In late September, Whole Foods Market (NASDAQ: WFM) announced that it would cut 1,500 jobs over the next two months. The step, the company said, was "part of its ongoing commitment to lower prices for its customers and invest in technology upgrades while improving its cost structure."
Whole Foods is popularly known as an employee-friendly company with a very low attrition rate, so this decision surely wasn't easy. Was the cut necessary? Will the company's fundamentals improve? Let's assess the situation.
Whole Foods' decision to cut 1.6% of its jobs comes on the heels of falling comparable-store sales and a few controversies that badly hit its image.
Whole Foods was the prime mover of the natural and organic foods market and had a monopolistic hold until stiff competition from companies such as Sprouts Farmers Market, Costco, Kroger, Wal-Mart, and privately held Trader Joe's diluted its share.
Organic fare is being made available by rivals at much lower prices than Whole Foods -- for instance, Wal-Mart's organic Wild Oats olive oil and black beans are cheaper than at other stores. As a result, Whole Foods' same-store-sales growth that used to hover around 8% three years ago has come down to below 2%. Even worse, the Seattle Times reported that according to an investment bank, Costco has surpassed Whole Foods in terms of total organic sales in the United States.
In terms of controversies, recently People for the Ethical Treatment of Animals sued Whole Foods, alleging it was charging higher prices for so-called "humane meat" that PETA says actually comes from animals raised in conditions not much different from industry minimums. Whole Foods claims its meat to be humanely raised, as it adheres to a strict five-step rating program for its suppliers. A higher rating indicates that the supplier treats the animals in a better manner.
Whole Foods has also been accused of mislabeling the weights of freshly packed foods, leading to overpricing. All these things are pulling down the wholesaler's image and sales.
Walter Robb, co-CEO of Whole Foods, has announced generous severance terms for its laid-off employees and the company plans to offer them jobs in the 100-plus new stores scheduled to be opened.
The cash saved with the employee cuts will be used in upgrading technologies and lowering product prices, which will help Whole Foods restrict market-share erosion and grow further.
Its new format, 365 by Whole Foods Market, wherein it will on take the competition head-on with lower prices, will kick-start with five stores by mid-2016. These small-scale stores are focused on attracting millennials, aiming to grab a share of millennials' expected $200 billion annual spending capacity.
Lower prices will hit margins, and this is where the benefit of cost reduction will come into effect. In the past three fiscal years, Whole Foods has maintained operating margin at an average of 6.6%, which is above competitors ranging from 2.9% to 5.7%.
In its earnings report on Nov. 4, Robb was quoted as saying:
There has never been a time where customers have had more interest in what they eat, where it comes from and who's growing it. Our company mission, commitment to transparency, and culture of innovation are more relevant than ever, and we see tremendous growth potential as food consciousness continues to evolve. We recognize the need to move faster and go deeper to rebuild traffic and sales and create a solid foundation for long-term profitable growth and are taking the necessary steps to better communicate our differentiation, improve our value perception, and fundamentally evolve our business.
In FY 2016, the company is aiming for sales growth of 3% to 5% along with roughly 30 new stores, including three 365 stores and two to three relocations.
After announcing the layoffs, Robb said in an interview with Fortune that the organic industry is going through a tectonic shift. Whole Foods is positioning itself with the changing times. It's necessary for the company to manage things both on the margin and sales side, and steps such as lowering headcount is a step in that direction.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. ICRA Online and Eshna Basu have 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.