BizAnalyst Network: China Scores Win for Capitalism

Thursday, October 27, 2005

China Scores Win for Capitalism

* The oil floodgates are now open for China
* Organic profits, aisle 12

"We were going broke. We were whining about how tough things were, then
we found out about the huge market for antibiotic- and hormone-free
beef."

-- Connie Hatfield, Oregon Country Beef

_____

Dear Wealth Daily Reader,

Before we get into the multi-billion dollar market of organic food,
there's some breaking news in the world of energy. Specifically, China
and Canada.

I've asked our resident expert on China, Sam Hopkins, to decipher the
news and to give us some thoughts.

Take it away Sam...

China Scores Win for Capitalism!

Today, the Chinese petroleum industry achieved a hefty victory in its
drive to procure enough oil to keep China burgeoning for decades to
come. Chinese company CNPC has taken over Canadian-based Kazakh oil firm
PetroKazakhstan (PKZ.TO) with a US $4.18 billion buyout.

Canadian courts had been deliberating on the sale of PetroKazakhstan,
whose offices are in Calgary. The legal sticking point had been a
Russian-Kazakh joint venture called Turgai Petroleum, which Russian firm
LUKOIL insisted should block the CNPC acquisition.

Kazakhstan lies directly west of China and south of Russia and holds the
Caspian region's largest recoverable oil reserves, touching off recent
bidding wars between its neighbors. Earlier this year, LUKOIL overpaid
for Toronto-listed Kazakh producer Nelson Resources, according to Alfa
Bank. Clearly, Kazakh oil is at a premium.

The PetroKazakhstan takeover is the latest, but certainly not last, in a
series of Chinese moves to pump oil from as many directions as possible,
which will keep its energy flow constant in case of instability in one
adjacent region or another. For its part, Kazakhstan will benefit by
purchasing 1/3 of PetroKazakhstan, once it is securely in Chinese hands.

In recent years, the Kazakh government has accused PetroKazakhstan of
monopolizing the local petrochemical market, proving that just because a
company bears a country's name, the government is not necessarily a fan
of said company.

Through the CNPC deal, Kazakhstan will also gain access to its country's
most modern refinery, which is operated by PetroKazakhstan. The
1,860-mile Kazakhstan-China pipeline is set to be completed in December
of this year.

Why is this important?

First, when the American government blocked the sale of Unocal to the
Chinese, many thought this sounded the death knell to the Chinese
economy.

But here, I always gave my readers the "basketball" analogy: If a 6-foot
guard is trying to score a bucket facing a center who is 7'4, it's best
not to jump over him. Rather, it's easier to dribble around the taller
opponent.

This is exactly what China is doing: Going around the US looking to snap
up oil assets.

Second, Canada's oil assets are now open season for the highest bidder.
And the highest bidder no longer speaks English, but Mandarin.

-Sam Hopkins
Editor, Waking Dragon

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Organic profits, aisle 12

About 10 blocks from the Wealth Daily office, beyond the comfort and
safety of the mid-town business district with all its power-washed,
pre-war architecture and rehabilitated mansions, sits another side of
Baltimore that you only see in reruns of Homicide or in magazines that
identify 'Charm City' as one of the top three contenders for "most
dangerous city in America."

Typically this is an area often avoided by most law-abiding and
clear-headed Baltimoreans.

Often looking like neo-ghost towns reserved for sci-fi movie sets, these
neighborhoods are pretty desolate. It's a wonder how the few retail
outlets operating in this place even stay in business.

There is, of course, a wide selection of liquor stores, corner bars and
check cashing kiosks. Not to mention the predictable Burger King and
random pissed-off Muslim selling bean pies and copies of the Final Call
newspaper on the corner.

And there's also the one, warehouse-like grocery store with bullet-proof
glass and shell casings in the parking lot.

Yeah, it's that bad!

So last weekend, on my way to a wedding, I had to drive through this
particular area to get to the highway. Unfortunately, my normal highway
route was closed for construction.

