How Whole Foods' Success Has Come Back to Haunt It

If you love organic food, it's probably been a pretty good few years for your dinner table. Whole Foods Market (NASDAQ: WFM  ) , the national champion of the organic grocery store, has expanded further than many thought possible. Its success has brought solid returns to early investors, but has also brought more competition to the market. Now, every Tom, Dick, and Jane wants a piece of this $30 billion industry.

As a result, Whole Foods has been punished for its spreading of the gospel. In last week's earnings announcement, co-CEO Walter Robb said that "competition is more intense right now than possibly [Whole Foods has] ever experienced before." The company took it on the chin in its second quarter, and things are starting to look dangerous for the once-mighty business.

Is Whole Foods in competitor denial?
The tone on last week's conference call was tense. During the question-and-answer session, analysts held Whole Foods over the coals, with at least one analyst saying that management didn't sound like it was taking the competition as seriously as many investors were.

"The competition" now includes just about everyone who sells any sort of food whatsoever. Pressure within the stand-alone grocery store business is coming from specialty retailers like The Fresh Market (NASDAQ: TFM  ) while bigger, generic retailers like Wal-Mart (NYSE: WMT  ) are also getting in on the action.

The Fresh Market took a knock-on-effect hit from Whole Foods' poor showing, with the stock dropping 10% on Wednesday. That almost sums up the Fresh Market's entire history -- following in the footsteps of Whole Foods. With 156 locations in the U.S., the Fresh Market is expanding into Whole Foods' neighborhood. In the past year, the Fresh Market has pushed into Texas and California, adding to the competitive landscape in those states.

Unfortunately for the Fresh Market, it hasn't done nearly as well as it had hoped. A divided focus among new locations has left it in a weak second place, looking at lost opportunities. Still, its presence has had an impact on Whole Foods, giving customers a second opinion on the cost of organic goods.

Playing its traditional role, Wal-Mart has been redefining the value of organic goods. Earlier this year, the retailer partnered with the Wild Oats organic brand, adding it to store shelves and undercutting other national organic brands. Considering that Wal-Mart operates over 4,000 grocery-carrying stores in the U.S., the introduction is sure to put a squeeze on Whole Foods.

Margins at Whole Foods
One point that came out on the conference call was that Whole Foods has yet to take a hit on margins, indicating that it has some wiggle room with pricing. Gross margin has been on the rise for years, but Whole Foods now sees that it has to come down -- even if only a little -- to keep the company competitive. It said that dropping margins slightly is "sustainable and the right strategy to drive sales growth over the longer term." 

The proof will be in the non-GMO pudding. Investors tend to love two things about Whole Foods: high margins and fast growth. If the company pushes the "value" button too hard, it could lead to a drop in profits that investors aren't comfortable with. Push too gently and customers will flee to cheaper brands. The next year is going to be telling for Whole Foods, but management has succeeded with challenges in the past, and there seems to be no reason to think that, in the long run, it will have trouble with this hurdle.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2014, at 3:32 PM, ScottAtlanta wrote:

    How many boutique markets can an area support? A limited % of population pays a premium at boutiques...which is the WFM model...extracting high profit.

    They don't want to lower their exploitation and they'll build new boutiques in other wealthy areas ....but tock is ticking....even Romney's shop at Costco.

  • Report this Comment On May 12, 2014, at 3:36 PM, Chipperfool wrote:

    Seriously. . . .if Fools don't understand that WFM knows their game and the issues facing the industry, they need to extract their cranium from a crevice!

    It's not "next year" or the year after. . . .Fools, look at the long haul. Worry about Safeway, Albertson and even Wal-Mart being mediocre. . .with mediocre returns, not WFM. And if you think "attention Wal-Mart Shoppers" will be the hue and cry for organics and non-GMO's, well that can only BENEFIT WFM.

    See you in the Funnies, Fools!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2952722, ~/Articles/ArticleHandler.aspx, 9/1/2015 2:17:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
WFM $32.76 Down -0.09 -0.27%
Whole Foods Market CAPS Rating: ****
TFM $21.53 Up +0.84 +4.06%
The Fresh Market CAPS Rating: ***
WMT $64.73 Down -0.21 -0.32%
Wal-Mart Stores CAPS Rating: ***