Has Whole Foods Dropped Its Prices Too Low?
Seeking to shed its "Whole Paycheck" reputation, Whole Foods over the last few years has been offering more discounts, brought in less-expensive products, and held prices in a bid to appeal to a broader range of consumers. But Wall Street is wondering whether Whole Foods has already lowered prices enough.
Shares of Whole Foods slid $9.40 to $87.50 last Thursday after management, in reporting first-quarter results, warned that it expects profit margins for the next three quarters to decline compared to last year. The declines were attributed to particularly tough year-ago comparisons but also to continuing investments to improve its pricing message. Better appealing to price-conscious shoppers is said to be more critical as Whole Foods enters smaller, more suburban markets.
In its 2012 annual report, Whole Foods attributed much of its success in the past few years — including grocery market share gains and 11 consecutive quarters of comp growth of 7.8 percent of better — to "visible value efforts which have positively impacted our price image."
But first quarter results indicted that those share gains may have slowed. While comps grew an impressive 7.2 percent, they were less than its range of 8.5 percent to 8.9 percent seen over the past year. Management blamed the moderation on a decline in consumer confidence and the macro environment. Top-line projections were slightly lowered for the year although EPS targets were kept the same.
Some analysts appeared to question whether the price cuts were still paying off. On the call, BMO Capital Markets’ Karen Short asked, "Given the quality of your offering, and everything that you guys have been working towards in terms of price investments, do you really need to keep investing in price?"
Pointing to increasing competition around the country, David Lannon, EVP, operations, answered, "Yeah, we’re going to keep investing in price. You say the gaps narrowed, that’s true. We would like to eliminate it while maintaining high quality. We think that’s a competitively very strong position to be in."
Walter Robb, co-CEO, added that the value-message is critical for the long-term to broaden its appeal as the organic/fresh opportunity grows.
"The market is getting bigger and we’re going for the big prize which is, those folks that are not eating as healthy," said Mr. Robb. "The fresh healthy food market is very large, and we think by continuing to improve our position we have actually got a much bigger market than we’re currently serving. So, this is an important point that giving our self the room to continue to do this."
Discussion Questions
Does Whole Foods need to eliminate its price gaps with traditional grocers to compete in the long run? How does any grocer gauge whether their prices are sufficiently low from a competitive standpoint? How should Whole Foods be positioning its pricing?
In most of their markets, which are higher income areas, Whole Foods still needs to be right on key items. They can sell all the organic and unique foods they want at very good margins, but consumers regardless of income today are looking for bargains.
The high-end niche stores are feeling it as well as guys like me, so Whole Foods recognizes that they need to stay sharp on similar items sold in the stores surrounding them. No one is immune from this downward trend in retail, and all of us need to keep the heat on deals for our customers.
It’s not possible to compete on price with “traditional” grocers and still maintain a different identity. WF is supposed to be (?) a fresh/organic/sustainable food purveyor which means that a large share of their products do not benefit from the falsely deflated prices that are inherent to typical factory farmed and processed supermarket fare. There’s a fable that most people don’t realize about US food prices: organic foods do not cost more, they are priced appropriately. In contrast, the most widely consumed food products are subsidized by the government (excuse me, taxpayer). So if a large part of a store’s product mix is beyond those commoditized items, the un-subsidized pricing puts them at a price disadvantage that traditional stores sidestep.
Additionally, in NJ at least, the quality of Whole Foods’ organic produce is increasingly poor. So they may be fooling themselves holding prices while dropping quality while places like Wegmans step up their game in the same category.
With the types of products it offers, I don’t see how Whole Foods can eliminate price gaps with traditional grocers without severely hurting its bottom line. And I question if they need to focus so heavily on price.
The core story of WF is quality foods that are good for you. In an ideal world, WF would be able to deliver on the promise of that story at prices that are competitive with traditional grocers, but that will be difficult, if not impossible to achieve.
WF management should always be looking for ways to deliver value to consumers, not compete based on price.
Whole Foods is doing just fine. The real answer depends on what someone’s goals are. Wall Street and reality at Whole Foods are two different worlds. The stock is already way ahead of itself so a pull back was inevitable. It’s like the company and its stock price are in some kind of race. Like the tortoise and the hare. Stock price is based off hype and demand and not really the company’s actual performance. Almost a novelty in a way.
As for store pricing, Whole Foods should be looking at how its prices compare with similar competition and not traditional grocers. Price is not so important to its customers, but rather the experience. There’s a cost associated to having that experience. Whole Foods is the Disney World of grocers. Have you ever heard of anyone not flying down to Orlando or not staying at a resort because the cost of admission was too high? I never heard of stock analysts trying to tell Disney they need to price their meals sold in the park closer to traditional restaurants.
Whole Foods and traditional grocers are two different worlds as is their stock price relative to financial reality.
Max and David are both right, price doesn’t make something a good value. The deathtrap brands enter is a laser focus on price—something has to give. No one needs an organic grapefruit, they want it. And those who want it will pay for it. Those who don’t want to pay for it shouldn’t be courted—they’ll always be around. The higher end, however, will notice when other things have to be compromised to meet the declining margins—and go elsewhere.
Whole Foods doesn’t resonate with consumers for value-priced items and I don’t think they should start taking that road now. Consumers inherently understand that healthy foods generally cost more. The discounting is something that shoppers want to see, but Whole Foods shouldn’t change their strategy so drastically as to encompass more of what “traditional” grocers carry. What would be the differentiator? Some healthy options, some not? Sounds like Not-So-Whole Foods to me.
