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[16 comments]

Is Whole Foods up to its competition?

May 9, 2014

Wall Street is very down on Whole Foods at the moment. The natural and organics grocer saw its share price drop 18.8 percent earlier this week as investors questioned whether the chain has a strategy for dealing with increased competition in the marketplace.

Whole Foods cut its outlook for same-store sales and earnings for the third time this year even as the company reported that its comp sales were up five percent and that it was achieving what co-CEO John Mackey called "healthy market share gains."

Analysts on the company's most recent earnings calls were particularly interested in how Whole Foods was dealing with increased competition from conventional grocers as well as others in the natural and organics space.

"I'm not really hearing anything that's suggesting management is taking this situation as seriously as some investors want you to," said Ken Goldman, an analyst with J.P. Morgan, in an exchange with Mr. Mackey. "There's a lot of talk about what's going, not a lot to talk about what it takes to win the change market. I'm really just curious what are you doing differently versus a year ago other than taking your cost down which I think the market's telling you may not be enough anymore?"

Mr. Mackey said the chain has gotten more aggressive in lowering prices and was cutting expenses to protect margins.

Later, during the earnings call question and answer period, Mr. Mackey's co-CEO Walter Robb addressed how the company intends to respond to increased competition. He said that, in addition to lowering prices, Whole Foods was making investments in technology and continuing to innovate in the store and with the customer experience.

"We're increasing our square footage growth quicker than any time we have in the history of the company," said Mr. Robb. "And we are pushing hard on the digital side and the innovative side to continue to differentiate ourselves from the competitors."

FINANCIALS:     [NASDAQ:WFMI] [ ]

Discussion Questions:

Has Wall Street's response to Whole Foods been appropriate for how the chain is handling increased competition? Does Whole Foods have the right plan in place to deal with growing competition from conventional grocers as well as those in the same niche?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How optimistic are you that Whole Foods is up to the growing competition for natural and organic foods?

Comments:

Whole Foods straddles several niches including organics, non-GMO, gourmet, personal care and household and it dabbles in specific dietary preferences such as vegetarian/vegan and gluten-free, which is one of its biggest challenges as competitors old and new attack these segments individually. More than anything, Whole Foods is dealing with the reality that many of the niches it boldly pursued are now mainstream, in some cases, including customer service. Commoditization always drives a race to the bottom on price.

Whole Foods also suffers from a bad case of store-centricity (a condition that has also hobbled Target, Best Buy and others). I'm concerned that it doesn't appear to have an e-commerce and home delivery plan at this point. Why did this pioneer sit back and let others go first?

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Carol Spieckerman, President, newmarketbuilders

If anyone thinks the economy is going in the right direction, than please disregard this comment. Whole Foods is dealing with many other similar stores who now offer the high-end products, and services for LESS money. Even though it is an amazing shopping experience, consumers are tightening up their wallets, and shopping everywhere for deals. The high income earners love Costco, and are finding tons of gluten free, and organic selections for much less, as well as Trader Joe's, and now Aldi just introduced a whole new line of gluten free with huge savings.

The days of 40% margins are now coming to an end, and it will hurt the bottom line for the high-end stores. The great service, and great products still matter, but it will have to be sold for less, or risk losing customers to other stores, who are consistently charging less for the same items. 

Even Apple, with all of their incredible marketing, is aware of the saturation of mobile phones, and is addressing the issue of value to stay ahead of the game. Online ordering of staples, including organic and gluten free has grown tremendously (Amazon), and all of us must look at how we market our products. Low prices are here to stay, so Whole Foods needs to adjust to stay on top.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

"Has Wall Street's response to Whole Foods been appropriate...?" is the question that caught my attention. Honestly now, how often has Wall Street's response ever been appropriate, focused on the future instead of the immediate, motivated by purposeful profit instead of sheer greed, built on abundance instead of scarcity, driven by courage, confidence and love instead of fear, capable of integrating the whole picture? It's all about the moment and seldom with any hint of logic.

And in Whole Foods case, sadly, we once again see the "race to the bottom" strategy of cut costs at all costs (aka cut your people, your "most valuable asset"). And while you're cutting things to your organic bone, Wall Street says, be sure to come up with new and innovative strategies to deal with competition. And who will energize and fulfill those creative strategies? Well those amazing Whole Foods employees of course. Wait...something's not right here.

Where have all the flowers gone?

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Ian Percy, President, The Ian Percy Corporation

The problem with "The Street" is in its math; it often substitutes knee-jerk math for passion. People have been predicting Whole Foods' demise since Walmart started carrying organics.

What the street has a hard time understanding is the notion of "trust." And I really do think analysts are underestimating the value of private label. If the "brand" becomes "organic" or "local," the 365 label becomes an affordable alternative within Whole Foods itself.

I think Whole Foods' customer base will grow, not shrink, and I like its prospects.

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Paula Rosenblum, Managing Partner, RSR Research

From what I see, Whole Foods is doing a lot of right things and I have no criticism of their operations. Stock price was just ahead of itself. More hype than reality. The current price is probably a better reflection of their good operations.

David Livingston, Principal, DJL Research

I knew they were in trouble when they offered the massive Groupon promotion. They could take a page from Stew Leonard's and bring more theatricality to their presentations.

Discounting doesn't bring profits in any sector.

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Bob Phibbs, President/CEO, The Retail Doctor

When I was in London this week, I saw a banner outside the Whole Foods in Piccadilly Circus advertising a Price Match Guarantee! The retailer's problem with price perception is intense and does much to undermine what otherwise is a sound proposition. While recent marketing initiatives, like price matching and around its 365 private brand, may help, I'm more eagerly awaiting the reception of its move into urban food deserts to see whether the company can extend its appeal beyond the suburban affluent.

