Five Things I Learned Reading Whole Foods Market, Inc. (WFM)’s Annual Report

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Digging into a company’s annual report, or 10-K, is a great way to spot hidden trends that get in the headlines.

Last week, Fool columnist Morgan Housel illustrated this point clearly in his article 5 Things I Learned From Reading Altria’s Annual Report (and his follow-up on Visa).

So to keep the theme going, here’re five interesting nuggets I learned from Whole Food’s Market (NASDAQ:WFM) annual report.

Whole Foods Market, Inc. (NASDAQ:WFM)

Whole Foods is a incredibly efficient marketer

I knew Whole Food’s Market (NASDAQ:WFM) wasn’t big on glitzy marketing, but I didn’t know just how little the company spent on traditional advertising.

“We spend much less on advertising and marketing than other supermarkets – approximately 0.4% of our total sales in fiscal year 2012. Instead, we rely heavily on word-of-mouth advocacy by our shoppers, which we believe is more valuable than traditional advertising” Whole Food’s 10-K

Last year, Whole Food’s spent only $47 million on marketing. Rather than purchase traditional advertisements, the company prefers to partner with local non-profits establishing the company within the communities in which it operates.

How does that compare to traditional rivals?

Let’s consider Safeway Inc. (NYSE:SWY). In 2012, the company spent $497 million in advertising and grossed $44 billion in sales. Safeway Inc. (NYSE:SWY) spent 10 times more in advertising to earn just less than four times more in revenue.

The problem with spending this much money on marketing is that in a tight margin business like groceries, small savings translate into big gains on the bottom line. Perhaps Safeway should steal some ideas from the Whole Food’s playbook.

Hidden company to play the organic boom

Buried in Whole Food’s risk section was a amazing stock pick.

“Disruption of significant supplier relationships could negatively affect our business. United Natural Foods, Inc. (NASDAQ:UNFI) is our single largest third-party supplier, accounting for approximately 31% of our total purchases in fiscal years 2012 and 2011. During fiscal year 2010, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through 2020 and added two of our regions to our distribution arrangement beginning in fiscal year 2011.” Whole Food’s 10-K

United Natural Foods, Inc. (NASDAQ:UNFI) is a hidden play on the booming organic grocery business and Whole Food’s expansion. Given the ten-year distribution deal, United Natural now has an incredibly visible source of earnings growth.

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