This is a growing sector and has been growing faster than the whole retail industry. While the possible continuingly increasing demand, the increasing competition as measured by increased stores or other type of sales channels temporarily slowed down the organic sales growth for existing companies in 2016/17 and thus put much pressure on price and thus margins of companies in this sector. However, sales may be picking up from the newly opened stores.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demand for natural and organic food& grocery has been growing faster in the past several years before 2016 compared with the whole retail industry as indicated by comparable stores sales of companies in this sector.
• Companies have experienced slowing down comparable store sales, increased pressure on price, shrinking margins, and decreasing incomes and cash flows in 2016/17 probably as a result of increasing competition.
• Accelerating the pace of opening new stores has been taken by some of companies as a way to deal with slowing down existing stores sales.
• Sales seem to be picking up as indicated by companies’ comparable sales in 2018 as sales from newly opened stores in 2016/17 picked up.

 

Causes behind the trend

• Many factors such as demographic changes and economy development are determining basic demand for grocery and food products. However, some factors such as consumers’ increasing preference for more natural and organic food resulted from changes in life style and awareness of healthy eating play an important role in the boom in this sector.
• The decrease in comparable store sales of companies in 2017 is mainly due to intensive competition as shown by the increasing availability for natural and organic grocery and food, which dilute the visits for existing stores.
• At the same time, market cultivation of new products or lifestyle may need time and may reach bottle neck in some certain regions or consumers’ segments. Organic grocery market’s development may be in some stage where existing markets have been reaching its bottle neck and new regions are being developed.
• Increasing competition caused companies not only to be able to pass on the increased inventory costs to consumers but also to have to frequently promote their products by discount. And this is the major reason that companies’ margin has been shrinking. In addition, the quick increase in new stores also dilutes the margin of existing stores.

 

Industry Future

• Gradually increasing population and accelerated recovery of economy form a foundation to support the growth in grocery & food retail.
• All fundamental drivers behind the growth in this sector will continue to exist and even be stronger. We will continue to see the fast growth in demand for natural and organic food. Therefore, if a temporary pause of growth in this sector was partially responsible for the slowing down organic sales of existing companies in this sector, we may be able to see the improved sales and profitability for those companies in trouble currently as the sector growth come back to its normal pace even though competition still continue to be intensive.
• There are many uncertainties involved in acquisition activities in this sector while it may be thought of to be going to intensify competition in the market and further squeeze companies’ profitability.

General Financial Performance of Companies In the Sector

There is no doubt that this is a sector that has been growing fast. And there are many favorable factors behind it driving its growth in demand for natural and organic food. However, in terms of existing companies in this sector, what we see is that comparable store sales/number of transactions had decreased in 2016/17, a radical change considering that they are used to have 5-10% growth rate three years ago. It is certainly a result of the increased competition, particularly increased stores or avail abilities for natural and organic food attracted by high margin of this sector. However, it may also be because the growth in demand has failed to match the increase in availability temporarily and regionally since the demand as indicated by comparable sales picked up in 2018 as newly opened stores in 2016/17 are matured gradually.

While this mismatch may be only temporary, which means that demand is very likely to catch up fast in the future, companies in this sector are currently experiencing shrinking sales. As sales decreased, it added more pressure on price, which is considered as the main reason that caused companies’ margins shrink. At the same time, to capitalize growth trend of organic food and deal with competition, some of companies accelerated its opening of new stores resulting in even deeper deleveraging of their existing stores’ margin. However, as sales caught up from its newly opened stores, we are seeing that the margin is rebounding back.

The typical decrease in comparable store sales among companies is between 1-2.5% in fiscal 2017.  The typical gross margin is currently down to 27% and operating margin is down to 2%.

According our analysis, companies’ enterprise price/adjusted EBI is around 39 with interest/EBI ratio of 10%. 

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