A financial disparity has emerged between popular health-conscious grocery stores and their more mundane rivals, a gap that's expected to widen as the millenial generation replaces the baby boomers as the dominant consumer force over the next decade.
A June report by investment bank Jefferies Group Inc. (NYSE: JEF) and advisory firm AlixPartners LLP entitled Trouble In Aisle 5 asserts that the rise of millenials, born between 1982 and 2001, and decline in baby boomers will fundamentally shift the buying patterns of many shoppers.
By 2020, millennials over 25 will make up 19 percent of the U.S. population, while the share of baby boomers are expected to decline below 20 percent. Millennials differ from their elders, focusing on convenience rather than loyalty to specific brands. The study used data from 2,000 consumers surveyed in May, with millenials responding that they were less influenced by brand names.
“We envision an environment that will require increased nimbleness and a relentless focus on the consumer for established food manufacturers and retailers, and the potential for rapid growth for new concepts and products,” said David Garfield, managing director at AlixPartners and head of the firm’s Consumer Products Practice, in a statement.
Millennials were also more price sensitive, particularly at low income levels. But they were also focused on healthy, organic and natural foods, showing a willingness to pay more for those specialty items.
In the wake of the recession, stores that market themselves as health conscious have already outperformed the broader grocery market. Whole Foods Market Inc. (Nasdaq: WFM) has been one of the strongest specialty food stores. In 2011, comparable-store sales rose 8.5 percent and operating margins rose 8.5 percent. Year-to-date in 2012, the stock was up 33 percent to $92.54 per share at Wednesday's market close.
They're a differentiated shopping experience, said Marc Riddick, a consumer goods analyst with the Williams Capital Group in New York. During the recession, Whole Foods actually gained market share and continued posting high profit margins, although it cut prices in some areas.
Riddick also likes Trader Joe's, which is privately held. Although it shares some similarities with Whole Foods, Trader Joe's tends to be smaller, and the two stores areable to coexist, even in close proximity to each other. On Manhattan's 14th Street, for example, there is a Whole Foods and Trader Joe's within three blocks, and both see heavy foot traffic.
Another store focused on organic and natural ingredents, the Fresh Market Inc. (Nasdaq: TFM), which went public in November 2010, has gained 39.37 percent to $55.61 per share this year. Analysts forecast a 27 percent growth in earnings this year
Meanwhile, Safeway Inc. (NYSE:SWY) has lost 21.63 percent of its value in 2012, close at $16.49 on Wednesday. The company has attempted to expand its organic and specialty food offerings in its Lifestyle program, but the recession has hurt same-store sales growth. The 'Lifestyle' model was built for the high end, but the economic downturn caused consumers to trade down to the low end, wrote Michael Keara, an analyst with Morningstar Inc., in a July research note.
Stop & Shop's parent company, the Netherlands-based Koninklijke Ahold N.V. (Amsterdam: AHO), is down 10.78 percent to $12 on Wednesday. The 150-year-old Great Atlantic & Pacific Tea Company, better known as A&P, bought one of its largest rivals Pathmark, only to declare bankruptcy in 2010. In March 2012, it emerged from bankruptcy as a private company.
Consumers have their own way of determining value, said Riddick of Williams Capital, adding that price was not the only consideration. There's clearly an interest in health and wellness across the board.
The recession served to make the consumers focus on the things they care about, he added. Consumers continue to vote with their dollars.