This year has been a disappointing one for organic and natural-foods grocer Whole Foods Market (WFM +0.00%). 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 (WMT 1.60%) and Kroger (KR 2.71%) 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.
