This morning WMT announced it plans to beef up its non-fresh organic presence and, in the process, undercut its smaller brand-name organic competition by at least 25%.
We think WMT’s strategy to carry the Wild Oats label (owned by Yucaipa Companies, a private investment firm) is properly aligned with the surging consumer demand for organic products.
By offering organics at a lower price, the company stands to reach two distinctly different audiences:
- Traditional consumers looking to trade up to affordable organics
- Existing organic consumers looking for a discount to their current spend
Given that WMT is the largest retailer in the U.S., the move stands to create winners and loser across both organic and non-organic markets. On the company side, we’d expect severe shelf space competition for the current largest players in the WMT’s pantry sections, which including KRFT and SJM (26% of revenues for each company come from WMT).
This push also has implications for the current organic players including, but not limited to, BNNY, WWAV, HAIN and POST, as Walmart stands to offer overlapping products at cheaper prices. Considering the scarce supply of organic growers and the recent spike in organic commodity prices, smaller premium players may be hard pressed to lower prices. If true, the spread between premium organic products and conventional organic products could prove detrimental to current players in the organic market as customers begin to trade down to more affordable products.
We expect these pressures to impact BNNY, which we currently view as a best idea short. To get a better understanding of this short thesis, we encourage you to listen to our podcast and review our presentation.
WMT has stated its intentions to launch Wild Oats in its pantry section in half of its 4,100 stores in the coming months, before rolling it out system-wide. According to Walmart’s internal company research, 91% of customers said they would buy “affordable” organic products if they were available.
We think today’s sell-off from current organic players was a direct result of WMT’s announcement, as the potential loss of shelf-space or customers has materialized as a serious threat for a significant number of companies.