When it comes to retail, no one moves the needle like Wal-Mart (NYSE: WMT). That’s why news that Wal-Mart is going organic is such a big deal.
No, Wal-Mart isn’t removing conventional foods from its shelves. But with the partnership it just announced with Wild Oats, Wal-Mart will soon carry around 100 organic staple food items packaged by Wild Oats.
Organic foods are nothing new for Wal-Mart.
The retail giant carries around 1,600 organic grocery items currently. The goal is that the Wild Oats items would cost around 25% less than organic items from national brands.
Wal-Mart’s non-organic Great Value line will still be cheapest option on the shelf. However by pricing Wild Oats organic items roughly the same as non-organic name-brand items, the strategy could prove hugely successful in luring customers that are seeking cheap organic foods.
That is surely of interest to a Wal-Mart executive team that has overseen four consecutive quarters of declining same-store sales.
Wal-Mart’s own research has suggested that 91% of its customers would buy more organic food if the price was lower. On top of keeping some customers Wal-Mart might lose to competitors, the retail giant might see success at winning back customers it has already lost.
Wal-Mart’s executive vice president of U.S.grocery, Jack Sinclair, offered some interesting comments on the matter. “What is it that makes organic products so expensive? Where’s the point of inefficiency?…We are trying to disrupt the market.”
So how exactly does Wal-Mart plan to reduce the costs of organic foods? By giving purchase commitments to small-scale farmers Wal-Mart can negotiate for lower prices. Additionally, Wal-Mart aims to cut out middlemen that exist in the organic food industry.
In a previous job I spent two years working in sustainability for a multi-national foodservice company. In this role I saw first hand the lack of organization and efficiency in the procurement and distribution of organic and local foods.
Though significant strides have been taken by Sysco (NYSE: SYY) and United Foods (NASDAQ: UNFI), this market remains fragmented and lacking the same organization and efficiency as has been brought to conventional food systems.
While I can easily picture some in the sustainability community criticizing the “evil corporation” and questioning the motives behind Wal-Mart’s announcement, a giant like Wal-Mart entering the organic space could be hugely beneficial to the entire natural food industry.
For starters, competition in the market and lower prices can only help bring in more consumers of organic foods. Before long these consumers will likely branch into the broader array of products distributed by United Foods, including the Annie’s (NYSE: BNNY) line of food products.
Wal-Mart’s motivations are obvious. Take a look at the performance of various kinds of food companies.
McDonald’s (NYSE: MCD) is up only 74% over the last five years while Chipotle Mexican Grill (NYSE: CMG) is up 682% during that same period.
Shares of grocery chain Kroger (NYSE: KR) are up almost 110% in the past five years while shares of Whole Foods Market (NASDAQ: WFM) are up more than 450%.
Consumers vote with their wallets. And the results show that the growth in food and grocery is in organic and natural foods.
Wal-Mart’s move is surely a jab at Whole Foods and other purveyors of natural and organic foods, such as Sprouts (NASDAQ: SFM) and The Fresh Market (NASDAQ: TFM).
And I honestly hope it pays off for Wal-Mart. Not just because I am a Wal-Mart shareholder but also because, if successful, Wal-Mart will force the organic food industry to be more efficient and price-focused.
Lower cost organic foods means more accessibility for consumers. And more consumers eating less-processed and higher-quality foods will almost certainly lead to healthier consumers. The fact that Wal-Mart is going organic could be a major event that drives us in that direction.
DISCLOSURE: I personally own shares of Wal-Mart in my IRA.
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