Wal-Mart's Organic Push Shouldn't Worry Whole Foods

Among the many competitors trying to get close to America's biggest organic food retailer, Whole Foods Market (WFM), the most formidable is Wal-Mart (WMT 0.46%). The world's largest retailer plans to go full throttle into the organic retail market and drive down prices significantly to create a huge customer base. And this isn't the first time Wal-Mart's made such a move. Should this get Whole Foods worried?

Chocolates stacked on shelves of a Whole Foods outlet. Source: Motley Fool

Wal-Mart aggressively expanding the organic food arena
In April, Arkansas-based Wal-Mart renewed its terms of partnership with Wild Oats, a leading provider of organic food items, to offer 100 or so organic food items for around 25% less than similar offerings. These 100 will add to the roughly 1,600 organic items that Wal-Mart already sells.

Wild Oats was Whole Foods' main competitor at one time. Whole Foods even acquired the company in 2007, only to forgo its stake because of antitrust issues in 2009. Through its Wild Oats tie-up, Wal-Mart is trying to change the traditional notion that organic food is expensive. According to Jack Sinclair, Wal-Mart Executive VP, "We are ... creating a new price position for organic groceries that increases access. This is part of our ongoing effort to use our scale to deliver quality, affordable groceries to our customers."

This isn't the first time
If we go back a few years, 2006 will give us a strong sense of de ja vu. In that year, Wal-Mart had expanded its organic offerings, and said it wanted to widen the category's reach by lowering prices. The media rhetoric back then was quite similar to what we are seeing now.

If the year is not mentioned, it would be hard to tell the following two statements were made eight years apart:

2006: "I don't see Wal-Mart as a great threat to Whole Foods right now. There's a lot of market share up for grabs in organics. The disparity of their customer base is too great." Customer Growth Partners' Craig Johnson said in a CNN Money article.

2014: " ... Wal-Mart's competitive threat, while formidable, will take some time to affect Whole Foods' business significantly, and there are many caveats along the way."fellow Fool Asit Sharma wrote in June.

In the years between those statements, Whole Foods has grown its revenue by a staggering 132% -- from $5.6 billion in fiscal year 2006 to $13 billion in fiscal year 2013. During the period, Whole Foods' store count went from 186 to 362. There are now 403 Whole Foods stores and the company is looking to increase its number of stores and enter new markets. In fiscal year 2014, it opened a record 38 new stores and plans to cross the 500-store mark in fiscal year 2017.

Things that shield Whole Foods
The Wild Oats items available at thousands of Wal-Mart stores, as well as on its website, consist of canned and packaged foods, a category in which it's comparatively easier to reduce prices as cost is lower compared with perishables. For Wal-Mart to reduce organic food prices beyond these packaged goods and include vegetables, meat, and fish, would mean bringing in economies of scale.

But an NPR article in April cited Charles Benbrook, an organic agriculture supporter associated with the Center for Sustaining Agriculture and Natural Resources at Washington State University, as saying that it would take years for organic to go large scale as, for instance, it takes time for farmers to be certified organic. "There will be hell to pay if Wal-Mart turns mostly to imports, and they know it," NPR quoted Benbrook as saying. And in any case the demand-supply scenario in the organic industry is reportedly skewed in favor of demand by 25%, so, it will be difficult for Wal-Mart to lower prices beyond a point.

Many believe the high prices of organic food are not premium -- they are the real costs of producing them -- and they fear that Wal-Mart's drive to bring down prices through scale might undermine ethical organic farm practices. This image of Wal-Mart is probably its biggest disadvantage against Whole Foods, whose products buyers swear by.

The approach of the two companies toward organic food is very different as they serve different sets of society. Whole Foods takes pride in setting the highest benchmark in organic practices, taking care of the way the food is grown, raised, harvested, and slaughtered. Organic is its only business, and it has been setting the standards since inception. The company prices its products accordingly, and its higher-income customers don't mind paying the premium over conventional items.

Wal-Mart is interested in organic fare because it sees people's interest in it rising. In 2006, the then-head of perishable food at Wal-Mart, Bruce Peterson, was quoted in The New York Times as saying, "Organic agriculture is just another method of agriculture -- not better, not worse. This is like any other merchandising scheme we have, which is providing customers what they want." The company's recent research has shown that more than 90% of Wal-Mart shoppers would prefer buying organic food from the retailer if it were affordable -- thus the price push. For Whole Foods' buyers, price is not much of a consideration, so losing them to Wal-Mart could be farfetched.

Whole Foods offers a unique shopping experience and high-quality organic food. It has a loyal customer base, which could grow with the higher store count. Through its larger footprint, the company is gearing up to ward off threats posed by rivals. It will not be an easy task for Wal-Mart or others to usurp Whole Foods' position.