Though The Business Press Maven's whole paycheck goes to Whole Foods ( WFMI), he was unfortunately too obtuse to invest in the stock. The lofty margins for what is in the end just a grocer scared me off. (I know, I know, it's so much more than a grocer -- it's even kind to lobsters -- puh-lease, spare me the email. Besides, I'm busy reading more today on how wrong I've been.) But the question of whether there is more money to be made in Whole Foods or whether the Johnny-come-lately competition from Wal-Mart ( WMT), Safeway ( SWY), Kroger ( KR), SuperValu ( SVU) and others, plus the ongoing confusion over just what is meant by the term "organic," might finally take a big lobster claw to those vaunted margins is becoming more timely. First, the strength:
Writing late Thursday , Libby Quaid, an Associated Press Farm and Food writer, touched on current growth rates. ( Editor's note: To access some of these stories, registration or a subscription may be required. Please check the individual links for the site's policy.) They made me want to cry in my chemical-enriched milk (I'm allowed my small pleasures). Conventional food sales, which are sleep-inducing, plug along in the low single-digits, and there is growth in organic foods. The segment has been growing at a 15% to 20% clip, and because it makes up only a tiny portion of the nation's food, perhaps there is room for growth. But Quaid touches on some emerging struggles to get organic food supplies. You think oil can be a complicated import? Try getting milk powder from New Zealand or suitably certified goods from South America. The Motley Fool has a good primer on the same problem, and touches on the dilemma of brands like Horizon (owned by Dean's Foods ( DF)), which has been accused of acting like a factory farm. A big part of the debate for the food segment is whether "organic" means simply keeping antibiotics and hormones out of feed or whether it includes welfare factors, like giving large animals more than two inches of space to graze in. Anyhow, torrents of new competitors, industry supply problems and basic debates over common product definitions are hardly automatic positives for a business like Whole Foods, one whose margins have a long way to fall. But shorts beware: I have been wrong on this stock from the start.
And putting organic food on the back burner, what is going right at the retail equivalent of supermarkets, the department stores? For years, their sales, like those of conventional food, could induce sound sleep. So what to make of the fact that for the second straight month, sales at department stores like Kohl's ( KSS) and J.C. Penney ( JCP) outpaced specialty stores like Abercrombie & Fitch ( ANF)? Well, it's too early to tell, The New York Times
rightly says this morning. But it appears to be part of a high gas price/interest-rate-induced shift to the low-price range, plus the merger of Federated ( FD) that led to the shuttering of some May stores and left some customers wandering about, there for the taking. The only problem with that analysis is that the high gas price/interest rate thesis probably doesn't account for what is mentioned lower in the story: Upscale department stores like Saks ( SKS) also did well. (In a related trend: Thursday, The Wall Street Journal pointed out that in the restaurant business, the trading down from mid-priced restaurants to lower-priced ones seems to be in full swing, with the higher-priced joints remaining strong. Seems like interest rates and gas prices might be squeezing the middle class into downgradeville while the rich -- who are different from you and me, mostly because they work harder and are smarter -- are unaffected.) While there may be cause to feel better about department stores, Business Week raises the big red flag of caution over one in the issue hitting newsstands today. When Target ( TGT) reported earnings this spring, there was disappointment that the number was a penny light. It may be worse than it looks, says Robert Berner: "Few seemed to notice that three-quarters of the company's 15% earnings gain came from its credit-card operations, not its retail business." And it may be worse than that looks. Defaults could very well be coming on those cards, what with those higher interest rates and gas prices, plus a deflating housing market that is going to make those home equity loans some of us should use to pay for organic food harder to come by.
While we are on the subject of today's Business Week, let me direct your attention to
a weary little ditty on Pfizer's ( PFE) drug Exubera, which lets diabetics inhale insulin powder rather than going the more cumbersome and painful injection route. Diabetes is an obviously enormous problem, which means it's a good opportunity, too -- and Pfizer has talked up the prospects for this drug. The stakes are high for Pfizer (see: generic competition for Lipitor and the depressing loss of the Zoloft patent). But Business Week reports that the act of inhaling can be cumbersome in its own right and leads to lung concerns, both in clinical trials and in the minds of diabetics. Plus, the inhalation device is expensive and big. And let's drive off into the weekend with The Economist, which has a good angle on a possibly bad effect of the Renault-Nissan/ General Motors ( GM) romance. A lot of the focus has been on its possible impact on General Motors, but The Economist, referring to the potential threesome as a "scheme" (ouch!), says that the fragile and rare cross-border success of the French Renault with the Japanese Nissan could be put in peril. And just for fun, in case you need something to read this weekend while getting sunstroke on the beach, check out how Houston Chronicle message board writers are suspicious that Ken Lay is dead. Paul was dead when he was alive and now he's alive when he is dead. Eh, maybe message boards will save the newspaper business yet.