Whole Foods: Competition drives change

10rwholefoods“I think it’s important to understand that competition has accelerated, there’s no question about it,” John Mackey, Whole Foods’ co-CEO.

That natural and organic foods are no longer the exclusive domain of retailers specializing in the niche has been confirmed — by none other than the category’s leading player.

Officials of Whole Foods Market acknowledged that growing competition for sales of natural and organic products has slowed its rate of growth and forced it into what could be a prolonged period of price investments and internal cost reductions — sure symptoms of competing with conventional food retailers. As a result, officials said they expect profits could be under pressure for the next several years, and some analysts were predicting a rocky road ahead, citing inflation and the potential for complications as Whole Foods’ store count rises.

 “I think it’s important to understand that competition has accelerated, there’s no question about it,” John Mackey, Whole Foods’ co-CEO, told analysts during an earnings conference call earlier this monthsupported in part by internal cost reductions.

Mackey said the competition “affirms our mission for the past 36 years and speaks to the increasing growth opportunity” in natural foods, but that it has also put a drag on its rate of growth.

“We’ve seen the conventional supermarket companies like Kroger and Wegmans and H-E-B, they certainly have upped their game in natural and organic foods,” Mackey added. “We’ve seen new entrants get public money such as Sprouts, Fresh Market, Natural Grocers, and they’re expanding more rapidly. Trader Joe’s continues to expand.

“We still remain the leader in this category, I think by a significant margin,” he added. “And the markets continue to expand which is why all these guys are jumping into it. They see the sea change, that natural and organic foods are continuing to penetrate the larger marketplace and everybody wants in on it. I think for a long time Whole Foods had the field to ourselves pretty much. That was nice. But we don’t any longer.”

Observers noted that Whole Foods — while experiencing sales, profits and a market opportunity wildly successful by conventional supermarket standards — was confronting a similar dilemma Kroger faced when it first addressed its pricing strategy more than a decade ago. While ultimately successful in growing earnings and market share, Kroger’s transformation took years.

“Nobody knows how much price investment it’s going to take to stabilize the picture for Whole Foods,” Andrew Wolf, an analyst at BB&T Capital Markets, Boston, told SN in an interview. “They’re still gaining market share but at only half the rate they used to be. Same-store sales have gone from high single digits to mid-single digits, and that’s probably not good enough for them.

“They are not going to have to do anything on the order of magnitude that Kroger had to do,” he added, noting that Whole Foods’ nonunion status provides a more flexible cost structure, and it has the comparative benefit of competing in a natural-foods industry that is continuing to grow. “But it’s not known at this point how long or how much price investment they will need.”

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