Whole Foods Market's (NASDAQ:WFM) second-quarter earnings report yesterday showed that even though the organic produce and natural foods market is expanding and giving consumers many options, it's not growing so fast that everyone can evenly keep pace. The company with the name synonymous with the industry indicated that investors can no longer count on the retailer's reputation to carry it ahead.

Reported sales of $3.3 billion were another record for the supermarket chain, but same-store sales came in weak at just 4.5%, below analyst expectations and a bit short of the 5.4% growth in comps it saw just the quarter before. Even CEO John Mackey could no longer deny the difficulty its many rivals pose to its once-preeminent position and was forced to admit the supermarket was "overly optimistic" of its own strengths.

While obviously still the go-to outlet for high-quality organic produce, the premium it exacts from its customers for the privilege of shopping at its stores is going to need to be reexamined. It may have been on a mission over the past 36 years to change consumers' shopping habits, as Mackey says, but the results speak for themselves and now it needs to turn from evangelizing to ministering the flock.

Whole Foods cut its 2014 guidance for both same-store sales and earnings this quarter, the third time it's been forced to do so, because not only does it face peer pressure from the likes of recent market entrants Sprouts Farmer's Market and The Fresh Market but it also faces challenges from conventional supermarkets as well, like Safeway and Kroger, which has made a special effort to highlight its organic produce offerings.

Even Wal-Mart has stepped up its game by bringing in more organic produce and just recently announced it would offer the Wild Oats brand in 2,000 stores at prices lower than you'd typically find on organic products.

Certainly, Whole Foods realized the landscape was changing before now. In the fourth quarter, it pointed to growing competitive pressures as one reason that comps came in at their slowest rate in four years and that it was pushing its 365 Everyday Value brand, not to mention testing out a discount loyalty card program.

The effect, though, has been the loss of pricing power, even as Whole Foods spins it as showing how it's responding to the new environment. Average price-per-item growth fell 160 basis points, from 3.3% to 1.7%, since just last year's third quarter alone. While Mackey didn't want to dwell too long on how it was taking pricing -- though he did say they were able to cut input costs some so that it wasn't all raising the ticket -- a tough economy, tight competition, and flat inflation on its inputs shows Whole Foods was still extracting a premium from its customers. 

Maybe that's really part of the whole "overly optimistic" thing Mackey referred to, thinking Whole Foods could continue raising prices above its costs and still have customers flock to its stores. With a plethora of alternatives out there, though, customers are pushing back and its actions seem to only reinforce the "Whole Paycheck" nom de guerre it's been saddled with.

That doesn't mean Whole Foods is finished, or that Sprouts and Fresh Market will become the new industry leaders. What it does suggest is that the leader in organic produce will need to become more aggressive than it's already been, and that's likely to impact margins going forward. 

The market whacked Whole Foods' stock today, sending it tumbling almost 20%, perhaps reflecting the pushback analysts were giving Mackey that it was doing all it could to meet the threats in the market. One analyst said it didn't seem management was taking them seriously, and Mackey challenged another who thought they could do more by saying, "It's easy to say 'scorched earth,' if you're not actually running a company and responsible to a variety of stakeholders."

Not that Mackey's not correct, and he said they have their strategy and they're following it, but he sounded a bit defensive -- meaning investors may want to wait to see if Whole Foods management got religion from the current quarter's results before deciding this is a doorbuster sale on its stock.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market. It 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.

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