Whole Foods Market, jokingly referred to as “Whole Paycheck” for consumers, who as a late night television wag quipped love organic foods but can’t stand having money, has been fighting declining sales and increased competition as basically every supermarket chain and other retailers enter the organic food market.
When it was founded in 1980, Whole Foods was one of the few natural food supermarkets in the United States. It enjoyed the benefits of a first mover and defined the organic grocery concept. Over the years, it experienced rapid growth, positioned itself as the preeminent organic grocery brand and charged premium prices. In June 2003 it became the nation’s first National Certified Organic Grocer.
But faced with declining sales in recent years, the firm is trying to reinvent itself as a lower-priced supermarket. The company has experienced six straight quarters of declining same-store sales, a key grocery industry performance metric, as consumers become less willing to pay a premium for the Whole Foods brand.
Organic and locally sourced offerings have increased at mainstream grocery store chains as organic food has become popular among American consumers, especially millennials. According to the Organic Trade Association, organic sales increased 209 percent between 2005 and 2015 and totaled about $43 billion in 2016.
As the American organic and sustainable foods market has grown, competitors have repositioned their brands to enter this segment of the grocery store business. In recent years, Whole Foods has seen increased competition from chains like Trader Joes, B-Fresh, Wegmans and Kroger; discount natural food operators like Sprouts and Fresh Thyme; and big box retailers such as Walmart and Costco, which cater to socially and environmentally conscious customers at lower price points.
According to a 2016 research report by Webush Securities, Whole Foods is about 15 percent more expensive than conventional supermarkets such as Kroger, Wegmans and Safeway. The same report found that Whole Foods was about 19 percent more expensive than specialty grocers, including Trader Joe’s and Sprouts Farmers Market.
Meal kit firms such as Blue Apron and HelloFresh add another layer of competition. On top of that, growing online grocers like Amazon Fresh and Fresh Direct appeal to the same affluent customers as Whole Foods. Earlier this year it was rumored that Amazon.com, Inc. considered buying the company. Big box retailers are also diversifying their food offerings, aggressively courting the health food market to capitalize on consumers’ growing interest.
To make matters worse, Whole Foods is facing pressure from activist investor Jana Partners, a $8.5 billion hedge fund. In April, Jana, which owns 8.3 percent of the company, unveiled a list of complaints about the firm’s “chronic underperformance for shareholders,” its management, operations and strategy.
To enhance growth prospects and combat sliding sales by positioning itself as a competitively priced grocer, the firm has announced a plan that includes cutting more than $300 million from operating expenses, closing nine stores and abandoning its goal of reaching 1,200 stores. Earlier this year the firm eliminated its dual executive leaderships structure and demonstrated an increased commitment to shareholders by increasing the quarterly dividend and authorizing a new share repurchase program.
The firm plans on expanding its new “365 by Whole Foods Market” store format aimed at “value conscious” consumers. The danger here is that this expansion will cannibalize demand from the higher-end Whole Foods stores rather than take consumers from competitors.
Closely related, the firm has cut prices to shed its whole paycheck image and plans on offering direct discounts to those enrolled in a new customer rewards program by the end of the year.
These actions convey a sense of urgency and represent steps in the right direction that should boost stock prices. Still, Whole Foods will have difficulty shedding its costly image and getting consumers to understand the new value proposition in an increasingly crowded market while dealing with the “perennial gale of creative destruction.” If they don’t succeed, they may yet be acquired by one of their competitors.
Originally Published: May 27, 2017