Can Whole Foods Make a Comeback?

This year has been a disappointing one for organic and natural-foods grocer Whole Foods Market (NASDAQ: WFM  ) . Its shares are down 35% this year, which makes it the worst performer in the Standard & Poor's 500 Consumer Staples Index. Also, Whole Foods didn't do its investors much of a favor by releasing tepid second-quarter results and slashing its earnings forecast for the year.

Going forward, Whole Foods' performance might deteriorate further as more-established names such as Wal-Mart (NYSE: WMT  ) and Kroger (NYSE: KR  ) are now looking to grab shares of the organic-foods market. However, Whole Foods is trying to rescue its business through different strategies, but whether they will succeed or not remains to be seen.

A weak performance
Whole Foods shares fell 20% after its second-quarter results. Since Whole Foods' products are priced higher than those of peers, customers are moving to cheaper options in the market. Also, Whole Foods hasn't done enough to cut prices in order to become competitive, according to analysts.

As such, it wasn't surprising when Whole Foods cut its outlook for the third time in six months. Its growth is slowing down as same-store sales, or comps, are expected to increase 5% to 5.5% this fiscal year, below the historical average of 8% growth seen in the last 15 years. This is not a good sign, especially considering that the organic-foods market in the U.S. is expected to grow at an annual rate of 14% until 2018.

Trying to revive growth
However, Whole Foods is trying hard to make a comeback. It is focusing on a proactive value strategy to drive comps growth in the future by slowing the rate of price increases on its offerings. Since the third quarter of last year, its average item price growth has moderated from 3.3% to a three-year low of 1.7% in the second quarter. If the company can sustain this positive momentum going forward, then it might become competitive again.

Also, Whole Foods will be expanding its locations aggressively going forward. The company has 374 stores across 41 states in three countries, and going forward, it expects to cross the 500-store mark by 2017. In the long run, Whole Foods sees opportunity for 1,200 locations in the U.S. alone. This is a good move given that the U.S. is the largest organic-foods market globally, and is expected to grow at a solid rate going forward. 

If Whole Foods is able to combine its price-control strategies with store expansion, then it will be able to capture a bigger share of the market.

Whole Foods is already seeing some benefits from its latest strategies. In Austin and Boston, two of its oldest markets, the company recorded market-share gains as it accelerated square-footage growth. It saw 20% higher annualized run-rate sales in the last year in both of these markets, and it will be trying to replicate this success in other markets.

Stiff competition
Keeping prices under control, and reducing them, will be key to Whole Foods' success going forward. This is because Wal-Mart has entered the organic foods market by launching Wild Oats organic-food items in April. Wal-Mart is relaunching Wild Oats with a new, more affordable price point, which is expected to be 25% lower than that of other national organic brands. At the same time, Wal-Mart is focusing on delivering quality products, which covers a broad variety of categories that range from salsa and pasta sauce to quinoa and chicken broth.

This move from Wal-Mart will further intensify the price war in the organic-foods market.

Meanwhile, Kroger's Simple Truth organic brand is growing at an "astonishing pace," according to management. It expects the brand to hit a billion dollars in sales by the end of the current fiscal year. Kroger added more than a hundred items to the Simple Truth brand in the previous fiscal year. Looking ahead, the company looks set to play a bigger role in the organic foods market after buying out Harris Teeter for $2.5 billion earlier this year. Kroger is now making investments to lower prices at Harris Teeter stores in order to attract more customers. 

The bottom line
Whole Foods is under pressure from different sides. Bigger players are entering the organic foods market and are also offering lower prices. Hence, Whole Foods will need to aggressively focus on price cuts and expansion if it is to benefit from the organic-foods market. We saw that the company is indeed making some moves, and it also looks like an enticing investment as it trades at its 52-week low. However, investors should wait for a couple of quarters and see if its strategies can lead to sustainable results before taking a call on the stock.

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Read/Post Comments (4) | Recommend This Article (2)

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 30, 2014, at 6:14 AM, rodman2u1 wrote:

    Your top pick in the first quarter was Whole Foods Market what happened was this a pump and dump

  • Report this Comment On May 30, 2014, at 9:08 AM, debrastark wrote:

    anyone who has been in a whole foods market knows that they do a beautiful job. have no doubt that they will bounce back, and their expansion plans are pretty on-target too. my much smaller store in concord, ma, is surrounded by whole foods, and we share customers. while i love our store and think we've got lots more heart and soul, give me a whole foods and i'd be a happy camper!

  • Report this Comment On May 30, 2014, at 9:23 AM, nick2302 wrote:

    While it is true Whole foods gets a lot of positive press from chef's WF is not all that and a bag of chips. First of all the shopping experience in most whole foods is pretty poor for the average consumer. This IS NOT like going to STARBUCKS instead of PEETS. Other big chains like Target and Trader Joes (which has a much better shopping experience) can buy and sell at a margin's WF cannot come close to. Two points these other stores have to their benefit, they have distribution systems well established and the competition is going to push the items people really are interested in not all the odd items on WF shelves..

    Two things Whole Foods has going for it is the Meat counter and the fresh produce which works well in towns like Austin where there are few farmers markets that give much competition. Now think about San Francisco with Farmer's markets just about every day not far from where people live and who is going to use a WF's? Not nearly as many as in second tier cities like Austin who have the bicycle, boat rowing millennial. The store in San Francisco has five floors of apartments above its ground floor location that start at $5000.00 per month and populated with mostly young tech workers (target audience).

    When a normal shopper goes into WF's most shop the outside circle and leave the middle section with all the odd unrecognizable products alone. Who wants to shop for food at a CVS? Secondly you cannot go by the performance WF's has shown so far as it has established stores in places that have the granola crunchers masses already there. So they have placed stores in the low hanging fruit locations where the type of customer they want to appeal to already lives.

    Will whole foods play well in Middle America with their high prices and odd selection of groceries? The jury is definitely out.

    Nick

  • Report this Comment On June 02, 2014, at 11:42 AM, pamf wrote:

    I would rate whole foods A+ for shopping. I shop in a lot of stores, and I think Whole foods has the best prices, and people do not know this. I buy a certain cheese for $3.49 three other stores charge $6.99 for the exact same cheese and package, these are supposedly cheaper supermarkets, You just have to know what your paying for. I would qualify myself as an expert frugal shopper.One time I was going through the line to pay for my food, and realized I forgot my credit card, the person bagging, paid for my things, and said it is on me. This is how they are trained. amazing.

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