Morgan Stanley recently predicted a good deal of growth for organic/natural food sellers. In fact, this area is "hot." And because it is, I want to clarify certain concerns regarding organic/natural food from an investment standpoint. Increasingly, we have an interest in this area.
But first, something from Morgan Stanley via Yahoo Finance:
A recent study by Morgan Stanley sheds some light on the prices consumers pay for groceries at several major store chains. The study compared the cost of 100 commonly-purchased food items at different stores, focusing on organic/natural food sellers:
The Kroger Co (NYSE: KR),
Whole Foods Market, Inc. (NASDAQ: WFM),
The Fresh Market Inc (NASDAQ: TFM) and
Sprouts Farmers Market Inc (NASDAQ: SFM).
The study found that organic products command an average cost premium of 47 percent when compared to non-organic products within the same store. The organic premium was highest at Sprouts, where customers pay 57 percent more for organic products than non-organic products. The lowest organic premium was found at The Fresh Market (33 percent).
… The study also compared perceived quality and location convenience of the four stores to 11 other supermarkets.
According to customers, Whole Foods has the highest perceived quality among Morgan Stanley's four focus stores, trailing only Trader Joe's Company overall. Kroger had the lowest perceived quality among Morgan Stanley's picks. However, Kroger still handily beat the perceived quality of Wal-Mart Stores, Inc. (NYSE: WMT) and SUPERVALU INC.'s (NYSE: SVU) Save-A-Lot, which took the bottom two spots.
What do we learn? Already consumers are differentiating among sizeable providers. But how are they doing so? This is a very important point for both consumers and investors. Currently, definitions in the "organic/natural" arena are often muddled and abrupt.
"Natural," for instance, is an industry term that has little in the way of a formal government definition. "Organic," on the other hand, is already significantly defined from a legal standpoint, though there are private definitions as well.
Professional investors seem to accept government definitions regarding organic food – no matter that they may include provisions that go beyond the actual food itself and what it contains. But eventually this could change.
As already reported, Whole Foods has begun moving beyond what is mandated in the government definition of "organic" with its own in-house standard. We wrote about that here:
With the expansion of both public and private definitions, this will continue to be a confusing sector – at least for investors. In fact, for investors, confusing standards, especially in-house ones, may result in lost opportunities and deteriorating positions.
Morgan Stanley ,in its study, stated that it expects the "organic/natural food industry to continue to grow at a 9 percent annual rate." It also over-weighted several providers like Whole Foods and Kroger.
This is encouraging news worth paying attention to. But in my view, Morgan Stanley ought to be even more predictive. As this sector matures there will be an increased number of definitions including such elements as "sustainability" of farming methods as well, of course, as the "carbon footprint."
Will these prove important to consumers? Time will tell.
There are indeed numerous facets to consider. Over time, we'll see what the consumer thinks – and winners and losers will begin to evolve. The Internet makes it more difficult to impose a one-size-fits-all government standard on a specific industry.
One scenario: At some point, consumers may at least in part turn more to locally grown produce and meat because these offer transparency and evident high-quality with less concern about non-essential impacts …
Or perhaps not. Perhaps these issues will prove MORE important to consumers. Predicting these trends will be an important part of investing in organic/natural foods and in building a successful business as well.