Download now: The Downfall of Cable, and the Rise of 5G!

Investing in Organic Grocers

Written by Briton Ryle
Posted February 25, 2015

There has been some consolidating in the grocery business which has reshaped the landscape. But as investors have one less national grocery store chain to choose from, others have recently sprung up to fill the void. And these new choices are promising to add much more value to investors’ portfolios than their predecessors did.

Let’s take a quick look at the nation’s five largest publicly traded grocery store chains to see which provide the better long term investment opportunities. You may find them quite appetising.

Tilling the Grocery Industry for a New Crop

Over the past several years, the grocery store industry has been consolidating, with long-time standing chains being bought-up and torn apart among a new crop of grocers.

In 2006, for instance, Albertsons, which offered groceries, prescription drugs, and general merchandise, was bought-out by and split-up amongst SuperValu Inc (NYSE: SVU), CVS Pharmacy (owned by CVS Health, NYSE: CVS), and a new Albertsons LLC (a private company owned by the private consortium Cerberus Capital Management). Albertsons’ stand-alone pharmacies went to CVS, while its supermarket grocery stores were split up between SuperValu and the new Albertsons LLC. In 2013, Albertsons LLC then purchased SuperValu’s Albertsons stores.

Recently, another national supermarket chain, Safeway Ltd, was similarly bought-out and split apart. In mid-2014, the Canadian Safeway chain was purchased by Canadian grocer Sobey’s which is itself owned by the Canadian consortium Empire Company Ltd. (TSX: EMP.A). Then in January of this year, the American Safeway chain was purchased by Cerberus Capital Management, who previously acquired Albertsons as noted above.

Through this most recent shake-up of the supermarket industry, a 100-year old American grocery legacy has come to an end. It was in 1915 when Marion Skaggs of American Falls, Idaho, purchased his fathers grocery store and grew it into what was later named Safeway in 1926. The name was chosen for the company’s policy of not offering credit, but selling purely on a cash-basis, which Skaggs called the “safe way to buy groceries” in that it saved both his customers and his business from accumulating un-repayable debt. Hungry stomachs during the Depression Era sent many a family and grocer into ruin on grocery store credit.

A New Grocery Concept

Yet the changes sweeping across the U.S. grocery landscape is not confined to the usual consolidation and reshaping of retail chains. Today’s changes are upturning grocery shopping itself, with a whole new grocery store concept sprouting up across the country.

At the time of its buy-out, Safeway stood as the nation’s third largest publicly traded grocery store chain. Taking its spot now as the new number three is Sprouts Farmers Market, Inc. (NASDAQ: SFM), representing the relatively new natural and organic grocery movement which has been gaining momentum for several years as consumers grow more aware of everything they put into their bodies.

In fact, of the three largest U.S. publicly traded grocery store chains, two are natural and organic foods retailers: Whole Foods Market, Inc. (NASDAQ: WFM) as the nation’s second largest grocer with a market cap of $20.42 billion, and Sprouts Farmers Market as the third largest grocer with a market cap of $5.53 billion. Even the nation’s largest grocer Kroger (NYSE: KR), with a market cap of $35.83 billion, has been taking notice of the organic grocers coming up behind it, and has been expanding its own selection of natural and organically grown foods.

Old Habits Die Hard

But the growing popularity of naturally grown foods does not mean Americans have completely given up on those sweet and fattening indulgences they have come to adore - like pizza and donuts, for examples. It’s no surprise, then, that the fourth largest grocer chain is Casey's General Stores, Inc. (NASDAQ: CASY) with a market cap of $3.54 billion, which specializes in these popular naughty foods of pizza and doughnuts. But it too is conscious of the growing trend toward healthier choices, and also offers sandwiches and fruit beverages to widen its customer base.

Rounding out the top five U.S. grocers is the SuperValu chain (NYSE: SVU), an all-purpose general grocer with a market cap of $2.63 billion.

A Return to Natural

The trend is undeniable. Not only are natural foods growing in popularity, but natural foods grocers are growing in value, as is clearly noted when plotting the top five U.S. grocers together, as graphed below.

organic grocery chains

Source: BigCharts.com

The clear winner over the past six years since the economic recovery began in early 2009 is organic specialist Whole Foods (blue), rising some 875%. But naughty food provider Casey’s (orange), rising 380%, shows how consumers still want a license to indulge once in a while.

In third place at 275% is the all-purpose Kroger (yellow), followed by the other top general foods grocer SuperValu (beige) at negative 20% (averaging -3.33% annualized). Cleary these chains are finding it difficult to be all things to everyone.

Last among the nation’s top five is organic grocer Sprouts (purple) which is in third place by size, but in fifth place in performance, with a loss of 7% over its short 1.5 year life as a publicly traded company (averaging -4.66% annualized).

But don’t count Sprouts out of the race just yet. According to earnings projections, the company is merely getting its footing.

Organics Grow Best

Comparing the top five U.S. grocers’ future earnings growth over the next five years reveals just how much momentum there is in the natural food movement.

• Sprouts tops the growth list at 28.57% in its earnings growth annual average over the next five years.

• Whole Foods is second with 13.25% growth

• Kroger is third with 11.98%

• Casey’s is fourth at 11.50%

• SuperValu is fifth at 6.23%.

Notice where our two natural and organic foods retailers are? It seems the younger of the two, Sprouts, is sprouting faster than even the longer established Whole Foods.

But these aren’t simply eager analysts with wild projections. These earnings growth expectations are based on solid company fundamentals that are already producing results even today, as evidenced by each company’s revenue growth, with the organic stores stealing more and more market share.

• Sprouts tops the list again with revenue growth of 21.00%

• General grocer Kroger is second with 11.20%

• Whole Foods comes in third at 10.20%

• Casey’s is fourth at 6.70%

• and SuperValu is fifth again at 4.80%.

Such growth in the natural foods segment of the grocers industry, however, is not simply just a fad that is sweeping consumers off their feet, but is based on profitable corporate management as reflected in each company’s profit margins, which again favour the organics.

• Whole Foods tops the list this time with profit margins of 4.02%

• Sprouts comes in second with profit margins of 3.49%

• Casey’s is third with 1.78%

• Kroger is fourth with 1.53%

• and SuperValu is fifth again at 1.03%.

While the grocery industry is consolidating and corporate structures are reshaped, such changes are being driven by solid, well anchored changes in consumers’ eating habits. The nation is moving toward healthy foods, and the performances of the nation’s five largest grocery chains is reflecting that.

Perhaps it is time to allow our investment portfolios to reflect the change to organics as well by planting one of America’s organic and natural food grocers, so that we too may reap the bountiful earnings harvest analysts are expecting when these cash crops mature in a few years’ time.

Joseph Cafariello

Buffett's Envy: 50% Annual Returns, Guaranteed