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'Slow' Food Is Outgrowing Fast Food

25 July 2013 in Trading Ideas

It was a rough week for McDonald’s.

Shares of the fast-food king tumbled after the company posted second-quarter profit and sales that fell short of Wall Street’s expectations. In addition, it said it would open fewer restaurants this year than it had originally planned while being careful to raise prices in the near term.

Indeed, the restaurant chain’s sales growth was barely growth at all – both global and US same-store sales rose just 1%. McDonald’s attributed the sluggishness to uncertainty to the weak economies around the globe, which has resulted in fewer people eating out.1

There’s also competition, particularly in the US. Both Wendy’s and Burger King have stepped up their game with new products and value offerings in an attempt to offset McDonald’s ramped-up focus on its famed dollar menu.

But it’s worth considering if there are other, longer-term, factors at play here. As CNNMoney writer Ben Rooney noted this week, McDonald’s tends to thrive in a down economy, so it seems “strange” that the company would cite the economy for its poor performance. And while the US economic recovery has been far from stellar, Rooney said, consumer sentiment has actually improved.2

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Rooney then took a stroll through the StockTwits community site to look for different theories. One investor suggested “guess people are starting to get more health conscious than cost conscious.”

While this is the sort of shoot-from-the-hip opinion one can expect from financial-market Internet chat rooms, the difference between growth of fast-food peddlers and healthy and organic food providers could be instructive.

Healthy and Tasty Motif

Consider, for example, Whole Foods Market, which has seen its shares rise more than 21% this year and continues to trade near all-time highs. The company’s revenue over the past 12 months has grown 16%, well ahead of the 10% pace it averaged over the past five years.3

(Whole Foods shares comprise a 10% weight in the Healthy and Tasty motif, which has gained 11.2% in the past month, and 28.5% so far in 2013. In that same timeframe, the S&P 500 has increased 7.9% in the past month, and 17.2% this year.)

Similarly, Fresh Market posted 12-month revenue of 17% and organic dairy producer WhiteWave Foods recorded a 12% increase.

Those sort of figures have paved the way for an initial public offering by Sprouts Farmers Market, which plans to open about 40 stores over the next two year in an eventual push toward 1,200.

In short, organic food is now a huge global industry. In fact, according to the International Federation of Organic Agriculture Movements, it is now a $63 billion market that grew at a compound annual rate of about 19% between 2002 and 2011.3

That’s not to say that past revenue growth rates should be an investor’s only point of analysis. For one thing, Research and Markets said it expects that organic food revenue growth will slow to a 7.4% rate through 2016 as production costs remain the industry’s biggest roadblock.

Also, massive companies like McDonald’s have made much more of an inroad into global markets, where potential future growth could be a big opportunity. And let’s not forget the 3.2% dividend yield of McDonald’s shares, which was likely no small part of its stock rising more than 17% through the first three-and-a-half months of the year while investors were increasingly embracing big dividend stocks.

For now, however, the term “organic growth” can be taken quite literally.

1Julie Jargon, “McDonald’s Earnings: Fast-Food Chain Sees Challenging Year,” WSJ.com, July 22, 2013.

2Ben Rooney, “McDonald’s: Investors not loving it,” CNNMoney.com, July 22, 2013, http://buzz.money.cnn.com/2013/07/22/mcdonalds-earnings-stock/?source=yahoo_quote.

3Rich Duprey, “Sprouts Farmers Market IPO to be Next Organic Opportunity,” The Motley Fool, July 22, 2013, http://www.fool.com/investing/general/2013/07/22/sprouts-farmers-market-ipo-to-be-next-organic-oppo.aspx.