Dr. Frances Frei at Harvard Business School says to great at something, you have to be willing to be bad at something else. Whole Foods is best known for their higher-end food selection offerings—fresh and organic. That’s what they are best at. They are not known for low prices, nor should they want to be. Not sure if they even can be without eroding the quality of their offerings. Pricing should be fair, but not necessarily low or lowest. They know their customer and what they are willing to pay for quality.
Whole Foods, like any other retailer, needs to keep its value proposition fresh and interesting for its target market(s) in order to keep profits and maintain growth. This is challenge enough in established markets where competitors continue to respond with their own value propositions and Whole Foods is likely to find an even greater challenge as they move into new target markets, even if closely adjacent to current markets where they are successful. The further they move from their core market, the greater they will find the challenge of providing compelling value while maintaining profits.
Much of the items found in consumers grocery carts are commodity items. To survive in today’s economy it is imperative that commodity items be priced at parity or better. Consumers are not going to pay more for the same item; instead they will buy commodity goods at a competitor and purchase the organic/fresh/specialty items at Whole Foods. This will limit Whole Foods’ growth to the share of the consumers overall purchases that are organic or fresh. Being competitively priced on other items will allow Whole Foods to grow their share of grocery purchases and experience topline sales growth.
If Coach reduced its prices to compete with Walmart, would it still have a magnetic appeal with its committed customers? No!
If Whole Foods eliminated price gaps with traditional grocers would its uniqueness be shattered? Yes.
Whole Foods has become a successful icon with its assortments and pricing strategy. Don’t change, WF!
“While comps grew an impressive 7.2 percent, they were less than its range of 8.5 percent to 8.9 percent seen over the past year.”
And they’re probably downright depressing compared to the double-digit gains I imagine they had in the ’80s. Get over it! Geometric growth can’t continue forever.
With regard to price, the whole point of differentation is that—as an ideal at least—you don’t “compete” with anybody because you have become a monopoly (you’re the only one that does what you do). Obviously WF hasn’t really achieved that—and it never will—but it will have to make up its mind. If it wants to continue growth beyond the fixed size of the Birkenstock crowd, then it will need to continue to compete on plebeian concerns like price. Of course management likely already HAS made up its mind; it’s only the analysts that want the guns-and-butter mix of high growth along with high prices…and that’s just not sustainable.
Going right to the headline “Has Whole Foods Dropped its Prices Too Low?” How low is too low?
As Whole Foods continues to grow, it is a safe assumption that they must have a broader appeal. I believe that it is a fair assumption that is their goal. To reach a broader appeal, they simply have to recalculate the value equation with respect to the next tier of customers that they would propose to attract. Price is only one factor in that equation and it’s most related to perception.
Nevertheless, in order to fulfill the remaining factors in the value equation, they will have to retain margin to support it. If the whole equation doesn’t work, it all fails.
They will need to make the same adjustment throughout their calculations as Target does to step up to a tier of the market over Walmart. It is really no different. Their growth will require it as they look for the requirements that it will take to reach beyond the price sensitive tier of consumer.
Whole Foods should remain positioned to attract their core shoppers. Moving into a more middle ground on pricing simply moves them away from their core proposition of quality fresh items and organic items, which by the way, happens to cost more at Whole Foods. Price does not equal value, and value is in the eye of the beholder.
No. Whole Foods is not a traditional grocer nor should it try to be. It is their differences at standing apart from traditional grocery offerings that has made the Whole Foods shopping experience unique and successful. By trying to imitate the very competitors which they are differentiated from, Whole Foods will instead find their unique differences becoming a liability (as they are already discovering) instead of a positive asset.
Whole Foods is a great merchant. They have been successful selling at premium prices, and then came the Great Recession. Now they think they must lower prices to compete directly with supermarkets. Whole Foods is closing in on maxing out its target market share. This is slowing down growth.
Many supermarkets have stocked key organic items and retained most of their customers. Unless there is some really important new word on organics, their price reductions will only retain current customers not bring in new ones. It can be expected to stay this way until the economy starts growing at over 3%.
Tony Orlando is the ultimate voice on this to me. He is the one in the field of battle.
Any time a luxury brand tries to be competitive with mass, and be more “accessible,” it backfires. Unfortunately, Whole Foods is beholden to Wall Street demands for short-term, ongoing sales and profit growth that can never slow down. This forces them into locations where the consumer is mainly interested in price—which was never in their brand DNA.
In an ideal world, WF would be a very profitable and growing luxury food retailer located in only those places that support it. Unfortunately that is not the case and they must compete on price to compete at all in the secondary markets. In that world, Wall Street will have to deal with a few quarters of less stellar results while WF sets a new financial foundation based on lower margins and faster turnover.
In the last couple of years, Whole Foods’ revenues and profits have been increasing. They recently met revenue and earnings expectations, but saw their shares suffer a steep decline because of lower forward guidance.
In my view, the underlying company and the market it serves remain strong, and thus there is no reason to panic and alter their core strategy and approach. Whole Foods is a great example of a retailer that is very clear about their positioning, and consequently can attract loyal shoppers who are likely comfortable paying a premium in order to buy from Whole Foods.
Bottom line: as long as Whole Foods continues to serve its core market well, and evolve with it, I see no reason why it would need to eliminate price gaps with traditional grocers. And if I were Whole Foods, I would position my higher pricing as an assurance of the quality of the items.