Why Half of Wal-Mart's Groceries Are Banned by Whole Foods

A look at what separates two giants of the grocery industry.

Feb 21, 2014 at 2:00PM

Ben Blatt of Slate magazine conducted an interesting and in-depth study recently to determine how many of the grocery products on a Wal-Mart (NYSE:WMT) shelf are outright banned from the more upscale retailer Whole Foods Market (NASDAQ:WFM). The results might surprise you.

According to Blatt's research, Whole Foods bans roughly 54% of Wal-Mart's fare due to the presence, in its words, of "unacceptable ingredients for foods." These 78 banned ingredients include everything from recognizable sweeteners like high-fructose corn syrup to the tongue-tying dimethylpolysiloxane.

In the process, Blatt left some cartons unturned, since Wal-Mart's website only discloses ingredients for approximately 50% of its grocery inventory. As a result, his survey is not scientific or comprehensive. Nevertheless, the findings are revealing for customers and investors alike.

Okc Store

Whole Foods store in Oklahoma City. Source: Whole Foods Market.

For example, it's no surprise that shoppers would be hard-pressed to find a liter of Coke or bag of Doritos at Whole Foods, but Blatt discovers that even household brands ranging from Minute Maid lemonade to Cracker Barrel cheese are deemed unworthy for Whole Foods' choosy clientele. Whole Foods claims these foods fall short of "safety, necessity, manufacturing methods and compatibility with our overall core values."

While the art of stocking retail shelves might seem quite mundane, the contrast presents two starkly different approaches to running a grocery store. Consider the following statistics:

  • 97% of the soft drinks sold at Wal-Mart contain ingredients that Whole Foods considers "unacceptable." If you ever wondered why a Whole Foods drink aisle makes you feel like you're in a foreign country, well, there's your explanation.
  • Wal-Mart's "Great Value 100% Whole Wheat Bread" contains seven ingredients that Whole Foods scoffs at, including everything from high-fructose corn syrup to calcium propionate. Not one or two "unacceptable" items, but seven. All in a staple product that you have to imagine just flies off the shelves. We're not talking about an obscure frozen dinner here; we're talking about sandwich bread.
  • More than 80% of the candy sold at Wal-Mart would never be found at Whole Foods due to artificial flavors, while 31% of the bacon and sausage products have been blacklisted due to monosodium glutamate, or MSG.

The list goes on and on. Beyond the statistics, however, Blatt attempts to answer the intriguing question for customers and investors alike: Why does Whole Foods limit consumer choice?

As he points out, the Food and Drug Administration has deemed every food product sold in a Wal-Mart store safe for consumption. Whole Foods, however, holds itself to a higher standard. Is Whole Foods, then, playing the role of Big Brother for health-conscious customers or simply catering to the finicky demands of foodies?

Marion Nestle, a professor of nutrition, food studies, and public health at NYU, was interviewed for Slate's article. She points the finger at health-conscious customers: "Whole Foods is giving their demographic what their demographic wants." The "top comment" in Blatt's piece -- which has so far collected more than 580 comments in total -- claims Nestle's conclusion is "the only relevant statement in the whole article." But is it really that cut-and-dry?

Not according to Whole Foods founder John Mackey. When he first started selling natural and organic foods at a small co-op in Austin, Texas, die-hard foodies were a blip on the radar in a massive national grocery industry. Now, the organic food industry, for example, is a $28 billion market that's more than doubled in size since 2004. This health-conscious trend didn't just spring out of thin air. For several decades, grocers like Whole Foods, recognized as America's first Certified Organic store, have ushered in a new wave of health-focused customers.

In the book he co-authored with Raj Sisodia, Conscious Capitalism: Liberating the Heroic Spirit of Business, Mackey claims that Whole Foods plays an important role in leading the consumer toward better choices. Instead of catering to the wants of consumers, Whole Foods educates -- without lecturing -- their clientele: "If the business is able to see unarticulated or latent needs that customers don't yet recognize, it has a responsibility to educate them about the potential value they are not yet seeing. ... We have to satisfy those customers in terms of what they want in the moment, while steering them toward better choices over time."

For Whole Foods, it's as much of a push from the grocer as it is a pull from the consumer to accommodate healthier food options. Mackey believes this makes sense because his grocers study everything from food to organisms to the environment and therefore have a deep understanding that customers might lack.

At the end of the day, it's always a dialogue between the two, but Mackey says a relationship built on trust has led customers to "increasingly look to Whole Foods Market to be their 'editors,' as we carefully examine and evaluate the products we sell." Or, to use another analogy, Whole Foods aims to maximize healthy outcomes for customers like a good mechanic would optimize the performance of an automobile.

As Whole Foods nudges the consumer to make better eating choices, it's in turn expanding that demographic. Their motto might as well be "Educate and they will come."

Wal Mart Produce

Produce aisle in Wal-Mart. Source: Wal-Mart.

But Wal-Mart's heading down a divergent path. From Blatt's point of view, the Bentonville retail giant offers a "laissez-faire" approach to curating the products it sells. Instead of banning ingredients, Wal-Mart's adopted a model for purchasing that provides lower prices and greater choice.

On the surface, this formula looks like a win-win for the consumer, but it comes with a small caveat: Shoppers are increasingly concerned about the ingredients and origins of food and are looking for guidance from a source they can trust. While no one wants their parent -- or grocer, for that matter -- telling them to eat their vegetables, many customers want to know that their grocer supports transparent and sustainable food practices. After all, their health and well-being depends, to a large extent, on the quality of foods in their diet.

Consequently, grocers who carefully monitor everything from ingredients to sourcing are riding on a wave of growth while others are lagging behind. The organic market, for example, makes up only 3.5% of total food sales, but it grew at double the annual growth rate of all food sales in 2012.

Grocers like Whole Foods and its natural-foods competitor Sprouts Farmers Market see increasing opportunity: Both stores recently upped their potential nationwide store count to 1,200 locations, which would triple Whole Foods' size and increase Sprouts' footprint by 7.5 times. While Wal-Mart towers above them with an estimated 3,000 grocery locations, its momentum is slowing. The world's largest retailer struggled to achieve 1.5% year-over-year global-revenue growth in the most recent quarter.

To reach its full potential, Whole Foods will likely continue to educate customers and may even ban a few ingredients along the way. For its part, that seems to be a time-tested recipe for success, translating to a seven-bagger stock over the last five years.

Wal-Mart, on the other hand, has to hope a cornucopia of products offers more for consumers than a carefully curated experience. From my perspective, focusing on rock-bottom prices looks less and less like a viable long-term strategy for the retail juggernaut.

Buy Local Produce

Produce section in Whole Foods. Source: Whole Foods Market.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Isaac Pino, CPA, owns shares of Whole Foods Market. The Motley Fool recommends and owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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