Also, totally agree with Carol on the desperate need for an e-commerce/click & collect strategy.

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Kelly Tackett, Research Director, Planet Retail

Whole Foods has shown particularly poor and ham handed-ness as it attempts to expand within the Portland, OR market...the kind of marketing klutziness that shows problems at the core. I doubt if they'll result in an immediate problem. But clearly execution is being poorly managed. In fact, my recent post on the topic was titled "Is 'Evil Empire' Part of the Whole Foods Brand Brief?"

So how are they handling the competition? Poorly.

Doug Garnett, Founder & CEO, Atomic Direct

In a word..."overreaction." WF has proven over time that it can set the right course and STAY the course while other retailers knee jerk.

We could argue all day about speed-to-market, but when is all said and done, they do get it right!

'vgallese'

In 1970, 70% oh the food dollar was eaten at home. Now only 50% of the food dollar is eaten at home. The successful supermarkets such as Wegmans , Whole Foods, Hy-Vee, Lund's and others are seeing two positive bumps from restaurants and prepared foods. First, it gets them back in the game for 50% of the share that they were missing. Second, it brings in guests on a more frequent basis. In other words the restaurant does for the supermarket what groceries did for Target and Walmart. Spin the wheel of retailing and the Woolworth lunch counter in back.

No matter what kind of spin retailers put on their pep talks, the demand for calories is constrained by need, not dollars. Therefore competition in the food sector is never good for the operators. Whole Foods has rounded the Cape and is leaving the Blue Ocean and entering a Red Sea. Whether they successfully traverse that sea depends on their abilities.

'DrCellmor'

I doubt that Wall Street's response to Whole Foods has been appropriate, especially in view of what's going on in the industry in general. Smarter people than me have written their comments and observations above to include:

  • More than anything, Whole Foods is dealing with the reality that many of the niches it boldly pursued are now mainstream.
  • Whole Foods is dealing with many other similar stores who now offer the high-end products, and services for LESS money.
  • From what I see, Whole Foods is doing a lot of right things and I have no criticism of their operations.

What's happening to Whole Foods is not much different than what's happening to almost all their retailer brethren -- Penney's, Sears, Office Depot, Best Buy, Target, you-name-it. They're all on board ships in treacherous waters -- have to wait and see who makes it to shore the most intact and wiser for the experience.

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Naomi K. Shapiro, Market Communications Manager, Upstream Commerce

Well nobody should be surprised that competition is tightening in the natural and organic food sector. Whole Foods has had a wide open playing field for a while at the upper end of the food market; now others have learned from its success and are plucking some low-hanging (organic) fruit.

Adding a few low-priced organic items to a larger assortment, as Walmart has done with the Wild Oats brand, does not reposition a mainstream retailer very much, in my opinion. It does create some price pressure on commodity items, and Whole Foods needs to respond to that to some degree.

Wall Street can be somewhat shallow in its analysis of market evolution like this. Of course they place their bets based on expectation of future performance, and they foresee increased margin pressure.

But Whole Foods has already made some moves to keep more price conscious shoppers in the fold. Most notably, I think, is its expanding private label program under its 365 brand. Products I've tried are very good and prices are competitive.

It's the branded, packaged products that may be challenged in the organics sector. Price points tend to be visibly high. The arrival of lower priced alternatives in mainstream stores may tend to alter value perceptions for some shoppers. Whole Foods may need to leverage this going forward.

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James Tenser, Principal, VSN Strategies

My initial thought (echoing what others here have offered): "If Wall Street thinks it can run WF better, maybe it should try...look at how well Mssrs Ackman and Lambert have done."

Obviously none of us here - except perhaps industry analysts like David - know enough, or can learn enough in a few minutes to comment meaningfully on their strategy; but I see no particular reason to choose the "experts" outside the company over those within it.

'notcom'

Whole Foods' greatest strength is their store associates. And their second strength is the loyalty of their customers. Preserve both of these and they will continue to thrive.

Jon Wylie, Sr., Account Director, Stevens & Tate Marketing Advertising

I would like to see Whole Foods maintain its integrity - "dance with the one who brought you." In my opinion, they have already come down in quality on their private brands and are using ingredients that purportedly have GMO crop questionability. They are only carrying their private brands on some products with no other brand options.

I have noticed the prices on the brands that are not their private ones going up. I have felt like I am being pushed towards their private brand and I do not like that. I have been their customer for twenty years and I now am buying less with them. I buy more meat direct from coops and more of the brands I like via Amazon. In the last seven years, my spending with WFM has dropped over 20%.

I am the anomaly; it is not about the cost, it is about the quality and the principal that I do not want to be "forced" into something, and I do not want GMO.

'palestar'

Wall Street responds to the numbers analysts feel relevant to stock considerations, so using the same process/numbers across an industry results consistent analysis - a critically important process in their business, but extremely unimportant to understanding the grocery business.

Viewing most of the comments here and there, just about everyone seems focused on center-store products and strategies - a somewhat valid outlook considering percentage of total store sales. Anyone who has taken a hard look at the maturation and incredibly impressive development of WF perimeter department programs over the last 4-6 years knows that this chain remains far out in front of any potential competitors.

One problem is that WF is also a bit out in front of consumers as well. As consumer concern over their meat and fish and fresh prepared "convenience" meals grows, the fact that Trader Joe's has their own soy milk and Costco stocks gluten free cake mix won't make falling a bit short of projections that big of a deal.

'ellisd302'

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