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You Are What You Eat


Brand loyalty and the organic revolution.

C-Town, a local grocery store in Bedford-Stuyvesant, Brooklyn, doesn't look like your neighborhood Whole Foods (WFMI). It's wedged between high-rise projects and graffiti covers its crumbling brick exterior. Inside, its customer service desk sits behind a wall of thick bulletproof glass. But even here you can find hormone-free eggs hatched from free range chickens.

That's because the organic food industry -- equal parts big business and cultural sensation -- knows few boundaries. Revenue for this sector continues to grow at a rate of 18.7% annually. For a little perspective, back in 1997 organic food represented only 0.8% of the food market. Experts now predict that number will grow to about 4.8% by 2010.

And no one is profiting more than organic food's flagship – Whole Foods.

A little background. Before acquiring chief rival Wild Oats for $565 million last August, Whole Foods brought in 35% of organic food revenue, or approximately $5.8 billion. They opened a record 21 stores in 2007 and plan to do the same this year. Although first- quarter income decreased 27% (on account of the massive Wild Oats purchase), revenue surged 31% to $2.46 billion.

Now, if you've been to Whole Foods, this goes without saying: Organic food ain't cheap. In fact, prices can range anywhere from 20% to 30% to even 100% higher than those at regular grocers. So with an across-the-board consumer slowdown in effect, the question on investors' minds is whether or not organic food is recession-proof.

According to Whole Foods CEO John Mackey it is.

"Historically, our sales have been highly resilient during economic downturns," Mackey reported in a February 20th conference call. "We attribute [this] to many factors, including loyal core customers and their dedication to a natural and organic lifestyle."

In other words, Mackey is banking on a single demographic to keep the wheels turning: Organic foodies. Maybe you've met one. Hell, maybe you are one. But if you haven't, or if you aren't, suffice it to say that these consumers are a committed breed. To them, Whole Foods isn't just a store, it's a way of life.

Like the Googles (GOOG), Apples (AAPL), and Starbucks (SBUX) of the world, Whole Foods promotes its products by branding a progressive identity. The company embraces motifs like sustainability and environmental conservation. In its mission statement you'll find buzz terms like "self-reliability" and "shared fate."

Consider the advantages inherent in Whole Foods' brand strategy: Each new report on global warming helps them. Each new report on obesity, pesticides and meat recalls helps, too. Most of the news out there is bad – and most of it can be used to justify why spending the extra money for organic food makes sense. Even when times are tough.

But Whole Foods may not dominate the trend for long. The organic revolution is already spreading virulently into the mainstream. Wal-Mart (WMT), for example, recently announced plans to double its organic offerings.

"We know that customers at all ends of the income spectrum want organic and natural foods," Wal-Mart CEO Lee Scott said at the company's general meeting in 2005. "We don't think you should have to have a lot of money to feed your family organic foods."

Neither does Target (TGT). With organic offerings ranging from t-shirts to bath towels, it's just the latest in a string of big boxes to market the benefits of natural goods. Meanwhile, other grocers like Safeway (SWY), Kroger (KR) and Trader Joe's continue to gnaw away at Whole Foods' share of the market.

Truth be told, the organic industry has yet to weather times quite like these. But brand loyalty is one of the best defenses against sinking consumer confidence. Whole Foods -- and the organic industry at large -- will need to continually reinforce the political and cultural undertones of its products if it wants people to cough up the extra cash.
No positions in stocks mentioned.

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