Whole Foods, Kroger Seen Facing More Competition From Cheaper Fresh Market

Several supermarket chains, including Whole Foods (WFM) and Kroger (KR), will encounter tougher competition following Apollo Group’s (APO) acquisition of The Fresh Market (TFM), Wells Fargo predicted. Yesterday morning, Fresh Market, a supermarket chain that specializes in perishable items, agreed to be acquired by private equity firm Apollo Global for $28.50 per share.

ANALYST REACTION: Multiple media outlets have reported that Fresh Market will cut its prices following the acquisition, Wells Fargo analyst Zack Fadem stated. After these price cuts are implemented, Fresh Market will become a tougher competitor for Whole Foods, Sprouts Farmers Markets (SFM) and, to a lesser extent, Kroger, Fadem contended. The analyst says that Whole Foods could be the most susceptible to losing market share to Fresh Market over the longer term, explaining that a relatively high number of Whole Foods and Fresh Market stores are located near each other and consumers tend to believe that Whole Food’s prices are high.

WHAT’S NOTABLE: The price of Fresh Market’s stock, which is trading near the $28.50 acquisition price, implies that investors believe that another suitor for the company could emerge, wrote Fadem. Kroger’s size and scale, along with its desire to experiment with small stores focusing on fresh and prepared food, would theoretically give it reasons to pursue Fresh Market, the analyst stated. However, Kroger probably won’t bid for Fresh Market, since it’s focused on increasing the number of Kroger stores in the U.S. and investing more money in existing stores, Fadem stated. The analyst kept Outperform ratings on Sprouts and Kroger. He kept a Market Perform rating on Whole Foods.

PRICE ACTION: In morning trading, The Fresh Market was little changed at $28.35, Whole Foods slid 0.9% to $33.20, Kroger fell 1% to $38 and Sprouts edged up 0.1% to $28.10.