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), Sprouts Farmer's Market Inc (SFM.O) and Natural Grocers By Vitamin Cottage Inc (NGVC.N) as well.
As middle-income outlets like Costco Wholesale Corp (COST.O), Wal Mart Stores Inc (WMT.N) and Target Corp (TGT.N) 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) – 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.
Whole Foods did not respond to requests to comment.
Fairway is in perhaps the toughest position of any specialty grocer, said Andrew Wolf, an analyst at BB&T Capital Markets. Among its problems: double-digit declines in its key stores in Brooklyn and the Upper East Side after Whole Foods opened locations nearby; a debt burden of more than $250 million that has forced the company to curtail its plans to open 300 new stores and triggered a $3.5 million fine for pulling out of a lease to open a store in the Hudson Yards project rising in Midtown West; and higher levels of discounting that have kept the company from turning a profit.
Fund managers are abandoning the now-$30 million market cap company. A total of 88 funds now own shares of Fairway compared with the 134 funds that owned it at this time two years ago. The Baron Small Cap fund - until June its largest shareholder, with 4.2 percent of the company's float - told Reuters that it sold all of its shares over the last six months. The fund took a loss of approximately $15.3 million on the shares, according to a Reuters analysis.
Chris Carter, co-portfolio manager of the $921 million Buffalo Discovery fund, is starting to bet on which grocers he thinks will survive. He added 175,000 shares to his position in Whole Foods in the last quarter, in large part because he thinks its "brand halo" will allow it to outlast its competitors, he said. The company will not be able to compete based on price, but rather by identifying new gourmet brands and stocking them before competitors, helping to continually draw in shoppers focusing on selection.
"Five years from now, I would expect the largest sellers of organic foods will be Costco, Wal-Mart, Whole Foods, and probably Amazon (AMZN.O)," he said.
Mark Wiltamuth, an analyst at investment bank Jefferies, however, said that most of the declines in specialty grocers are self-inflicted, rather than as a result of traditional chains moving into organic foods. Between 60 percent and 70 percent of both Whole Foods and Sprout's same-store declines are the result of companies opening new stores within 10 miles (16 km) of existing stores that are cannibalizing their sales, he estimates.
"The sector of natural and organic is growing 8 to 10 percent a year, but these companies are trying to expand their store counts by 12 percent a year," he said.
Reporting by David Randall; Editing by Linda Stern and Jonathan Oatis