Rotting

05.09.14

Whole Foods Is Getting Its Organic Lunch Eaten

Frilly food isn’t for yuppies anymore as everyone’s local supermarket tries to take a bite out of the high-end grocer.

Whole Foods is getting its organic, non-GMO, fair trade, locally sourced lunch eaten.

After the closing bell Tuesday, the high-end grocer that inspires hosannas for its fabulous selection and hatred for its high prices reported its earnings. Superficially, they weren’t bad. Whole Foods actually makes money, but investors reacted to it the way gourmands do when encountering Cheez Whiz. The stock dropped 15 percent in after-hours trading Tuesday and the carnage continued Wednesday morning.

What gives? Whole Foods is still growing, after all. Total sales were up 10 percent to reach $3.3 billion. Same-store sales, which measures how well stores open for more than a year are doing, were up 4.5 percent, which is respectable, but not great. “Average weekly sales per store were $742,000, translating to record sales per gross square foot of $1,000,” the company boasted. Whole Foods has an enviable stomach- and wallet-share among consumers of high-end grocers. Indeed, few stores have ridden the wave of America’s growing and increasingly pervasive foodiness more effectively than Whole Foods, which now boasts 379 stores.

But this is America and as John Mackey, the libertarian chief executive officer knows, the free market can be a brutal, humbling force. Carve out a profitable niche, and someone—or some group of people—will aim to muscle in.

That’s precisely what has happened. We are becoming the United States of Ameri-kale. Local food cultures are rising up everywhere, not just in yuppified suburbs and chi-chi cities. And Whole Foods’ success is inviting others into the increasingly crowded aisles. Small chains are gaining scale and resources. Sprouts Farmers Markets, which went public last summer, has 150 stores, concentrated in Arizona, California, and Colorado. Fresh Market had 151 stores in January and opened 25 in the last fiscal year. While Fresh Market doesn’t rival Whole Foods across the board, it is a reasonable alternative—especially for bulk items like nuts, and its fruits and vegetables are much more reasonable. Trader Joe’s, a quirky competitor, opened its 400th store last year.

As John Mackey, the libertarian chief executive officer knows, the free market can be a brutal, humbling force.

Meanwhile, the higher standards being set by Whole Foods, restaurants, locavores, food blogs, farm stands, and CSAs, are causing mass retailers to up their collective game. Seeking differentiation in a world of commodities, chains like Wegman’s, Stop’n’Shop, and Kroger are expanding their organic offerings, and improving their produce and prepared foods. They may not compete directly with Whole Foods, but they are holding on to some customers at the margins who might have fled to the upscale grocer.

Add it all up, and more savvy companies are competing for the same dollars. For incumbents like Whole Foods, that means sales don’t rise as quickly, and those sales it does get are won with slimmer margins. When Whole Foods comes into a new market, it does extremely well. But over time, its growth moderates to look more like that of the market as a whole. The most telling piece of the earnings report: a table that broke down same-store sales growth by the age of the store. At those that have been open for 8-11 years, sales grew just 1.7 percent in the most recent quarter. And for those 11-15 years old, sales grew 1.9 percent. Put another way, in places where it has been established for a decade or more, Whole Foods seems to be losing market share.

For big, valuable American brands, stagnation at existing locations isn’t the end of the story. Run out of space to roam at home, and you start looking for growth abroad. The U.S.—as I never tire of reminding people—represents about 4 percent of the globe’s population and about 25 percent of its economic activity. Most of the economic action is taking place overseas. The good news is that American brands travel really well—Starbucks, Coca-Cola, McDonald’s, General Motors, Disney. All these consumer brands get a huge—and growing—chunk of their sales room overseas. The typical member of the Standard & Poor’s 500 gets about 50 percent of its sales outside the U.S.

But Whole Foods remains almost entirely reliant on the U.S. for its current sales, and for its future growth. The company has nine stores in the U.K. and eight in Canada—and that’s pretty much it.

CEO John Mackey expressed confidence in the company’s ability to dominate the sector it helped forge. “The rapidly growing demand for fresh, healthy foods affirms our mission for the last 36 years and highlights the increasing growth opportunity ahead of us,” he noted in the earnings release.

Whole Foods remains wedded to the trendy American consumer—one faced with lots of choices. The company recognizes that this means a slowing of growth. In the earnings report, it lowered expectations for sales growth and profits margins in the coming year. But Whole Foods seems to be doubling down. It plans to add about 36 stores this year and about 40 next year—virtually all the in the U.S. By 2017, it expects to have 500 stores in America, up from 379 today.

Looking ahead, Whole Foods still no real plan to invest overseas. And that’s dangerous. In this country, category killers don’t always remain category killers—ask Borders, or Office Depot, or Sears.