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The Kroger Co. (KR), Whole Foods Market, Inc. (WFM): Has America Reached Peak Obesity?

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Let’s face it, organic food is pricey, but that doesn’t stop folks from buying it. Whole Foods has been on a tear. In the last 5 years, they’ve gained around 425% in stock value, or about 85% annualized. If you had put $10,000 in Whole Foods Market, Inc. (NASDAQ:WFM) in June of 2008, you’d be sitting on $42,500 right now. Not bad for a store that charges folks an arm and a leg.

Organic produce and non-processed foods are more popular than ever. And as proof of this, more specialty stores are popping up left and right to meet that need (i.e. Trader Joes, Sprouts markets here in California). More competition means there’s more money to be had in the marketplace.

Why Organic? Organic foods has become more of a “catch-all” term for “healthy” foods . People are buying it simply because they think it’s more healthy than “regular” produce.

Whole Foods Market, Inc. (NASDAQ:WFM)

Things like less high-fructose corn syrup, saturated fats and other (undesirable or unnatural) ingredients are increasingly landing on the radars of most folks. Those said healthy benefits may or may not pertain to weight, but Americans are no less concerned and have latched onto the term. This points to a fundamental shift that is taking place in America’s health habits and diet. Awareness is the first step before major change.

Has America reached peak obesity?
After years of negative publicity (all around the world!), trying every diet known to man, America is finally coming to terms with its weight issues and deciding to seriously do something about it. The US obesity rate is currently the highest in the developed world,  but the evidence is starting to show that obesity is actually leveling off. Even better news is that childhood obesity rates are also slowing, which is a good future sign.

Even fast food, long blamed as a big contributor to America’s obesity problem, is changing its tune. Just 5 years ago, McDonald’s wasn’t offering apple slices  or chicken wraps .Taco bell wasn’t offering a “Fresco” option (with items of less than 10 grams of fat) on their menu.

Calorie count laws enacted from New Yorkto California  probably just add to the more urgency to change.

Sprouting competition

Sprouts Farmers Markets and The Kroger Co. (NYSE:KR), besides the privately held Trader Joes, are the main competition for Whole Foods Market, Inc. (NASDAQ:WFM). Sprouts, which was also privately held, just did an initial public offering on August 1. Its stock more than doubled on the first day. They’ve so far got 163 stores, mostly in the southwest and western US, and are growing 12% annually every year.

What’s amazing about all this is the fact that Sprouts was founded in only 2003, just 11 years ago (and subsequently snatched up by Private Equity firm Apollo Global Management). This perhaps, gives you some idea of how quickly and how recently this health trend in America has been taking shape.

Sprouts is perhaps the current largest direct competitor to Whole Foods Market, Inc. (NASDAQ:WFM) though they’ve got quite a bit of catching up to do to Whole Foods current 355 store count. Besides a lower store count and lower recognition I don’t see any unique value proposition that would cause them to supplant Whole Foods Market, Inc. (NASDAQ:WFM). Their prices are the same yet they don’t offer many of the same things Whole Foods Market, Inc. (NASDAQ:WFM) does in their stores to entice customers (such as free samples or freshly cooked food areas). Sprouts is ho-hum organic. Whole Foods Market, Inc. (NASDAQ:WFM) is upscale organic.

The Kroger Co. (NYSE:KR) is a traditional grocery store that is hopping on the organic/natural food bandwagon. They weren’t on the bandwagon even 5 years ago . They are doing great in their traditional segment. Margins are low at 1.6%, but like most retail chains they are making up for it in bulk with $1.5 billion in net profits last year.

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