As I was running late, knowing I didn't have time to search for a
convenience store, I decided to (against my better judgment) run into
the ominous ghetto grocery store for a bottle of water and a pack of
gum.

Now this isn't the first time I've been in a place like this.

Years ago, right after college, I lived pretty close to this
neighborhood. And while I didn't do my regular shopping at this
particular grocery store, I had been in there once or twice for
batteries or film.

It brought back some memories, as very little had changed.

The produce was still withered and old, the meat department was still
offering up ground beef beyond its expiration date and the evidence of
rodent infestation could still be found in the form of mouse droppings
underneath the bread racks.

Yes, not much had changed here at all!

Except for one thing.

And I knew from the moment it caught my attention, I'd have to share
with you today.

In the dairy case, next to the gallons of whole milk and generic coffee
creamer, were two rows of organic soy milk.

And in the same case - Stonyfield organic yogurt.

Now crossover into conventional supermarkets is nothing new for the
organic and natural food industry.

In fact, we've talked about it a number of times in our Green Chip
Stocks, Daily Updates.

But to find organic soy milk and organic yogurt in a place like this -
well, it was certainly a shock.

Listen, I'm not saying that we should expect to see inner-city gang
members drinking quarts of chocolate soy milk from paper bags anytime
soon. But to even stock such items in this part of town is certainly
proof that conventional crossover could be even more staggering than we
thought.

Conventional crossover in organics proves profitable

Over the last few years conventional supermarket chains have been
aggressively seeking organic and natural food alternatives for their
customers.

After watching shares of Whole Foods Markets (WFMI:Nasdaq) go through
the roof (as well as watching Whole Foods Markets crush the likes of
Safeway and Kroger in sales and revenue growth), conventional
supermarket CEOs could no longer ignore the potential of organic and
natural food demand.

Today, you'd be hard-pressed to find one conventional supermarket in the
U.S. or Canada that's not pushing some kind of organic or natural food
product.

Take a look at Giant Food, Inc., for instance.

Giant Food, Inc. is the largest supermarket chain in Maryland and D.C.

Last year, Giant Food launched its own line of natural and organic foods
called, Nature's Promise, which included organic and natural milk,
butter, cookies, frozen vegetables and cereal.

Now before this particular product line even came into existence, Giant
had already been selling outside organic and natural food brands, like
Amy's Organics and Silk organic soy products.

But with its own, fully-developed brand of organic and natural food,
Giant can now cut the price premiums often attached to these products
while still maintaining higher profit margins.

Back in 2003, Kroger Co. and Wegmans Food Markets, Inc. also introduced
their own private-label organics.

Conventional Cohabitation

Another way conventional food retailers are getting in on organics is
through cohabitation projects with well-established organic and natural
food retail chains.

Last May, Wild Oats (OATS:Nasdaq), the number two organic and natural
food retail competitor in the U.S. opened its first of five
'store-within-a-store' boutiques with leading northeastern supermarket
chain, Stop & Shop.

The boutique is a state-of-the-art holistic health center where
customers can choose from a variety of vitamins and supplements,
homeopathic remedies and natural and organic body care products.

The deal has worked out quite well for both chains.

Stop & Shop is able to provide organic and natural health and body care
products to its customers without the added cost of developing their own
brands, while Wild Oats is able to bring their natural and organic
products straight to conventional consumers who would otherwise not shop
at an organic and natural foods store.

This introduction to the organic and naturals market has also provided
an excellent gateway to other natural and organic products as well -
such as outside organic and natural brands like Hain Celestial
(HAIN:Nasdsaq) and Cascadian Farms.

Stop & Shop operates 365 stores throughout Massachusetts, Connecticut,
Rhode Island, New Hampshire, New York and New Jersey.

If you can't beat 'em, copy 'em

Last week, Supervalu, Inc. (SVU:NYSE), operating food retail chains like
Cub Foods, Sav-A-Lot and Shoppers Food & Pharmacy, announced its plans
to enter the organic and natural foods market with the launch of its own
Sunflower Market - a value-priced organic foods retail outlet.

