1 Ridiculously Simple Solution to Maximize Whole Foods Market's Margins

Source: Whole Foods Market. 

Whole Foods Market (NASDAQ: WFM  ) saw its stock price plummet 20% after its latest earnings report, when it missed analyst estimates, reported slowing growth, and cut earnings guidance for the third time in six months. But there's a new opportunity to pull profit from where no major American grocer has gone before. Here's what you need to know.

Food fight
Whole Foods Market enjoys massive gross margins -- 35.7%, to be exact. Compare that to The Kroger Co.'s 20.6%, and it's evident that all grocery retailers are not created equal. And when the dust finally settles, net profit margins tell a similar tale. Whole Foods' net profit margin clocks in at 4.1%, better than 85% of its competitors. On the other end of the spectrum, the Kroger Co. ends up with just 1.6% of sales.

But investors have had high expectations for Whole Foods Market -- and priced its stock accordingly. So when the grocer's Q2 report missed where it matters most, its share price dropped accordingly. In the last 12 months, shares have dropped 25% in value, even more than the S&P 500 has gained in the same period.

WFM Chart

While there's no denying that Whole Foods has had a tough year (Kroger Co. shares are up 42.6% by comparison), any long-term investor shouldn't be interested in Whole Foods' increasing competition. The grocer that brought organic food to mainstream America is a victim of its own success -- everyone's offering organic now. Kroger is in the market, and even Wal-Mart Stores is getting in on organic, offering its own in-house line of more than 100 products via an exclusive Wild Oats partnership.

As Whole Foods CEO John Mackey puts it: "For a long time Whole Foods had the field to ourselves, pretty much. That was nice. But we don't any longer."

A new opportunity
Now, Whole Foods needs to look elsewhere -- and it's doing so. As fellow Fool Anand Chokkavelu recently wrote, his local Whole Foods stores offer make-your-own orange juice machines, walk-up windows, coffee bars, and even street-food kiosks.

But Whole Foods' biggest opportunity yet stems from an entirely untapped source. The European Union has declared 2014 the "Year Against Food Waste," and French grocer Intermarche took the message seriously.

Instead of throwing out aesthetically unpleasing produce, Intermarché created a new line of "Ugly Produce." The food retailer cut prices 30% on the inglorious fruits and veggies -- and the public couldn't get enough. According to Intermarché, it sold an average 1.2 tons of the stuff per store during the first two days, no doubt due to the massive 24% overall increase in store traffic. Check out the video below for the full story.

Whole Foods Market already goes out of its way to deal with such food. While many grocers push ugly produce straight into landfills, Whole Foods has tried a variety of alternatives. At different stores, the company composts, donates food, and has even turned its food waste into fertilizer. In a case study partnership with Waste Management, the two companies successfully diverted 2,660 tons of food scraps in a single year from just eight stores.

Creative destruction
In the past, Whole Foods Markets has given its premium products premium prices, earning it the infamous nickname "Whole Paycheck." Now, it's having to drop those prices to compete with other stores like Kroger and Wal-Mart.

But if Whole Foods embraces ugly produce, it can turn a cost into a profit, improve its environmental footprint, strengthen its brand, and once again prove to investors that it's still got profit-pulling tricks up its sleeves.

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