Increased competition, a new pricing strategy, and other factors have made Whole Foods Market (NASDAQ:WFM) stock volatile in the past two years. Over the past six months, the company benefited from decisions made last year to lower product prices, and shares have gone up 30%. Yet over the last month, shares have declined nearly 10%. Here are three things investors should know during this volatile period.

Simple Truth Almond Milk

Kroger's Simple Truth brand: Photo: Kroger

1. Whole Foods might not be the largest organic food seller for long
Whole Foods currently sells more organic food than any other company, but it may lose this top ranking in the next couple of years, according to one report. Competitors have rushed into this space, including dedicated natural stores like Sprouts Farmers Markets (NASDAQ:SFM) and big-box retailers like Costco Stores (NASDAQ:COST). Yet the company that has been most aggressive in this race is The Kroger Co. (NYSE:KR).

Kroger has started its own push to appeal to the organic and preservative-free market with a dedicated natural food private label called Simple Truth. Just two years after its launch, which Kroger COO Mike Ellis called the most successful brand launch in the company's history, Simple Truth already has over 35,000 products that boast all natural ingredients and no preservatives.

According to a report by JPMorgan, Kroger is on target to surpass Whole Foods as the single largest seller of organic food in the U.S. by 2017. With over 2,600 locations, compared to just over 400 for Whole Foods, Kroger is well-positioned to truly become a mass market organic food provider.

2. Gross margin is declining quickly
As the first mover in the organic and natural foods market, Whole Foods was able to charge huge mark-ups on its items and benefit from the very high margins that produced. It's not just produce and meat, either: a Bloomberg Industries study in 2014 found that a basket of 148 branded items (identical items found at both stores) was 13% more expensive at Whole Foods than at its competitor Sprouts.

Whole Foods' nearly 40% margins, by far the highest in the industry, didn't last. With so many competitors in the space, Whole Foods can no longer charge such high prices. Whole Foods has been working on lowering prices and making them more transparent over the past year. While costs of goods sold -- namely produce, meat, and other natural and fresh foods -- and the prices of those items have both decreased, Whole Foods' gross profit margin has gone down consistently, from 35.8% at the end of 2013 to 35.5% at the end of 2014, and most recently to 34.8% in the first quarter of 2015, its lowest point since 2011.

3. Whole Foods has a great balance sheet
It's not all grim news for Whole Foods. For one thing, even though gross margins are falling, they are still by far the highest in the industry, at about 35% compared to 25% for the industry. Largely because of that high margin, as well as prudent cash management, Whole Foods is in the best cash position of any of its competitors.

With almost zero debt, Whole Foods' operating cash flow could cover its long-term debt more than 246 times. Compare that to just 0.62 times for Sprouts, which has over $400 million in debt with only $180 million in operating cash flow. These numbers are important when you consider that they make Whole Foods more nimble as it looks to increase its store count. If Whole Foods was trying to aggressively build by taking on debt, that might be a concern. Instead, the company is in a great financial position during its current expansion -- which includes plans to triple its store count by 2030.  

Regardless of headwinds, Whole Foods looks strong
Kroger does pose a real threat to Whole Foods. In response to that and other competition, Whole Foods continues to lower prices. While this is leading to declining gross margins, realistically Whole Foods still has some room to drop prices more, as increased volume from these pricing changes will make up for the drop in margin to maintain steady earnings.

There are definite headwinds Whole Foods is facing, but Whole Foods' steady cash management and proven growth model are reasons not to discard it.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Whole Foods Market. The Motley Fool owns shares of 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.