22
MAY
2015

In the Headlines-May 22nd, 2015

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In The Headlines

Organic Food Fight: Walmart Takes a Bite Out of Whole Foods Market

Over much of the past 30 years, Whole Foods Market co-founder John Mackey enjoyed wild success selling organic groceries to the masses. That brought media buzz, fast growth, and high profit margins to his grocery chain. It has also attracted imitators. Now, with the likes of Kroger and Wal-Mart Stores muscling into everything from organic milk to sustainably raised salmon, Mackey finds himself fending off challenges from bigger rivals intent on eating Whole Foods’ lunch.

Just how well the competition is doing became clear on May 6 when Whole Foods reported that sales growth at stores open more than 57 weeks had slowed to 3.6% in the most recent quarter, well off the 5.3% gain forecast by analysts. Mackey also announced a plan to revive growth by starting a lower-priced chain aimed at millennials next year. The disappointing growth and seeming change in strategy spooked investors, who trimmed almost 10% from Whole Foods’ stock price on the day after the news. “Business has really slowed down compared to what it used to be,” says Brian Yarbrough, an analyst at Edward Jones. “I fear they’re being a little complacent about what’s going on in the competitive environment.”

So far, Whole Foods has said only that the company’s as-yet-unnamed chain for millennials will be smaller and more focused on value, convenience, and technology than traditional Whole Foods markets. They will also be cheaper to open and build, Mackey said. With the new stores, Whole Foods is targeting younger consumers who may not be as dazzled by its organic offerings, particularly when many of those items are increasingly available at their neighborhood grocery stores, says Virginia Morris, vice president for global consumer strategy at retailing consultant Daymon Worldwide. “It’s not unique to millennials—they’ve grown up with it,” she says. “There’s no cachet.”

The grocer was founded in 1978 in Austin, Texas, by Mackey and a former girlfriend. It expanded quickly in the 2000s—there were fewer than 200 Whole Foods stores in 2006, compared with more than 400 now—as it helped introduce items such as kale and quinoa to mainstream Americans. In its glory days, from 2000 to 2008, Whole Foods’ average annual sales growth was 20.4%. Stores opened quickly, as the company snatched up cheap real estate that defunct retailers such as Circuit City had abandoned. Those gains slowed to 9.9% in the fiscal year ended Sept. 28, 2014, the smallest annual increase since 2009. Kroger and Fresh Market, which sells high-end produce, both logged better sales growth in their latest fiscal years. To hold on to shoppers, Whole Foods since 2014 has focused on lowering prices, especially on fresh fruits and vegetables. It also started running its first national ads, dubbing its campaign “Values matter.” But it has not pulled back on the fancy amenities that have given it an image to match its prices. A new store in Boston, for instance, has a spa; many others offer valet parking.

Sales of organic foods in the U.S. jumped 11.3%, to $39.1 billion, last year, according to the Organic Trade Association. The problem for Whole Foods is that an increasing share of those sales is going to mainstream players in the U.S. grocery store business, which logged $1.07 trillion in sales last year, according to Euromonitor International. Kroger’s natural and organic Simple Truth line has become a $1 billion-a-year brand. Costco Wholesale sells organic and grass-fed beef and organic coconut oil under its Kirkland Signature brand; its total organic sales were close to $3 billion last year. Even Wal-Mart is hawking everything from organic chia seeds to its Wild Oats Marketplace organic marinara sauce. There are about 3,800 Wal-Mart stores in the U.S. that have at least 30 Wild Oats items, the company says, plus about 2,300 Walmarts have separate organic produce sections. “You’ve got a number of competitors out in the marketplace that are growing very rapidly—Kroger, Sprouts Farmers Market, Trader Joe’s, Fresh Market,” says Bruce Cohen, senior partner at consulting firm Kurt Salmon. “It’s caused Whole Foods to pause.” Whole Foods concedes that rivals are encroaching on its sales gains. “Everybody is jumping kind of on the natural and organic food bandwagon, and that’s really frankly due to our success,” Mackey said on a May 6 analyst call. He and co-Chief Executive Officer Walter Robb declined to be interviewed for this story.

Developing a grocer specifically for millennials could be a gamble. Americans under the age of 35 prefer natural and organic food, which often costs more, and seek more transparency on labels, according to recent Goldman Sachs research. Yet, while millennials tend to marry later and put off having kids, once they settle down and form families, their shopping habits are not that unusual, says Sucharita Mulpuru, a Forrester Research retail analyst. “It’s all delayed, but once those things happen, they spend just like their parents.” That means the biggest determinants of where they will shop will be value, convenience, and selection.

