Whole Foods' Newest Competitor In Organic: The Kroger Co.

Whole Foods could soon find itself squeezed between two massive and aggressive competitors with capabilities it lacks --Wal-Mart and Kroger.

Apr 29, 2014 at 5:30PM

Whole Foods Market (NASDAQ:WFM) has more than just Wal-Mart Stores (NYSE:WMT) to worry about as the organic food wars heat up. It has another massive and well-organized competitor with similar capabilities to Wal-Mart out there: Kroger (NYSE:KR).

Kroger and Wal-Mart pose a very similar threat to Whole Foods because, at the end of the day, Whole Foods is just a grocery store. Kroger and Wal-Mart offer customers a lot more than just groceries. Kroger has subsidiaries; such as its Kroger Marketplaces (http://blog.chron.com/primeproperty/2014/02/houston-area-to-get-first-kroger-marketplace-selling-clothes-and-shoes/) in Texas,  that sell everything from furniture to fine jewelry. They give customers a wide variety of reasons to stop by. All that most Whole Foods locations offer is groceries.

Kroger operates 1,240 supermarket fuel centers -- supermarkets with gas stations. The idea there is to offer one-stop shopping so customers will stop in to fill the tank and the shopping cart at the same time. Kroger also operates 2,109 pharmacies in its supermarkets.

One-stop shopping threatens Whole Foods
The one-stop shopping strategy is designed to lure in middle class customers, mostly women who are pressed for time. It has certainly worked for Kroger, which saw its trailing yearly revenue grow from $94 billion in October 2012 to approximately $99.3 billion last October.

Wal-Mart has certainly taken notice of Kroger's one-stop shopping success. The discount giant has announced plans to open up to 300 Walmart Express locations, small-box stores that offer groceries, gasoline, pharmacies, and a discount store. Wal-Mart U.S. operations chief William S. Simon has even bragged about the one-stop shopping at the Express locations.   The purpose of Walmart Express is to compete with drug stores and dollar stores directly (http://www.fool.com/investing/general/2014/03/19/wal-mart-express-real-target-drugstores.aspx)  in the way that Kroger already can.

Wal-Mart's increased organic foods offerings are yet another attempt to appeal to middle class customers with more one-stop shopping. Why make a special trip to Whole Foods when the same organic items are at Wal-Mart along with the Tide, gasoline, and prescriptions? The chain's traditional low-income customers are not going to be interested in organic kale; middle class mothers are.

Kroger has also gotten aggressive about organic foods. TV viewers have probably seen ads for its Simple Truth line of healthy offerings that are supposedly free from 101 artificial ingredients, according to Kroger's own website.

Kroger has also targeted Whole Foods with its Fresh Fare Market concept. Fresh Fare is basically a Kroger designed to look more like a Whole Foods, with more food cooked in the store and more organic offerings. Yet Kroger isn't relying on organic produce alone; a King Sooper's (the Denver-area Kroger brand) Fresh Fare in Denver's Kent Place development offers a pharmacy.

Foolish Takeaway:Online Ordering and Delivery might be the Real Threat to Whole Foods
One-stop shopping is not the only weapon that Kroger and Wal-Mart can deploy against Whole Foods; there's also delivery. Both Kroger and Wal-Mart are aggressively rolling out online retail and delivery options.

Kroger offers Home Shop, which utilizes existing supermarkets as fulfillment centers for its online customers. Kroger is even offering delivery of beer and wine in Colorado. Wal-Mart is offering a similar service called Walmart to Go in cities like Denver and Washington, DC.

Delivery is potentially a bigger threat to Whole Foods than one-stop shopping because it is even more convenient. Instead of making a special trip to Whole Foods, all the customer has to do is pick up the tablet, make an order, and have Wal-Mart or Kroger drop the food, including the organic beets, off at his or her house.

Such an online delivery option appeals most to the kind of well-educated, tech savvy people who are most likely to shop at Whole Foods. Whole Foods' middle class customers are already used to buying a lot of stuff through Amazon Prime. Ordering produce, laundry detergent, and even ready-made meals from the store deli is the next logical progression.

To stay competitive, Whole Foods may have to start offering more amenities, such as delivery and pharmacies. Whole Foods seems to recognize this; it is already offering a personal shopping and delivery service at some of its stores. Customers have to pay a $5 fee for the service.

The big question here is: Does Whole Foods have the resources to offer these amenities? The organic grocer has been growing fast, but it reported trailing yearly revenue of just $13.3 billion on Dec. 31. One has to wonder how Whole Foods can compete with Kroger's and Wal-Mart's aggressive expansions into organic groceries.

Walmart and Kroger's aggressive foray organic groceries could put serious pressure on Whole Foods' profit margins but those margins can take a lot of pressure. Whole Foods' reported a gross profit margin of 35.8% in 2013 while Kroger reported a gross profit margin of 20.6%. Although that pressure will not be a pleasant experience with Whole Foods' massive expansion drive under way.

Whole Foods finds itself in a difficult position for a growing company. It faces a host of aggressive and highly creative competitors with far greater resources that it has. One has to wonder if Whole Foods can really be anything but a boutique grocer.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Jennings has a position in Kroger. The Motley Fool recommends 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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