Jim Cramer has lately received a lot of questions from investors who are wondering if they should buy stocks like Whole Foods and Sprouts Market. His answer? Welcome to the most overcrowded group of stocks out there.
The "Mad Money" host understands why they seem appealing, too. Whole Foods has a price tag of $41 and is down more than 18 percent for the year. Even Sprouts Market is looking pretty delicious for a buy, as it is down 10 percent year-to-date.
But it was Cramer's interview with Target CEO Brian Cornell on Monday that woke him up to the dangers of bottom feeding in the natural and organic food space. Cornell shared that he wants Target to grow bigger into "wellness" and confirmed that the company is just getting started on its expansion of the food aisle.
"I say welcome to the most crowded area of the supermarkets and big-box business these days, because it's a double-digit-growth category at a moment when supermarkets have zero to low single-digit growth in their center of store merchandise," Cramer said.
Sure, natural and organic sales are surging this year, as some have estimated the market at almost $40 billion. Some may think that this means there is room for everyone. Cramer does not agree.
The big players are getting into the natural and organic food space, and they are determined to win. Companies like Costco are now neck and neck with Whole Foods, which is a big change considering the fact that the Costco CEO admitted to Cramer a few years ago that he thought the whole health food thing was just a fad that would go away.
Now even Wal-Mart has recognized the importance of this movement. Cramer was shocked by this, considering that a store clerk sent him to the Rice Krispy-treats aisle when he asked for rice cakes just five years ago.
Target's Cornell knows that he cannot afford to lose this battle, as this strategy has become integral to his determination to capture the millennial families. What does all this competition in the organic and natural food space mean? A price war.
But the big problem that Cramer has with this overcrowded group is that when there is a price war, it will hurt the margins of all stocks involved. A big company like a Costco or a Wal-Mart can afford the hit to margins, but the bottom-feeders cannot.
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"So I come out and say, be careful here with bottom-fishing in the narrowly focused natural and organic supermarket stocks," Cramer added. (Tweet This)
When you wander into the natural and organic aisle at the grocery store, you are wandering into a battlefield. The big dogs like Target are determined to win, and Cramer is not about to doubt that they will.
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