Whole Foods (WFMI) is in a class of its own, despite the fact that retail sales at grocery store stocks have not been inspiring in the last year or so as the recession weighed on consumer spending. Companies like Supervalu (SVU), Kroger (KR) and others slashed prices and squeezed margins to court shoppers – and even Walmart (WMT) had to institute a massive “rollback” to prove it was really the best bargain out there. Walmart slashed prices on over 10,000 items covering mostly food and general merchandise.
It comes as no surprise then that these companies have struggled due to razor-thin margins in a race to the bottom of a pricing war. Supervalu stock is down -27% in the last year despite a +12% gain since June 2009 for the broader market. Kroger stock is down about -15% in the same period.
So why is it that Whole Foods (WFMI) has seen breakneck growth, opening new stores left and right and watching its stock soar nearly +80 in the last year as competitors fall apart? There are a host of reasons why, but here are three:
Quality Prepared Food Sales: Grocery stores carry loads of deli meat, cheese, seafood and produce. So it’s a no-brainer for them to throw those ingredients together and sell them to consumers at a modest mark-up. Whole Foods has succeeded in turning itself into a gourmet grocer that is as much a restaurant as a shopping destination, offering everything from a taco bar to barbecue to sushi depending on the location. That allows WFMI to really boost margins and sales. According to research firm NPD group, supermarkets as a group saw a 1% increase in sales of prepared foods last fiscal year — even as total restaurant industry traffic was down 3% in the same period! That’s a trend Whole Foods has tapped in to big time, and others would be wise to follow suit. That means expanding offerings beyond mushy potato salad at the deli to restaurant quality foods that keep shoppers coming back.
Focus on Organic Produce: One of Whole Foods’ core values is to “celebrate the difference natural and organic products can make in the quality of one’s life.” And while 20 years ago most businesses would have scoffed at the movement towards organic foods, there has been a massive shift in shoppers’ tastes and many major restaurants are still very slow to catch up. According to the Organic Consumers Association, more than 6 in 10 Americans say they buy organic foods or beverages at least sometimes when they shop – but shoppers cite the lack of availability at conventional supermarkets and grocery stores is one reason many people who don’t regularly buy organic or buy more. Supermarkets that don’t get serious about organics are really missing out on a huge portion of the buying public.
Reasonable Growth Plans: As of last fall, Whole Foods operated just 284 stores in the U.S., Canada and the U.K. Compare that to Supervalu, which operates about 2,350 retail stores, including 855 Save-A-Lot stores. During fiscal 2009, SVU closed or sold 112 stores in order to streamline its operations. The reasonable growth trajectory of Whole Foods — despite a nearly cult-like following among many shoppers — has allowed the company to keep one foot on the ground and avoid growing too big too quickly.
True, Whole Foods did not fare so well during the recession when its high-end foods were shunned by value-conscious consumers. WFMI stock was trading above $30 a share in 2008 before the bottom fell out of the stock market in the wake of the financial crisis. But grocery store chains have a lot to learn from Whole Foods’ resurgence and recent success.
As of this writing, Jeff Reeves did not own a position in any of the stocks mentioned here.
