Investment pundits have been panning the retailer as being too posh or upscale for the ordinary consumer. Since when is doing the right thing reserved exclusively for the rich? by Bill Gee
(centrist)
Wednesday, May 4, 2011
As a small-scale investor, I try to follow two very basic rules of thumb when it comes to where to make my stock purchases. Rule #1: Invest in companies that you believe are doing the right thing for both their customers and the rest of the world and Rule #2: Invest where you shop. So far this philosophy has been working pretty well for me. Earlier this year I purchased a modest number of shares in Whole Foods Market and up until the last few weeks, I have been relatively happy.
According to the Organic Trade Organization, the average Whole Foods shopper has the following characteristics:
1) Concern for buying “Organic”: According to a 2009 study, 73% of Whole Foods shoppers purchased organically grown products because they believe that these products are better for their health. With over 90% of produce in conventional stores produced on “factory farms” that use high levels of genetically modified seed and precarious levels of pesticide, we are concerned that consuming organically grown products is the best way we can maintain good health.
2) Willingness to pay more: According to a Mintel survey, 35% of respondents said they were willing to pay a higher price for organically grown products and 48% said that they are purchasing just as many organic products as they were prior to the economic downturn. This is why Whole Foods has been able to maintain strong growth despite the fact that incomes have remained flat or have declined.
3) Desire to cook more: Since the recession started, people have started to cook more at home rather than going out to eat or purchasing prepared foods. Whole Foods devotes more shelf space for ingredients for cooking than any other food retailer. When you cook for yourself, you control the amount of salt, fat and sugar that goes into your body.
4) Shopping on a budget: A common misconception is that you cannot shop at Whole Foods and keep your purchases in a reasonable budget. If all you purchase are prepared foods in the frozen section, this is true. However, if you know how to cook or are willing to learn, you will find that your food will taste better, will be better for you, and you will be able to keep in a reasonable budget. There is an old saying that “food is only as good as its ingredients”. You will not find a more affordable collection of quality ingredients at Whole Foods.
5) Long-Run Opportunity Cost: True, it is possible that I can cut $25 to $50 from my weekly grocery bill if I stopped shopping at Whole Foods and went to Costco, Acme, or ShopRite instead. However, if what I am eating contains harmful chemicals or is lacking in essential nutrition due to the fact that the food is genetically modified or harvested long before it was ripe, my long-term health will suffer. This will translate into a Long-Run Opportunity cost in reduced earning potential, higher healthcare costs, and a reduced quality of life. Over the course of a year, I could potentially save $2,600 on my grocery bill by shopping elsewhere, but my “real cost” will likely be in the hundreds of thousands of dollars.
Why I invest at Whole Foods
As I mentioned in my first paragraph, up until the last few weeks, I have been very happy with my modest stock purchases at Whole Foods. I purchased my first stock back in December 2010 when the price was just over $46 and by mid-April the stock price was approaching $67. The stock paid out a small dividend in January and again last week, and their second quarter earnings report will be released after the market close today. So why did Jeffries analyst Scott Mushkin downgrade Whole Foods stock on May 2nd?
In short, Mr. Mushkin believes that food prices are essentially elastic. In other words, recent rises in gas and food prices will drive away a significant number of Whole Foods shoppers to their less expensive competition.
The results of this one analyst downgrade has been a 12% drop in the stock price of Whole Foods and reports that even company insiders are selling their stock.
Why the downgrade of Whole Foods is premature
Below are the reasons why I believe the downgrade of Whole Foods stock is premature and outright incorrect.
1) Price Elasticity: Whole Foods shoppers are less responsive to changes in price than other food shoppers. They tend to value quality over price and are willing to pay a little more in order to get it. Therefore, if the prices of other products such as gas go up, these shoppers may be willing to drive less in order to keep shopping at Whole Foods. That is what my family decided to do.
