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

Organic products aren't pulling profit like they used to -- and they don't have to.

Jun 29, 2014 at 9:00AM


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.

Leaked: This coming device has every company salivating
Early Whole Foods Market investors recognized that this grocer would revolutionize the way America eats -- and they've realized massive profit accordingly. The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Justin Loiseau owns shares of Waste Management and Whole Foods Market. The Motley Fool recommends and owns shares of Waste Management and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers