This is exactly what Whole Foods Market (NASDAQ: WFM) didn't need.
What could be worse for a company trying to overcome its "Whole Paycheck" image than getting caught overcharging customers by using inaccurate weights?
In a recent investigation, the New York City Department of Consumer Affaris found that the organic grocer has mislabeled items, and charged customers as much as $6.15 extra as a result. The DCA tested 80 different samples of pre-packaged products, finding some fault in each. This is not the first time that Whole Foods has been found guilty of such overcharging, as it was previously fined nearly $800,000 in California for a similar incident -- but the New York inspectors said it's the "worst case of mislabeling they have seen in their careers." Fines in New York, where thousands of inaccurate labels were found, could be in the millions of dollars.
With the company already facing slowing sales growth and a battered share price, and preparing to launch a new downscale chain aimed at millennials, this news only makes a hoped-for recovery all the more difficult, and adds fuel to the criticism of Whole Foods' prices.
Management at first denied the allegations, saying, "Despite our requests to the DCA, they have not provided evidence to back up their demands nor have they requested any additional information from us, but instead have taken this to the media to coerce us. Our customers are our number one stakeholder and we highly value their trust in us."
Irate customers took to Facebook and other social media to denounce the company, with many saying they would no longer shop there. Among the taunts, Whole Foods was called "scammers" and "immoral and unethical."
Several days later, Whole Foods' co-CEOs finally issued an apology on YouTube, saying that "Mistakes were made," and adding that they were inadvertent and unintentional. Co-CEO Walter Robb pointed out that weight errors had been made in both directions -- some were in the customers' favor -- and outlined a solution to the problem. The company said it would increase training, hire an outside auditor to ensure weights are accurate, and said customers would be given any mislabeled products for free.
Incompetence is no excuse
In the wake of the allegations, Whole Foods seemed intent on clearing the air about the nature of the weight errors, insisting that they were not deliberate but simple mistakes. However, for a company that positions itself as a high-end grocer, even an admission of incompetence smells of negligence rather than simple mismanagement. According to Gothamist, one employee said the company has been aware of the labeling issues but eliminated the position for verifying weights in order to control costs, instead using part-time employees with little training.
Considering that the company had been dinged for weight issues before, the errors seem to be part of a larger pattern.
Since the DCA released the information Whole Foods' shares have fallen nearly 6%, and are treading near 52-week lows, down 40% from the stock's all-time high in 2013. As a stand-alone issue the measurement problems wouldn't be so concerning, but Whole Foods' once-glowing prospects have already dimmed as competitors have horned in on the organic market. Whole Foods' management is correct that the weight issue only affects a small percentage of products for a small percentage of its customers -- but its image is the greater concern. As customers flee for Trader Joe's, Kroger, and other organic sellers, Whole Foods needs to win the PR battle, and convince customers of its value proposition even if it does have high prices. Recently, as this issue and the swoon in the stock price has shown, that has been a losing fight.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Facebook and Whole Foods Market. The Motley Fool owns shares of Facebook 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.