Whole Foods Market Expands in Canada. Is It a Good Idea?

Whole Foods Market is really gung ho on Canada as co-Chief Executive Officer Walter Robb recently talked up the company's plans to eventually increase the store count in the country from single digits to more than 30. Whole Foods has been operating in Canada for a dozen years and the planned expansion might give it a much-needed impetus to boost its international presence and be less dependent on U.S. sales. Lets dig deeper.

Photograph taken by Broken Sphere via Wikimedia Commons

What's behind the current push?At the end of September, Whole Foods had 381 stores in the United States. Outside the U.S., Whole Foods had just 18 stores -- nine each in in Canada and the United Kingdom. The company's international sales accounted for 3.3% of total revenues in FY 2014 and the mix has been in the range of 3% to 3.3% from 2010 to 2014.

Despite Whole Foods' limited overseas exposure, it is worth mentioning that international revenues for the 2010-2014 period have increased at a compounded annual growth rate (CAGR) of 14.74%, which is higher than the company's U.S. sales CAGR of 11.96% in the same time frame.This could not have gone unnoticed by management, especially now when competition is increasing in the U.S.

Whole Foods is facing challenges in its domestic market from large and small players such as Wal-Mart, The Kroger Co., Trader Joe's, and Sprouts Farmers Market. The biggest potential threat is from Wal-Mart, which is aggressively looking to gain traction in the organic food segment with the help of lower prices and higher store count. The competition has had an effect on Whole Foods, hitting its comps and revenue growth in the last few years.

Data taken from: Whole Foods, chart by author.

In such a situation, Canada looks attractive as it's not only the company's oldest international market -- Whole Foods entered the Canadian grocery market in 2002 and entered the United Kingdom two years later but it's also a good growth opportunity. A report by Packaged Facts suggests that natural and organic food and beverage sales in Canada are expected to increase at a CAGR of more than 11% from 2014 to 2019, higher than the 9.4% CAGR clocked in 2009-2013. The report says "millennials and South Asian and Chinese [ethnic] groups [are] helping to spur growth." Packaged Facts publishes marketing studies on consumer goods in the U.S.

The Canada focus seems to be part of a road map formulated by John Mackey, co-CEO of Whole Foods, in mid-2013. He had said the company was looking to open 40 stores and clock $1 billion sales in Canada.

The game plan

About six weeks ago, at the opening of Whole Foods' 10th store in Canada, Robb toldThe Wall Street Journalthat the company is looking to add another 30 or more Canadian stores.He said, "Our efforts in Canada are part of the effort to grow. We think the opportunity for fresh, healthy foods is larger now than it's ever been."

Overall, Whole Foods wants to cross the 500-store mark by 2017, and by the end of the fourth quarter of fiscal year 2014, it had 401 outlets. If the company increases by 100 stores, the Canadian expansion would form nearly 30% of that, if we assume the company adds at least 30 stores in Canada.

Whole Foods' Canadian stores had been in the Toronto and Vancouver metropolitan areas. In late November, the newest Canadian Whole Foods opened in Ottawa, and Calgary might be next in Whole Foods' radar.Canadian retail news site Retail Insider predicts that there are several locations in the country that are just right for a Whole Foods outlet -- Edmonton in Alberta, Winnipeg in Manitoba, Victoria in British Columbia, to name a few.

Investors need to bear in mind that opening such a large number of stores would require large capital outlays. But the company has a strong balance sheet and good cash-flow-generating abilities with net cash balance (cash and cash equivalents less debt) of $128 million and operating cash flow of $1.01 billion for the 2014 fiscal year. Thus, it can be reasonably inferred that Whole Foods is adequately funded to carry out its expansionary initiatives. With sales per gross square foot touching a record $990 in fiscal year 2014, the new stores should add to Whole Foods' top line going forward.

The Canada plan sounds promising as the country is a known turf for Whole Foods, demand for organic food in Canada is increasing, and there's no dearth of capital for funding the expansion. However, success will depend on the efficient implementation of the plan. A wrong move could add to Whole Foods' woes, while successful execution could open a promising growth avenue for the company and its investors.{%sfr%]

The article Whole Foods Market Expands in Canada. Is It a Good Idea? originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. ICRA Onlineand Eshna Basuhave no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.