Whole Foods officials told analysts last month during the company’s earnings conference call to expect profits to be under pressure for the next couple years. The company cited growing competition for sales of natural and organic products, and what could be a prolonged period of price investments and internal cost reductions.
“I think it’s important to understand that competition has accelerated, there’s no question about it,” said Co-CEO John Mackey. “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. 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 market leader in this category, I think by a significant margin,” he added. “And the market continues to expand, which is why all these guys are jumping into 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.”
It should be noted that Whole Foods is still gaining market share and same-store sales continue to climb. However, their market share gains are at half the rate they used to be, and same-store sales have gone from high single digits to mid-single digits. Wall Street doesn’t like that, nor do Whole Foods executives.
Perhaps most disturbing to Whole Foods, although they won’t admit it, is Walmart’s entrance into the organic food arena. Walmart’s buying power and value-pricing may bring lower prices to natural and organic foods overall, and could lead to price competition typically reserved for the conventional supermarkets.
As Analyst Neil Stern of McMillan Doolittle pointed out, “even Aldi has a private label for natural and organic.”
Despite these challenges, Mackey pointed out that Whole Foods has a record 114 new stores in its development pipeline and was poised to approach 500 stores by 2017.
Analyst Chuck Grom of Sterne Agee believes a more tepid store development approach is required, and expressed concern over Whole Foods’ ability to communicate a lower price image, stating that the company “will need to get very loud with its price message, which would almost certainly lead to lower operating margins.”