Whole Foods Market, Inc. (WFM), United Natural Foods, Inc. (UNFI): This Retailer’s Value Pricing Strategy Is Critical in Winning New Customers

Despite this, I prefer Sprouts Farmers Market over Whole Foods Market, Inc. (NASDAQ:WFM). Compared with Sprouts Farmers Market, I believe that Whole Foods Market, Inc. (NASDAQ:WFM) will be more adversely impacted in the event of an economic downturn. When the economy weakens, price conscious customers will be likely to substitute its high end premium priced products with more affordable non-organic food or attractively priced alternatives from Sprouts Farmers Market.

United Natural Foods, Inc. (NASDAQ:UNFI) is a distributor of natural and specialty products and has been a primary supplier to Whole Foods Market, Inc. (NASDAQ:WFM) for more than a decade. It registered 13% and 9% growth in quarterly revenue and net income to $178.2 million and $31.6 million, respectively, for the third quarter of fiscal 2013. This was the result of increased penetration of conventional supermarket and supernatural channels and cost savings from the implementation of productivity initiatives. Management has guided for a 15% increase in full year fiscal 2013 sales, with plans to develop other distribution channels such as institutional foodservice providers and gourmet stores going forward.

Investors typically have the headache of choosing between suppliers and retailers as their investments in an attractively growing industry. For me, the answer is simple: I pick the one that boasts of higher profitability. Historically, United Natural Foods, Inc. (NASDAQ:UNFI) has generated gross margins averaging about 20%, compared with significantly higher gross margins in excess of 30% for retailers Sprouts Farmers Market and Whole Foods Market, Inc. (NASDAQ:WFM).

Conclusion

Investing is all about spotting secular growth themes and picking the best proxy. I am optimistic about increased customer acceptance of organic and natural food, and I am confident that Sprouts Farmers Market’s value-based pricing strategy makes it well-positioned to gain more market share from other specialty retailers and conventional supermarket peers.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Retailer’s Value Pricing Strategy Is Critical in Winning New Customers originally appeared on Fool.com is written by Mark Lin.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.