Whole Foods feels the pinch of a changing market

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

Rich getting richer is no accident

The upward redistribution of income in the United States over the last four decades has been well documented. Many argue there is little we can do about forces like globalization, accelerating technological change, the transformation to a service economy, taxes and government programs that have put downward pressure on wages for the ordinary American worker, but there are steps government could take to address these changes.

Economic inequality is the result of conscious policy choices. This issue is especially relevant in light of President Trump’s new tax blueprint and the health care overhaul recently passed by the House of Representatives.

From the 1950s to the mid-1980s, the richest 1 percent of Americans earned a touch under a 10 percent share of the national income. By 2012, that number was about 20 percent.

Overall wealth is even more concentrated than income. In 2012, the top 1 percent of the population controlled about 42 percent of the wealth.

The promises many politicians make about material comforts are duplicitous, since only a small minority have access to such comforts and they come at great expense to the majority. Working-class Americans feel left behind, stewing in their resentment of economic hardships and being forced to make daily choices between things like buying gas or putting food on the table.

They have come to believe government is run by and for the rich, who are used to getting their own way and face none of the daily struggles they do. Much of the American working class lives in a provisional world where making it to the next day is a victory.

Average Americans were cut adrift from their former lives, given little help to build new ones and disparaged as a basket of deplorables. All this was largely happening outside the view of the media and the political class.

You don’t have to have the psychological acuity of a self-important academic to understand the ironclad rage of the working class, which is proving to have the shelf life of radioactive waste. Is it any surprise that when powerless to determine their own destinies and achieve the American Dream, they backslide into anger and resentment?

This was not supposed to happen. In the optimistic period after the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1992, free-market capitalism, with its invisible hand miraculously transforming selfishness into common good, was seen as the way to usher in a period of prosperity and peace.

More recently, one event after another has exposed this utopian narrative. The 2008 financial earthquake revealed fault lines running through the economic system that cost millions of Americans their jobs, homes, life savings and hopes for decent retirements. It unraveled communities, especially those where manufacturing jobs have disappeared and the well being of the working class has been marginalized by circumstances beyond their control. It was a cataclysm far worse than any natural disaster.

Troubling results from growing inequality include dampened economic growth, reduced social mobility, and a corrosive impact on democratic institutions. Another important consequence is weak consumer demand to support the economy.

It would be wise to recall how Henry Ford simultaneously created transportation for the masses and drove economic growth. He furnished consumers with reasonably priced cars while raising wages for his own workers to make the car affordable to them.

Rather than raising the federal minimum wage, a modern version of Ford’s approach would be to expand the earned income tax credit to supplement low-wage workers’ incomes, which would mean the government paying Americans whose earnings are below a certain level. The program was started under President Ford in 1975, expanded once by President Reagan and again by President Clinton.

President Trump has proposed expanding the earned income tax credit beyond the 27 million working families who currently benefit from it. Such a move would increase demand and economic growth by providing working class Americans with the living wage they deserve.

Originally Published: May 13, 2017