Whole Foods Moves Beyond Organic

Note: A previous version of this article incorrectly implied that Whole Foods Market is altering its product line. We apologize for this error and have made the necessary corrections below.

Whole Foods Market (NASDAQ: WFM  ) is working to lessen being perceived as an upscale grocer by offering more deals to compete more effectively with other food retailers.

According to the Wall Street Journal, some of the company's sales strategies include "flash" sales on specific items promoted on social media that run for a few hours, like a five-hour sale on ice cream, where customers can buy one item and get one free. Customers can also expect to see more one-day sales on specific items.

Whole Foods' goal is to appeal to a more middle-class food shopper who may perceive the grocer as too expensive and a place that caters to affluent shoppers. Stores are also opening up in lower-income areas and in smaller markets. The focus on more affordable options in recent years has helped the company survive decreasing revenue brought on by the recession.

In late 2008, Whole Foods shares traded as low as $4.27. Shares currently trade at around 12 times that amount after a stock split of two-for-one on May 29. Despite the improvement in the stock price, Whole Foods has under-performed larger rival Kroger (NYSE: KR  ) , but did beat smaller retailer The Fresh Market (NASDAQ: TFM  ) :

 

Adj. close on 7/29/2013

Adj. close on 1/2/2013

% change

Whole Foods Market

$55.62

$45.31

+22.8%

Kroger 

$39.45

$26.11

+51.1%

The Fresh Market

$52.78

$46.70

+13%

Source: Yahoo! Finance

Customer education key in maintaining loyalty
Whole Foods has offered its customers money-saving tips for a while now using coupons and via information on its website. The discounts have not had much of an impact on profit margins, which have held steady at around 36%.

Co-chief executive Walter Robb discussed in the Wall Street Journal that heavy discounting will continue to match competitor prices and that aggressive pricing may negatively impact gross margins. Mr. Robb noted the importance of striking the right balance with sales, which may not have the intended effect of bringing customers into the store to buy sale and regular-priced items .

In its 2012 annual report, Whole Foods noted it had decreased the pricing gap versus its competitors on value items to its narrowest margin. The company's targeted pricing and promotional strategies achieved good results in a fiscal 2012 competitive survey, resulting in its most competitive position in more than three years.

In its latest third quarter ended July, net income increased 21% to $142 million and diluted EPS rose 20% to $0.38. Comparable-store sales rose 7.5% .

Rivals move in opposite direction
While Whole Foods moves to shed its pricey reputation, rival Kroger has increased its natural- and organic-product selection to attract a more affluent consumer. Customers interested in products like dry-aged beef and a wide selection of cheeses and vitamin supplements.

Kroger also recently acquired Harris Teeter Supermarkets and its 212 stores located in Southeastern and Mid-Atlantic markets. The transaction is expected to be accretive to diluted EPS by $0.06 to $0.09 in the first full year after the merger minus expenses. Long-term EPS growth is estimated at 8% to 11%. With a larger scale, Kroger will be better able to achieve its planned annual cost savings of $40 million to $50 million over the next three-to-four years .

A more direct competitor to Whole Foods, The Fresh Market, maintains its focus on providing customers with "affordable luxury" by offering premium products in its smaller stores. Chief executive officer Craig Carlock finds customers are responding well and the company is focused on expanding its number of stores.

In its outlook for 2013, the Fresh Market expects to open 19 to 22 stores, with four- to-six stores opening in the second quarter and 13 to 15 new stores launching in the second half of the year. Growth plans should result in capital expenditures in the range of $130 million to $150 million .

My foolish conclusion
Whole Foods' strategy of highlighting its everyday values to shoppers should help the company expand its customer base. As more customers are exposed to organic- and natural-food options and are persuaded to buy them, prices between these products and more conventional food products should level off.

This can make price competition between grocers less relevant and they may turn their focus to other areas, like customer service or select product and service offerings. The competitive food-retailer space will continue to evolve as food and health trends alter consumer-buying habits.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

 


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