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Food Fight In the Grocery Aisle

Whole Foods’ stock leaped 10% this week on news that Jana Partners acquired an 8.3% stake in the natural grocery food chain. Jana, well known as an activist investor, is keen to get Whole Foods back on the growth track.

Before this announcement Whole Foods stock was flat for the last year. It hit a high of $63 in late 2013 when the company was racing to open new stores and logged in 4-7% comp store growth on a reliable basis.

Whole Foods soon became a victim of its own success. Smaller organic chains received financial backing and began expanding. At the same time, traditional grocery stores were coveting the high growth and wide profit margins Whole Foods was enjoying.

The influx of competition from traditional grocery stores weighed on sales. Chains like Krogers and Publix copied its prepared foods bar and added sushi counters, gelato bars, and artisanal cheeses. Competitors devoted aisles to “natural” and organic foods and carved out entire sections to mimic a mini-Whole Foods within a larger traditional grocery store.

Whole Foods same-store sales started to wilt in 2015 and fell 2.5% last year. That decline continued into the first quarter of this year.

It’s no secret that consumer preferences are shifting to organic, healthier options. According to the Organic Trade Association, Millennials (those born between 1981-1997 ages 19-35) recently made up 52% of organic purchases. As this group matures and starts growing its families, the trend toward healthy foods will become even more pronounced.

The problem for Whole Foods and the entire grocery sector, is that everyone is fighting for that same slice of the market. Despite adding organic options grocery chain, Kroger has been unable to move the needle on its same-store sales.

Traditional grocery stores are slugging it out with each other for customers. As demand for packaged foods declines, the industry is crowding into the organic space.

Couponing and marketing programs are eating up a bigger portion of grocery store budgets with little-increased customer count to show for it. Stores are shifting shelf space from packaged foods to coolers and bins of fresh foods.

Add to this the news that Wal-mart is asking suppliers to cut prices so that it can compete more effectively with European chain Aldi who has just begun expanding in the U.S. and you’ve got an all-out brawl happening in the grocery aisle. A second Germany-based grocery discounter, Lidl, is expected to enter the U.S. market this year.

In Profit Catalyst Alert we covered one very successful food short with a 64% gain and added more bearish trades this week.

I expect there will be more shake-ups in the grocery sector. The demographic shift away from packaged foods and industry pressure on suppliers to help boost profits will remain in place for some time, leaving a big mess in the aisles of grocery stores.

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