2) Company Growth: Despite the bad economy, Whole Foods has continued to grow by opening new locations while their competition “holds pat” or closes underperforming stores. As news of how factory farms are destroying our health and our planet moves more into the mainstream, Whole Foods gains new customers who are seeking a better alternative to high-sodium, high-fat, and a potentially contaminated food supply. The growth in new customers allows the company to take better advantage of economies of scale and to take better control of the supply chain, which will translate into more affordable prices for their customers.
In the end, I go back to my original “Rules for Investing” when it comes to Whole Foods stock, despite what the idiots on Wall Street have to say. If a company has a product you believe in and the company is doing a good job at bringing that product to market, eventually your investment will pay off.
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I like Whole Foods. We shop there a couple of times a month. There's just one problem. The one we shop at is 30 miles away! Hey Whole Foods: put a store in Warrenton, VA or Gainesville, VA! There's an abandoned Shoppers Supermarket building in Gainesville that's just waiting for you to grab it!
After the Wall Street close last night Whole Foods reported their 2nd Quarter earnings, which exceeded analysts expectations. (In your face Wall Street!)
In addition, the Whole Foods CEO reported that the company no longer holds any long term debt and will be using the extra cash in their balance sheet to either increase their dividend to shareholders, buy back common stock or expand the chain even faster. Options 1 & 2 are good for me, and Option 3 might be good for you.
Also, the Whole Foods strategic planning is generally responsive to customer requests for new store locations. I'm sure if you wrote them an email or started a small email campaign among your friends who would also shop at a closer location, they would consider it. For example, when Whole Foods purchased Wild Oats a few years back, customers complained that the downtown Princeton store was too small and not conveniently located. So they purchased an abandoned ShopRite location on Route 1, turned it into the largest Whole Foods in Central New Jersey and closed the downtown Princeton location. (They also opened a Trader Joe's right across the street)
Posted By: Natalie Schultz
Date: May 7, 2011 11:24:51 PM
I like Whole Foods AND Trader Joes. Trader Joes is more affordable, but according to my mother (I haven't been lately) they have scaled back on their "whole" foods section and replaced it with a LOT more prepared and "quick cook" stuff. That angers me, BUT I know how the owners of Trader Joes and Aldi (same private German owners) operate - they will dump anything that doesn't sell and increase supply of what does sell. So, no more whole, non-processed grains at Trader Joes :( My mother bought all the Quinoa that was left on the shelf! Trader Joes has a STRICT NO GMO policy, so I like not having to read every label looking for ingredients like "corn" and "soy."
I agree - I live on Long Island, and with a population of a few million people there are only TWO Whole Foods here. One is 45 minutes from me, the other even further in the opposite direction. They only open new stores in wealthy areas, usually more "Liberal" areas (such as by my old University - the ONLY Democrat majority in the county). Trader Joes has many more locations, the closest is about 20-25 minutes from me (congested traffic is the problem).
As for strength in a weak economy, I agree with you 100%! You took the words right out of my mouth when you explained the long-term health effects of eating cheap, toxic Government-Approved foods instead of Organic. As a firm believer in eating the way our ancestors ate BEFORE "modern advancements" destroyed our food supply, I see the ban on natural salt and NATURAL saturated fats as the DUMBEST thing in the world! I firmly believe that Obama is pushing these regulations and allowing unabated Genetic Engineering of crops (ALFALFA - a PERENNIAL!?!?!) to MAKE US ALL SICK, and therefore make us WILLINGLY ACCEPT GOVERNMENT-RUN HEALTHCARE!
The Whole Foods / Trader Joes shopper is NOT a stereotypical "American" shopper. They always weigh the short-term financial costs against the long-term health costs. They may choose Walmart to purchase a TV or sofa over a high-end appliance or furniture store to save money, but with food that is NOT an option. Also, they will make half as many visits to the store and buy twice as much to save on gas (that's what I began doing about a month ago).
