Mainstream organic food hurts specialty grocers; Fairway hardest hit

Fri Dec 18, 2015 1:47am EST
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By David Randall

NEW YORK (Reuters) - Two years after going public as a fund managers' favorite, New York City-area specialty grocer Fairway Group Holdings Corp FWM.O now sees its shares selling for less than a pack of organic gum.

At around 70 cents per share, the company is down 94 percent from its April 2013 initial public offering price and is in danger of being delisted from the Nasdaq for trading below $1 for 30 consecutive days.

Yet Fairway, even with its deep wounds, is just the extreme illustration of a trend that is hurting competitors such as Whole Foods Market Inc (WFM.O: Quote), Sprouts Farmer's Market Inc (SFM.O: Quote) and Natural Grocers By Vitamin Cottage Inc NGVC.N as well.

As middle-income outlets like Costco Wholesale Corp (COST.O: Quote), Wal Mart Stores Inc (WMT.N: Quote) and Target Corp (TGT.N: Quote) expand their organic offerings, the companies that pioneered the trend are being left behind. The number of organic items now available in traditional grocery stores is up between 35 percent and 50 percent over the last year, according to estimates from investment bank Piper Jaffray. Overall, the U.S. organic food market should top $45 billion in 2015, a compound annual growth rate of 14 percent from 2013, according to TechSci Research.

Supermarket chain Kroger Co (KR.N: Quote) – whose shares are up 31 percent this year – now says that organic foods account for 10 percent of its $108 billion in annual revenue, making it the second-largest seller of organic foods behind Whole Foods. Whole Foods, meanwhile, is down 34 percent for the year to date, while Sprouts Farmer’s Market is down 25 percent.

“We’re definitely in a little bit of a shakeout right now, and I don’t expect that all of these specialty grocers are going to survive,” said Sean Naughton, an analyst at Piper Jaffray.

To compete with that trend, Whole Foods, Fairway and other specialty grocers will either need to cut prices - as Fairway has done - or focus on higher-margin prepared foods, he said.

"Whole Foods is almost a restaurant masquerading as a grocery store," Naughton said.   Continued...

Corporate logos are seen on the rear of a Costco membership card/American Express credit card in this photo illustration taken in Toronto, Ontario February 12, 2015. REUTERS/Hyungwon Kang