A tale of two grocers -- one a big-box retailer selling in bulk at low margins, and the other a high end organic and natural foods grocer achieving industry-leading margins. The two grocers, Costco Wholesale (NASDAQ:COST) and Whole Foods Market (NASDAQ:WFM) have both had incredible success in their respective niche over the last couple of decades, but each is experiencing their own headwinds now. However, one has been outperforming the other lately, and shows that it's better equipped to keep doing so.
Whole Foods' increased competition
Whole Foods was one of the first companies to successfully appeal to a higher-end health conscious demographic at scale. Because of that, it was able to charge more for its items and achieve gross margin around 36%. Compare that to around 20% to 25% gross margin for its low-cost grocery competitors.
As competitors saw the success of the healthier food trend, many have joined in to try and win market share. Larger competitors like Kroger (NYSE:KR), which is expected to overtake Whole Foods as the highest volume seller of organic and natural foods in 2017, have started to cut into Whole Foods' traffic and pricing power. Whole Foods' same store sales growth has dropped from around 7% year over year in 2013 to now down close to 3% in the most recent quarter, while gross profit margin has started to diminish.
For Whole Foods fiscal third quarter ended July 3, sales rose 2% year over year, driven by new store openings. However the company reported same store sales down 2.6% year over year. Because of lower gross margin and higher SG&A expenses, Whole Foods posted earnings down 14% year over year.
Costco's own headwinds
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Which shows more promise for growth?
The better buy: Costco
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale 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.