Is Costco the new organic leader?

by Eric Schroeder
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Costo may have surpassed Whole Foods Market as the nation’s largest provider of organic foods.

ISSAQUAH, Wash. — Could there be a new leader in the organic foods market? An analyst with BMO Capital Markets seems to think so.

On May 28, Richard Galanti, executive vice president and CFO of Costco, said during a conference call with analysts that the retailer’s organic food sales have grown from about $3 billion six or nine months ago to a total that “at least has a ‘4’ in front of it now.”

“We are pretty good at getting out there and working with suppliers, both here and around the world to commit more to it (organic) whether it is raising eggs or ground beef processing or produce,” Galanti said. “And so it is going to still — it should still drive sales and drive incremental sales. I have given a couple of anecdotal examples over the last couple of years. One of note was when we introduced organic fresh ground beef, 80 percent of it was to existing members that like us but had never bought ground beef from us because they are organic ground beef buyers. So it had the benefit of being incremental, mostly incremental business to us at a little better margin at a greater savings versus our competitors because it is organic. So that will continue to be nice, but again, I put it under that category of the good news it is a lot of different things and certainly that is one of them.”

Following the release of Costco’s third-quarter financial results on May 28, Kelly Bania, an analyst with BMO Capital Markets, said the Issaquah-based retailer may have surpassed Whole Foods Market as the nation’s largest provider of organic foods.

If Costco’s organic sales are about $4 billion, it would eclipse Whole Foods’ total, which BMO Capital estimates at about $3.6 billion, Bania wrote in a research report.

Bania cited three near- and long-term advantages to Costco’s growing presence in organic foods:

• slightly higher gross margin percentage supporting a favorable mix-shift;

• supports ongoing customer traffic growth outlook (given the appeal of about 40 percent lower prices versus industry leaders); and

• supports an outlook for Costco to connect with an increasingly important consumer group — millennials, an area Bania said Costco remains underpenetrated.

“We believe that Costco’s low GM percent (12 percent ex-fuel) combined with product nimbleness and growing convenience supports an outlook for the company to remain highly relevant in a fast-changing consumer environment,” Bania wrote.

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