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Real Organic Growth
Food processors and retailers are typically regarded as among the more staid selections in the stock-market universe. Within this group, though, investors can still find some dynamic niches. The field of natural and organic foods is one such area. Even the most prominent pure plays are just a fraction of the size of industry heavyweights, such as Kraft Foods (KFT) or supermarket giant Kroger (KR). However, as healthy eating has become more of a priority with a growing segment of the population, successful players in the natural and organic foods arena have been rewarded with vigorous growth rates and lofty stock-market valuations.
From a Wall Street perspective, the highest profile player in natural / organic foods is likely Whole Foods (WFMI). The company’s revenues have increased 18% a year, on average, so far this decade. By comparison, Kroger and Safeway (SWY) have seen their revenues increase at low single-digit rates over the same stretch. Other leading names in the natural / organic foods space include Hain Celestial (HAIN), a maker of food and personal-care products under the "Health Valley", "Celestial Seasons", and other labels. United Natural Foods (UNFI), meanwhile, distributes these products to many retailers, most important being Whole Foods.
A prominent niche in the natural food and organic food sector alone, though, is no guarantee of success for these companies and their investors. In the past year, for instance, there has been scant evidence of the rapid growth that had characterized the industry for most of the decade. In fact, comparable-store sales at Whole Foods declined 3% in the fiscal year that ended in September. The weak economy clearly curbed the public’s appetite for organic and natural foods, which typically are priced at a premium to similar products that don’t carry these labels. Too, many of the traditional retailers, no doubt having taken note of Whole Foods' past success, are carving out more shelf space for these items. In 2005, for example, Safeway rolled out its own line of organic products and now offers more than 300 items under its "O Organics" label.
Investors will need to be vigilant as the market tries to sort out the issues at play behind the recent sluggishness in sales growth at some of the leading natural and organic food companies. A stronger economy, and job market, could go a long way toward making consumers once again more willing to trade up for these items, with likely favorable implications for share prices. On the other hand, the lofty valuations now afforded some of the equities in this niche would be vulnerable to the degree that other, more secular factors are also at work. In this regard, investors should be alert for indications that the in-roads being made by niche mainstream food processors and retailers are leading to market share losses among the “pure-plays,” or that potential new customers are less receptive to incorporating these items into their lifestyle, than were their predecessors.