Whole Foods Market (NASDAQ:WFM) has established itself as a brand that offers top-quality organic and natural food. This should bode well for the company, as natural and organic food sales are estimated to expand at a rate of 16% through 2020 given favorable demographic trends (i.e, millennials) and a rising awareness regarding the importance of healthier eating.

Strength in the name
Mainstream grocers are able to beat Whole Foods Market in the pricing game, but Whole Foods Market's strength stems from authenticity and a premium shopping experience as a true organic grocer.

Exclusive brands such as 365 and 365 Everyday Value brands are an important competitive advantage and allow the company to really stick out. Consumers have come to appreciate the brand as they continue to trust the company's procurement standards and commitment to local suppliers.

Whole Foods Market's brand recognition and concept can be defended over the long term, as the company has demonstrated that it understands its customers and provides an overall shopping experience that few could duplicate.

Weakness in pricing
As previously mentioned, pricing is an issue for Whole Foods Market, which has forced the company to invest in price improvements and lower its gross margin expectations to the 34% to 35% level after peaking at 36.4% last year.

For the past few years, management has talked about investing in a lower-price strategy, but more recently management has shifted its tone to admitting it has suffered from investing in the wrong mix of products.

It may be too soon to determine if the company's price investments will improve store traffic and the company can attract the "value-conscious" segment that has avoided Whole Foods Market stores for financial reasons.

Opportunities are plentiful
At the same time that Whole Foods Market is investing in price improvements, it is working to lower its store labor expenses, improving procurement leverage while trimming its general and administrative expense.

Whole Foods Market could also benefit from further store openings, as the company has 114 stores in its development pipeline. As such, management expects to increase its sales by $11 billion over the next five years to approach $25 billion in annual sales.

By increasing its footprint across the country, the company should be able to grab a larger share not only of the supermarket industry but the natural channel. As Whole Foods Market is still in a rapid growth stage, the company is far from saturation, giving investors a unique opportunity to own a company that is in the right industry.

Whole Foods Market should be able to utilize its $1.5 billion in cash (with no debt) and free cash flow positive ($88 million in fiscal 2014) not only to fund growth for years to come but to perhaps engage in acquisitions.

Threats a concern from much larger players
Whole Foods Market faces threats from mainstream and traditional grocery retailers. Investors can have their pick of which company poses the greatest threat among Kroger, Safeway, and even Target and Wal-Mart. However, perhaps Whole Foods Market should be most worried about the threat coming from Costco Wholesale (NASDAQ:COST).

Costco appears to be paying extra close attention to the organic segment. The giant wholesaler has done a fantastic job promoting the quality of its fresh produce and can easily leverage its reputation as it expands into organic and natural foods.

During Costco's third-quarter conference call, the company may have revealed Whole Foods Market's biggest weakness: it's size. Richard Galanti, Costco's chief financial officer, told analysts:

And the challenge is the supply, frankly. There is not enough supply but if we can show great value, we will figure it out.

It is safe to assume that there is an overlap between Costco members that also shop at Whole Foods Market given the similar shopper demographics. In fact, Galanti further hinted of a segment of Costco shoppers who never purchased ground beef at its warehouse but suddenly bought organic ground beef once offered.  This may seem trivial, but organic meat, fish, and poultry are projected to be the biggest growing sector for organic with a compounded annual growth rate of 14.6% through 2020.

For the time being, Costco's management admitted that it has not yet "sat down and strategically thought" about how it wants to enter the category; but Whole Foods Market should worry about the threat coming from Costco, which is notoriously well known for accepting smaller margins.

Foolish take
Bottom line, Costco can win a pricing war against Whole Foods Market, but it is not yet clear if Costco will dedicate shelf space to products in its warehouses that compete with Whole Foods Market. It seems logical that Costco will chose to increase its exposure to the rapidly growing organic and natural category.

If Costco does decide to enter the space, Whole Foods Market will enter a fierce battle. Regardless, Whole Foods Market should thrive in the coming years, as   management's commitment to investing in price is a very positive sign that it is now listening to investors and not only customers.