Whole Foods Finds First-Mover Advantage Only Lasts So Long

Chain faces growing competition from all corners

Author: Andria Cheng

March 27, 2017

Whole Foods Market pioneered the organic and natural food category, but markets catch up to first movers at some point, and that is what has happened in the natural food space.

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A Barclays study on Monday showed that the company’s average 3% traffic decline in the past six quarters translates to this big number: loss of 14 million customers.

“The magnitude of the traffic declines—when discussed in numbers (not %) are staggering,” Barclays analyst Karen Short said. “As most retailers know, once traffic has been lost, those patterns rarely reverse.”

Whole Foods “might face significant challenges to reverse behavioral changes even if execution improves because execution at competing retailers remains very strong,” she said in the report.

Whole Foods didn’t immediately respond to a request seeking comment.

Thanks in part to Whole Foods, healthy and organic foods are now widely available. Retailers from Walmart and Target to Kroger and Costco are competing for consumers who want healthier food options. Meanwhile, Trader Joe’s and Sprouts Farmers Market are also eating into Whole Foods’s lunch with their own organic and natural food focus.

Nearly half, or 47%, of Whole Foods’s stores, for instance, are within three miles of a Kroger and more than half of them are within 5 miles, according to the Barclays report, adding that Kroger has been a “meaningful beneficiary of (Whole Foods’s) woes.” In fact, Kroger has sold $16 billion in natural and organic products in fiscal 2016, more than Whole Foods’s sales of $15.8 billion the last 12 months, the report showed.

In another sign of Kroger’s encroachment, satellite and aerial image study of cars in parking lots at the same time of the overlapping stores suggested that Kroger stores have gained traffic share from Whole Foods, the Barclays report found, citing RS Metrics data.

Kroger isn’t the only grocer winning business from Whole Foods. A UBS study released March 23 found that Trader Joe’s and Sprouts Farmers Market overlap with 42% and 12% of Whole Foods’s stores within a five minute drive. Its study found Kroger’s overlaps with 34% of Whole Foods stores within a five-minute drive.

“Increasing competitive overlap serves as a rising risk” for Whole Foods, wrote UBS analyst Michael Lasser, who initiated coverage of Whole Foods with a sell stock rating, one of only five in his coverage universe of 28. Lasser forecast organic and natural industry sales to rise 9% this year, outpacing the 0.4% increase for Whole Foods. Whole Foods’s stock has taken a hit with its slowing sales. Its stock is now near at least a two-year low.

Whole Foods, with close to 500 stores, isn’t oblivious to its challenges. The company is seeking to cut costs, abandoned its previous 1200-plus store count goal and has opened a lower-priced 365 chain. And it is taking a page from Kroger: In February, Whole Foods said it hired consulting firm dunnhumby, the very firm that’s been widely credited with helping to steer Kroger’s turnaround and help Kroger use data to better target customers.

We were ignored for most of our history. Nobody paid any attention to us. 

“For the longest time, we always just see the Whole Foods as kind of this—a niche player,” said John Mackey, co-founder and chief executive officer of Whole Foods Market, in the company’s earnings call in February. “We were ignored for most of our history. Nobody paid any attention to us. …. In a lot of ways, the more conventional mainstream supermarkets have upped their game.”

As a result, Whole Foods has seen a decline in people who used to drive long distances on the weekends to make big purchases and stock up on products at its stores, Mackey said.

Whole Foods, after at least three quarters of declining same-store sales, in February cut its full-year comparable sales forecast to a decline of “2.5% or better.”

Whole Foods said it’s also examining its pricing strategy, even though Mackey said he has no interest in participating in “a race to bottom.” He said a key sales opportunity lies in driving the number of items that its core customers purchase.

“If these customers add just one more item per trip, the sales potential is significantly greater than with any other segment,” he said.

However, whether that alone is enough remains a question.

“With more retailers looking to compete in the fast growing natural & organic space, (Whole Foods) has started to lose pricing power,” UBS’s Lasser said, adding its study of 50 items in Los Angeles area suggests prices at Whole Foods, with a nickname “Whole Paycheck,” are about 13% higher than Kroger’s Ralph’s and Sprouts on average.

Whole Foods’s new strategy and hiring of Dunnhumby could help drive “sustainable growth,” Lasser said. “But it’s going to be costly.”

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