The Fresh Market Can't Compete With Whole Foods

After market close yesterday, The Fresh Market (NASDAQ: TFM  ) dropped its third-quarter earnings announcement, and things looked rough. While the chain managed to increase sales at a modest rate, it sees trouble ahead, and was forced to lower its earnings forecast for the fiscal year. On the earnings call, CEO Craig Carlock avoided putting the blame on competition, but investors see the problem clearly. Fresh Market is battling Whole Foods (NASDAQ: WFM  ) for top-dollar customers... and it's losing.

The tale of the sales
Fresh Market has been expanding, and recent pushes into California and Texas have put the once regional player in direct competition with Whole Foods' core customers. The difference in comparable-sales -- sales from stores open for more than a year -- growth tells most of the story. Whole Foods grew comparable sales by 5.9% year over year last quarter, putting growth at 6.9% for the full fiscal year. In its last quarter, Fresh Market managed just a 3% increase.

Carlock didn't want to point the finger at competition, and when asked about the drain on comparable sales, he said that competition wasn't much of a factor. That's simply not true.

The market for high-end groceries is expanding, and Whole Foods took more of that market growth than Fresh Market did -- and it took it without sacrificing margin. Whole Foods beat out Fresh Market on gross margin, showing the strength that the brand has.

Can Fresh Market bounce back?
Fresh Market's biggest problem is that it's fighting too many battles at once. The company was poised to open in California this year, and then the chance to open four stores in Houston came along. The company jumped on the opportunity -- probably good for the long run -- but forced itself into multiple fights instead of focusing on just one. The Houston stores have suffered already, with sales slow to grow due to a lack of brand recognition.

To get back on the right track, Fresh Market needs to focus on keeping what it's got, and only taking on one major market at a time. Carlock seems to recognize the tight situation that the company put itself in, but 2014 is already under way. If any adjustment is going to be made to the overall expansion strategy, it's not going to be seen until 2015.

With that in mind, I'm worried about Fresh Market next year. Whole Foods isn't getting any weaker, and Fresh Market seems to be doing a lot of learning on the fly. If it can get Houston under control and better manage -- which is to say focus on -- its California bid, I think it can still do great things. If it all gets out of hand, this is going to be a nightmare. Right now, Whole Foods holds all the cards, and Fresh Market seems to be scrambling just to get back in the big game.

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