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Trading Down at Whole Foods

Bob Vosburgh August 6th, 2008

Many people have been waiting to see how Whole Foods Market would perform in this faltering economy. Yesterday came the answer: The company eliminated its dividend, scaled back expansion, got out of new store leases where it could, and announced plans to cut down on discretionary spending.

Of course, more than the economy is at work here. WFM is still working to integrate the Wild Oats chain, which is acquired last year for $565 million. But let’s face it. The evidence indicates that a large number of shoppers are abandoning the chain and trading down.

Whole Foods has fought back by promoting new prices on many grocery items, but that only goes so far. Try as it might, the company isn’t known for having competitive prices on yogurt and cereal. CEO John Mackey has built WFI’s reputation on high-quality perishables, and its standards almost preclude it from offering anything less than organic, free-range, humane-certified, sustainably-harvested fresh foods. Just about all of it is beyond the average consumers’ budget.

Whole Foods’ problem is that — in taking the high road and bringing its message to the masses — it never developed a strategy to lower itself back down to where the rest of us are currently shopping. It’s lonely at the top, and apparently, pretty expensive.

2 Comments to “Trading Down at Whole Foods”

Patrick Rea Says:

August 13th, 2008 at 10:40 am

I’d be interested to know what percentage of Whole Foods’ earnings decline is due to difficulty integrating the Wild Oats acqusition and what percentage is due to consumers ‘trading down’?
Bob Vosburgh Says:

August 18th, 2008 at 12:09 pm

Judging from the details contained in the company’s third-quarter results, I’d say the Wild Oats integration is a bit of a wash right now. WFM listed diluted earnings per share at $0.24, with an estimate that “the negative impact on net income from Wild Oats was approximately $4.9 million, or $0.03 per diluted share, in the quarter.” Yet, sales at the Wild Oats stores in operation during the third quarter topped $168 million (just under 10% of total sales), and comparable store sales growth at the Wild Oats units was 5.4% — more than double the numbers posted for existing Whole Foods stores (comparable sales there were 2.6%). WFM closed six Wild Oats stores during the quarter, and re-opened one Wild Oats store that had been closed for a major renovation.
So, it sounds like the former Wild Oats stores have attracted a whole bunch of new customers, with the volume boost helping to offset the costs related to the integration.