more attractive to investors.

To a new way of life, and a new generation of wealth...

Tags: Whole Foods

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