Retail giants Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are increasing health and organic food lines to keep their own bottom line trim and healthy. The competition for which store can offer the most is heating up.
Long ago, there may have been some organic food at the supermarkets, but the market wasn't big enough then. Now it is. More and more, health-conscious shoppers are looking for ways to enjoy food with nutrient-packed natural ingredients.
Following this consumer trend, the two rival supermarket operators also have their own private label health foods. Woolworths has Macro while Coles supermarkets has Simply.
Consumers who buy health and organic food are willing to pay up for the availability and selection. The health food premium and cheaper production costs of private labels make product margins better.
What's more is the growth rate of this category last year was close to double regular fresh food like fruit and vegetables, so it can be a winner for supermarket operators. These rivals are always on the hunt for sales growth.
Woolworths notes it stocks over 400 healthy products and the Coles website boasts having over 100 certified-organic products for shoppers. Market research company Nielsen estimated that in 2014, packaged health food sales overall were $665 million. Both stores have roughly the same market share – about 35% each, so together they dominate this retail space. Other retailers like Metcash Limited (ASX: MTS), Aldi and Costco would fill the remaining 30%.
As the supermarket retailers face slower earnings growth due to competition, high input costs and a less than robust economy, organic and nutritious food can help make their bottom line a little healthier.
In other areas, Woolworths and Wesfarmers are still battling it out in the DIY hardware market. Bunnings Warehouse is still one of the best performing businesses for Wesfarmers, whereas Masters has continued to lose money for Woolworths as it builds up a national store network.
Also, the next big thing for both retailers looks to be financial services. It's a market potentially big enough to help maintain long-term growth targets. There has been speculation Wesfarmers may be considering a financial service acquisition after selling off its insurance businesses.
Earnings growth was slow for the retailers in financial year 2014, but forecast earnings are expected to grow more for Wesfarmers than Woolworths. Woolworths stock offers a 4.5% fully franked yield and Wesfarmers stock is yielding 4.6% fully franked. Judging just on those two points alone, currently Wesfarmers looks to be the better choice.
