What’s the Catch with Cramer’s Favorite Stock? WFM, SWY & WMT

Mad Money’s Cramer has proclaimed organic supermarket stock Whole Foods Market (NASDAQ: WFM) as his “fabulous stock for 2013,” but investors should keep in mind that other supermarket players like Safeway (NYSE: SWY) and Wal-Mart Stores (NYSE: WMT) are also trying to bump up their fresh, natural or organic offerings and they are not the only competition WFM faces. Right now, Whole Foods Market has between 300 to 400 stores, but Cramer noted that 1,000 locations isn't out of the question while Co-CEO Walter Robb has gone on Mad Money to say that growth will be a big theme for 2013. Cramer also pointed out that the last time Whole Foods Market reported earnings, it reported a 23% revenue increase to $2.35 billion, earnings excluding items rose from 42 cents to 60 cents and there was a special $2 dividend.

However, Whole Foods Market’s share price has eased off recently after hitting the $100 level in October. On Monday, Whole Foods Market closed at $91 a share, but the stock is still up 30.8% since the start of the year, up 113.7% over the past five years and up 584.3% over the past ten years.

Cramer isn’t worried because he believes Whole Foods Market is a trendsetter, but here are a couple of reasons investors might want to be cautious for the long-term:

• The Big Boys: Wal-Mart Stores and Safeway. The competition in the form of Wal-Mart Stores and Safeway has taken notice of Whole Foods Market’s success. Specifically, Wal-Mart Stores is trying to improve the nutritional value of the food it sells plus it wants to double sales of fresh produce from local farms in US stores by the end of 2015. Wal-Mart Stores is also spending more than $1 billion globally to move fresh food to its stores faster. In addition, Safeway is revamping its "Lifestyle" format stores with the new format giving more space to organic selections and fresh produce. It should be noted that Wal-Mart Stores has around 3,982 US stores and 620 Sam’s Club (not all Wal-Mart locations have supermarket items) while Safeway has 1,678 stores across the US and Canada. That’s a much bigger footprint than Whole Foods Market has right now and obviously a major push into natural and organic foods by either will have an impact on margins and the bottom line.
• Smaller Competitors. When you think about competitors to Whole Foods Market in the natural or organic space, Trader Joe’s comes to mind, but they are hardly the only alternative. CNBC recently mentioned Take Good Eggs Inc. which launched a website this summer that allows customers to by food directly from farmers and vendors in San Francisco who then deliver their products at neighborhood hangouts. Take Good Eggs Inc. hopes to expand to the rest of the Bay Area plus other major cities like Detroit, Los Angeles, Brooklyn and Portland. In addition and in Beaufort, SC, the SILO-Beaufort market offers a website where local farmers can list what they have to sell and registered buyers can place orders online for pickup on Friday evenings. And while sales are forecasted to hit just $250,000 for mid-2012 to mid-2013, that’s $250,000 not being spent at any local Whole Foods Market.
• Local Farmers’ Markets. The CNBC article also noted there are now 7,100 farmers’ markets operating in the USA at the end of last year for a 20% increase over the previous year while another CNBC article from last year pointed out that there were only 1,755 farmers markets in 1994. The increase has come due to a rise in demand for fresh food, but it has not exactly meant that small farmers are getting rich. The average amount spent by a consumer at a farmers’ markets market is just $17.50 with vendors needing at least $600 in sales to make it viable and averaging just $1,070 a month. In other words, an individual farmer at a farmers’ market is not a threat to Whole Foods Market, but an entire farmers’ market is a competitor.

My bet is that big supermarket chains like Safeway and Wal-Mart Stores will start to take a bite out of Whole Foods Market’s natural and organic food margins and sales while smaller competitors will nibble around the edges. That would mean that the days for spectacular growth could be over for Whole Foods Market, but if they can significantly increase their store footprint to compete with Safeway, Wal-Mart Stores and other competitors, the stock could still see more upside.