The new stores will stock between 8,000 and 12,000 store keeping units
(SKUs) of natural and organic products. And more than 100 will be under
the newly launched, "Nature's Best" brand; a SuperValu private label.

The "Nature's Best" product line will also be made available to
consumers shopping at almost 2,200 other independent retailers.

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Conventional supermarkets vs. organic retailers

With all the momentum that has pushed conventional supermarkets to offer
their own versions of organic and natural products, is it possible that
the few, well-established organic and natural food retailers could begin
to lose market share?

Not likely, say industry experts.

The consensus seems to be that organic and natural product offerings
from conventional supermarkets are accomplishing two goals at the
moment:

1.) They're providing potential crossover solutions for
non-organic food consumers.

2.) They're providing a convenient alternative for those organic
and natural food consumers who may only need one or two items at a time.
As there are clearly less organic and natural food retail outlets
compared to conventional supermarkets, it's easier for these consumers
to go to the closest store to pick up the basics - organic eggs, milk,
oil, etc.

This is certainly great news for organic and natural food manufacturers
that have already penetrated the conventional food retail markets.

Of course, don't expect conventional supermarkets to put the few
profitable organic and natural food retailers out business either.

For many LOHAS consumers, the experience of shopping in a strictly
organic and natural food store is half the appeal.

That's what got them there in the first place!

LOHAS consumers are extremely loyal. And these consumers will continue
to do their shopping at the retail outlets that have provided them with
their organics for the last ten years.

Your typical organic food consumer doesn't even want to see non-organic
or non-natural food.much less shop somewhere that offers the stuff.

Many of these established organic and natural food stores also offer
organic "high-end" prepared foods product lines that most conventional
supermarkets could never match in regards to both quality and quantity.

There's no denying that prepared foods from conventional supermarkets
are much cheaper. But in the LOHAS world, where price is rarely a
concern, there is zero appeal to non-organic prepared foods - despite
the deep discounts in price.

Mark my words, organic and natural food markets will continue to
maintain profitability and exceed sales and revenue growth well into the
next decade.

It took them thirty years to get to this point. Conventional
supermarkets are not going to be able to duplicate the same results with
their own organic brands in five years.

And investors know that even as conventional supermarkets offer up more
and more organic and natural food choices, their stock prices will not
increase at the same record-breaking rate as the younger and smaller
organic and natural food markets.

In fact, the crossover potential to organic and natural foods, thanks to
conventional supermarkets, will only continue to introduce new consumers
to the full-scale organic and natural food retailers.

Most conventional supermarkets will never crossover completely. So for
those who seek to further immerse themselves into organic and natural
food diets, their only alternative is the closest Organic market.

And let's face it, how many conventional supermarket chains are trading
below $4.00 per share too?

Right now there are three major organic and natural food retail chains
in North America.

One, Whole Foods Markets, has already validated the potential of these
outfits as its delivered gains of nearly 600% in less than five years.

The other two are younger, but are following in the footsteps of Whole
Foods - mimicking its growth strategies and profiting year after year
for the last five years.

You've heard me mention one of these before. A Canadian organic and
natural food retailer that has been nothing short of amazing - putting
some Green Chip investors up 254% since the beginning of the year.

And take a look at the chart. This company has been maintaining its
gains for more than a month after its stock price spiked.not once, but
twice.

Instead of the predictable adjustment that often occurs after such a
spike in stock price, our Canadian organic retailer is sustaining, and
gaining even more momentum.

This particular company will be releasing its annual numbers on Friday.
And I already know they're going to announce a 125% growth in sales
since last year.

I also know that their rate of new store acquisitions over the course of
the next two years is going to further solidify their position as the
dominant organic and natural food retail chain in Canada.

Just as Whole Foods Markets did in the U.S.

And I'm sure you're well-aware of the profit-taking on that one!

Until next time.

Jeff Siegel
Editor, Green Chip Stocks
http://www.greenchipstocks.com/dedicated/organic3.html