Even if Mackey is right about a need for stores tailored to a younger demographic, his new tack could present problems, says Edward Jones’s Yarbrough. The smaller locations will likely have lower profit margins and may cannibalize customers from Whole Foods’ namesake chain, he says. Some analysts think Whole Foods may be taking aim at Trader Joe’s with its new concept. That 440-store chain appeals to young consumers who have broad, global tastes and like to hunt for items they might not find elsewhere, Daymon’s Morris says. But Trader Joe’s benefits from a perception that its products are cheap-chic, while Whole Foods continues to grapple with its “Whole Paycheck” image. Says Morris: “That’s something they really haven’t been able to shake.”


Real Estate Data Reflect a New Reality in the Housing Market

Homes are selling at a faster clip this spring, but something still is not quite right in housing. Thanks to the epic real estate crash of the last decade, market watchers and reporters now have a whole cottage industry of data providers to track every move in home sales and mortgage financing. However, looking at all those numbers now, something does not add up to a “normal” housing market.

Mortgage rates are rising, up in just the past two weeks from an average 3.6% on the 30-year fixed to just over 4%. In the first three months of the year, rates were lower, prompting a refinance “boomlet.” Lower rates, however, did not translate into more mortgages to purchase a home. In fact, purchase loan originations were down 25% in the first quarter from the previous quarter and up only 1% from a year ago, according to new data from RealtyTrac. “The purchase loan market remained largely missing in action despite tepid growth from a year ago. The prime buying season still remains ahead, providing some hope that first time homebuyers and other traditional buyers relying on traditional financing will come out of the woodwork in greater numbers in the coming months,” said RealtyTrac Vice President Daren Blomquist.

But in analyzing the numbers, Blomquist admitted that FHA insured loans, a favorite among first-time buyers due to their low minimum down payments, saw weak volume. Granted the first quarter was still winter, but the comparison to a year ago points to weakness, especially given that the economy has supposedly improved in the past year. RealtyTrac also recorded the highest volume of non-owner occupant buyers (largely investors) in the first quarter since 2011. Investors are still in the game, and some are now starting to use mortgages again for their purchases, though that share is still small. “Investor activity continues to represent a disproportionately high share of all home sales activity in this housing recovery, but unlike the past three years the large institutional investors are backing out while the smaller, midtier and mom-and-pop investors are remaining active,” said Blomquist.

That dovetails with a report from CoreLogic showing that all cash sales are still inordinately high. At nearly 38% of all sales, cash is still king. That is down from 46.5% at the worst of the housing crash in 2011, but it is still significantly higher than the normal 25% share. Some states, like New York, Alabama, Florida and Indiana are seeing around half of all sales in cash. Cash may play a bigger role in the coming months, as weak inventory leads to more bidding wars. All-cash buyers have a significant advantage in the competition, as sellers would rather not have to rely on borrower buyers, especially as home prices rise more dramatically, and homes do not get appraised at deal values.

Home prices have been gaining steam this spring, rising at a far faster pace than income and employment growth. April was the third-straight month that prices grew above 6%, according to Redfin, a real estate brokerage. Even with three-straight months of increased listings—about 10% more each month, according to Redfin—supply is not keeping up with demand, not even close. The numbers also do not speak well of credit availability. Forty-seven percent of real estate industry experts polled by Zillow said lending is still too restrictive. Tight credit, combined with higher home prices, continue to sideline first-time buyers, at least in larger metropolitan markets. Good news for the rental market, but not for home ownership. “Renters face several challenges,” said Zillow Chief Economist Stan Humphries. “They need enough money on hand to start to buy homes. Even as mortgage credit becomes easier to obtain and home prices level off, renters are confronted with slow income growth and high rental rates. In addition, they face sometimes fierce competition for very few available homes in the market.”

Still another survey, of demand, finds that since the end of the recession in 2009, the housing market’s capacity to support sales activity has nearly doubled. That is, people’s ability to purchase a home. This points again to the supply problem at the heart of housing today. “The fact that actual existing home sales volumes were lower than market capacity, yet house prices are increasing, indicates that the market is experiencing supply constraints more than demand constraints,” said Mark Fleming, chief economist at First American. Put simply, the housing market is underperforming because both homebuilders and home sellers are underperforming. Housing starts are still well below even historical norms, despite pent-up demand, and sellers, despite gains in home equity, are still not willing to list at current prices.

“Existing-homes sales are currently below expectations because it’s hard to be a buyer if at first you can’t be a seller,” said Fleming. “Without the constraint of insufficient equity, many more homeowners would be willing to sell their homes, especially given the continued low interest rate environment and increased certainty in labor markets.” The story these data tell is important because the home ownership rate, a cornerstone of the American dream, now stands at the lowest level in 25 years, and it continues to drop each quarter it is measured.