The funny thing is my entire family (Dad's side) is extremely strict Catholic pro-life Republican, and they ONLY shop at Trader Joes! They are fairly "frugal" as well, but still obsessed with organic foods. It's funny because since my Grandparent's died my cousins have been making Christmas Eve dinner, and while my Grandmother made everything by hand from scratch, they don't, but they justify opening a can of corn because "It came from Trader Joes!"
Oh, another way to get "safe" food is European imports! Many food stores carry a small section, but I LOVE going to the Polish store! (sadly the German pork store around the corner closed up shop after being there for generations - it's now a Mexican Bodega :( I love to stock up on REAL natural jams there - super cheap, all natural fruit and made with REAL SUGAR! Did you know that all the jams, preserves and jellies made by Smuckers and other big names are made with High Fructose Corn Syrup? I only read the ingredients like a month ago and I was SHOCKED! How do you make jam without real sugar? YUCK!!! Also, the problem with American "sugared" foods is that they use GMO beet sugar. It must say CANE SUGAR to be natural! But, because the USDA has absurd restrictions on growing and importing real sugar cane, all our sweet foods are made with GMO beet sugar. In Europe GMO sugar beets are illegal, and anything containing GMO ingredients must be labelled!
Oh yeah, don't eat American chocolate! A few years ago the FDA approved a genetically engineered filler ingredient to replace real cocoa butter so chocolate manufacturers could save money. So, Hersheys and Mars and American-made Nestle is OUT! I thinks it's listed as PGR in the ingredients. In Europe chocolate makers are NOT ALLOWED to use this ingredient; they are trying to get permission to replace some cocoa butter content with Palm Oil, but so far it has not been approved. But Palm and Coconut Oil are very good, very healthy all-natural saturated fats, so in a candy bar that wouldn't bother me.
Personally, I distain "USDA Organic" because it was the Government's way of protecting Big Ag against small family farms who have always been "organic." The costs and regulations and paper-work of being "Certified USDA ORGANIC" are ASTRONOMICAL! Many old-school organic small farms just cannot afford to be certified because the excessive Federal paperwork alone requires a full-time job separate from the farming itself. I'm from the Northeast, so ALL the farms are small family farms that have been in the same families for generations. They have been absolutely DECIMATED by the Federal Government. First, years ago the Government "bought out" many dairy farmers - they paid them to stop producing milk so that prices would increase. Great, the problem, as the family farmers soon found out, was that the money was not enough, but they signed a contract preventing them from ever producing milk again, so many of the farms fell into bankruptcy (the cows stood idly around) and their children were forced to leave the state and find jobs outside of farming. I used to live Upstate and there was a dairy farm around the corner and the cows were essentially roaming the fields for show. That absolutely destroyed Upstate NY and New England rural communites. After USDA Organic regulations went into effect, the original founders who coined the term "Organic" started their own "Certified Naturally Grown" program - a volunteer organization of SMALL farmers who produce with NO pesticides or herbicides, NO GMOs and only truly free-range, NEVER CAGED livestock with NO antibiotics or hormones. The USDA is currently trying to OUTLAW the "Certified Naturally Grown" label; so far they have succeeded in banning it's use on animal products.
BTW: Whatever happened with the Left-Wing boycott of Whole Foods after the Libertarian CEO came out against ObamaCare? Are they still boycotting? ;) I always assumed it would have the opposite effect - that more Conservatives would deliberately begin shopping there. Like Sean Hannity - never even contemplated shopping at Whole Foods until the CEO came out against ObamaCare!
BTW: Whole Foods actually pays the farmers a high premium for their produce. My mother's boss's daughter grows brocolli for Whole Foods (in one of the Carolina's), and the added expense of being "USDA ORGANIC" is worth it because Whole Foods is willing to pay the price.
Whole Foods is filling a big VOID created by Big Government bureaucracy that has killed off all the local small farms and farmers markets. So, when you shop at Whole Foods and pay the high prices, just remember that you have Big Brother to blame. Big Brother killed small farmers and farmers markets, and Big Brother gave permission to Big Ag to poison us with toxic Genetically Engineered "conventional" foods. Way to go, Liberals!
