Wal-Mart vs Whole Foods: The Battle Over Organic Pricing

Wal-Mart has to decided to make a play in the organic foods market and that could be a major problem for Whole Foods.

Apr 12, 2014 at 8:16AM

Wal-Mart (NYSE:WMT) has announced plans to carry the Wild Oats brand of organic groceries and promises to reduce customer cost by at least 25%.

That move directly targets Whole Foods (NASDAQ:WFM) and The Fresh Market (NASDAQ:TFM), which have built their businesses around selling higher-priced organic groceries. 

The Wild Oats line, which dates back to 1987, relaunches at Wal-Mart later this month with what a press release describes as "a new, more affordable price point on quality products covering a broad variety of categories – from salsa and pasta sauce to quinoa and chicken broth."

The company promised that its prices will be 25% or more lower in comparison to national brand organic products, a claim the company bases on item price comparisons (per ounce) of 26 nationally branded organic products available at Wal-Mart stores that was conducted earlier this month.

"We know our customers are interested in purchasing organic products and, traditionally, those customers have had to pay more," said Jack Sinclair, executive vice president of grocery at Wal-Mart U.S. "We are changing that and creating a new price position for organic groceries that increases access. This is part of our ongoing effort to use our scale to deliver quality, affordable groceries to our customers."  

If Wal-Mart has anything, it's the scale required to force down prices. With over 4,000 stores in the United States and a growing line of grocery-only Neighborhood markets, the chain is an immediate player in any category it enters.

Wild Oats was once a player

Wild Oats was once a grocery chain that was the number two organic grocer in the country behind Whole Foods, which purchased its competitor in 2007. Whole Foods was later forced to sell the brand in 2009 due to antitrust concerns, though many of its former locations became Whole Foods stores.

For its rebirth the Wild Oats line will have around 100 products rolled out first to around 2,000 Wal-Mart stores then to the full chain. 

"Our availability at Wal-Mart will allow us to finally pass along scalable savings directly to consumers. We are reinvigorating our brand by bringing great tasting Wild Oats products to more customers than ever before," Wild Oats CEO Tom Casey said.  

Taking on Whole Foods and Fresh Market

While Whole Foods and The Fresh Market are not the only major players in the organic game -- nearly all grocery stores carry some organic products now -- they are the two that built their brands around offering "better" products even if they cost more. 

In 2013 Whole Foods had a record $12.9 billion in sales, an increase of 10% from last year. The Fresh Market is a much smaller player with $1.51 billion in 2013 sales, a 13.7% increase.

Both of these companies are highly vulnerable to an assault from Wal-Mart because Wal-Mart has enormous buying power and its $473 billion in sales last year dwarf Whole Foods and Fresh Market combined.

Wal-Mart has the ability to drive prices lower and force suppliers (and its suppliers' suppliers) to work more efficiently or take less margin. Wal-Mart also has reason to believe that its customers will buy organic groceries.

Internal research carried out by the Bentonville, Ark.-based store chain showed 91% of their shoppers would happily buy organic products at Wal-Mart if the price was right, Wal-Mart Executive Vice President of Grocery Jack Sinclair told Forbes.

Wal-Mart has picked an excellent time to enter the space as the market for organic food is growing.

"About a quarter of Americans are regular eaters of organic food," NPD Group analyst Harry Balzer told Marketwatch, adding that the rate doubled from 13% in 2003.

Will Whole Foods shoppers go to Wal-Mart?

Shopping is not all about price and some Whole Foods customers are likely never going to set foot in a Wal-Mart, even if they might save a few dollars.

Walter Robb, co-CEO of Whole Foods, told CNBC that he's not concerned about the growing competition.

"Their customer overlaps least with us," he said.

Robb also pointed out that despite his company's reputation for high prices, the Wild Oats assortment is dry groceries and Whole Foods has its private-label 365 dry grocery line, which "is also very price competitive." It's a validation, he said, "the market is growing overall."

That may be true and some Whole Foods customers may be too highfalutin to shop at Wal-Mart, but being a bit downmarket has not stopped Wal-Mart from winning customers from established rivals in the past.

This should be good for consumers

While Whole Foods may not be acting concerned you have to imagine the company will take steps to compete. That may not mean matching prices with Wal-Mart -- there are parts of the Whole Foods shopping experience worth a certain premium -- but it should mean lower prices. The Fresh Market will likely have to follow along, which may be a challenge as it lacks the scale to force lower prices on many vendors or offer large enough volume buys to get better deals.

The winners here should be consumers -- specifically Wal-Mart customers who now have access to a better quality of groceries at reasonable prices. Wal-Mart may not be a natural fit with organic foods but if its customers say they want them and can buy them at reasonable prices, that should have a ripple effect leading to better health, stronger farms, and overall larger scale and lower prices to produce organic goods.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Kline has no position in any stocks mentioned. He shops at Whole Foods. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool 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.

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