Citations
1. http://bloom.bg/1HfsBpZ – BusinessWeek
2. http://www.cnbc.com/id/102682571 – CNBC


The Good News Is . . .

• U.S. import prices fell for a tenth straight month in April, likely reflecting the impact of a strong dollar, a sign of benign inflation pressures that could encourage the Federal Reserve to delay raising interest rates. The Labor Department said import prices fell 0.3% last month after slipping 0.2% in March. In the 12 months through April prices fell 10.7%. The dollar, which has gained about 11% against the currencies of the United States’ main trading partners since June, and lower crude oil prices are keeping a lid on price pressures.

• Cigna Corp., a leading health insurance provider, reported earnings of $1.96 per share, an increase of 7.1% over year-ago earnings of $1.83. The firm’s earnings topped the consensus estimate of analysts by $0.12. The company reported revenues of $9.5 billion, an increase of 11.4%. Management attributed the company’s results to growth in premiums and fees in its Global Health Care unit.

• The conglomerate Danaher Corporation said it would acquire the Pall Corporation, a water filtration systems company, for $13.6 billion in cash ($127.20 per share) and split itself into two publicly traded companies. Pall, based in Port Washington, N.Y., makes systems that remove contaminants or separate substances from a variety of solids, liquids, and gasses. It will be part of a science and technology company that includes Danaher’s diagnostics, dental and water quality businesses. This company, with roughly $16.5 billion in revenue including Pall’s, will keep the Danaher name. Danaher plans to split off its industrial businesses, which include its test and measurement and automation businesses, into a separate company, with $6 billion in revenue.

Citations
1. http://1.usa.gov/1g3MHd9 – Bureau of Labor Statistics​
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1FrV4LH – Cigna Corp.
4. http://nyti.ms/1Ps9uQU – NY Times Dealbook


Planning Tips

Tips for Purchasing a Home Security System

It is one of your worst fears: a window breaking in the middle of the night, a door unlocking, and the steady thud of footsteps wandering your house. Few experiences are more terrifying or invasive than a home break-in. While no alarm system can prevent break-ins, they can act as a deterrent, provide home owners with an immediate response and alert the authorities. There are many choices to evaluate when you are considering the purchase of a home security system. Below are some tips to help you these systems.

Take a personal home security audit – Consider your family’s security concerns and issues and make a list of reasons for purchasing a home security system. Prepare a list of the security essentials that you absolutely need. Be sure to take into consideration all doors, windows, garage, locks and who has keys, square footage inside and outside (the perimeter) as well as special medical and personal needs, neighbors, lighting around your property and in your neighborhood. Research the number and types of crime in your neighborhood by contacting your local police department.

Look for an immediate response – If you are buying a home security system that does not offer an immediate response, you are wasting your money. You need a home security team that is going to be available days, nights, weekends and holidays, 24/7. Remember, home security is only as good as its response to the threat. An immediate response means more than alerting the authorities–it means that if you are out of the house, an alert is sent to your smart phone warning you of the problem.

Read customer reviews – It is the customers that count. Look online for customer reviews and find out if they are happy with their service. When they call the customer service team, do they feel their needs are being met? If there is an attempted break-in or other threat, how did their home security system help?

Look for more than a basic alarm – When you are looking at home security systems, you are looking for more than protection from burglars. You want a system that protects you from fires, carbon monoxide, and warns you about tornadoes or other severe storms. Great home security packages offer wireless technology capable of alerting you to any changes in your home. Even if you are at the office and the smoke detector goes off–you will know immediately thanks to an alert sent directly to your smart phone. A quality home security system protects you from everything–not just people looking to steal your laptop.

What features will you use? – When you are buying a home security system, it is easy to get overwhelmed by all the options. Hundreds of options may make a system look better than it is. Remember, it all comes down to you. Consider every option, but cross any you cannot see yourself using off your list. The best home security systems will let you choose which type of alerts you want to receive. One of the first decisions you will need to make is whether to use a wired or wireless system. Other typical options to choose from include:

• Type of sensors—e.g., magnetic switches, heat and motion sensors, and / or acoustic discriminators.
• Type of audio and visual alerts
• Panic button
• Video camera over home entrances
• Optional fire protection

Citations
1. http://bit.ly/1qMJYrf – Security Today
2. http://bit.ly/1KYVnM5 – Vivant
3. http://bit.ly/1HlZ660 – WikiHow.com
4. http://bit.ly/1Fiqjpv – Consumer Reports
5. http://huff.to/1FiqkJX – Huffington Post

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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