Four Threats Confronting Whole Foods
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In the distressed supermarket sector, Whole Foods (NASDAQ: WFM) is thriving. Second-quarter earnings of 64 cents per share beat Zacks 59 cents consensus estimate, along with being 25.5% up from the same quarter last year. It also has been doing course correction on problems such as being perceived as high priced. Its origins were in the upscale segment and it wants to expand to midde class shoppers. Employee performance is continually rewarded, including with stock or "gainsharing." That enhances service, which makes going to Whole Foods an overall pleasant experience. In addition, Whole Foods could expand in the U.S. from about 317 to 1000 locations. The list of competitors will only continue to grow.
First of all, there are the traditional competitors like Kroger (NYSE: KR) and Safeway (NYSE: SWY) which could lose market share. Secondly, it has grown an identity as a place to not only to shop for food but to also sit down and eat, hang out, and even conduct meetings. Obviously, that could provide a new form of competition to Starbucks (NASDAQ: SBUX) and Panera (NASDAQ: PNRA). Third, with the stock at 89.96, in a 52-week range of 91.06 to 53.32, investors should be wary of everything from the company’s not being able to sustain earnings/profit performance to the stock overheating and then crashing. Fourth, given the success of its model of organic and natural food, supermarkets, big boxes, dollar stores, and fast food/casual dining could roll out their own better, more affordable versions and throw Whole Foods off its game.
The formula for the traditional supermarket to stay in business, amidst competition from big boxes and more recently dollar stores, has become this: Combine providing an experience along with lower prices. Kroger has been the most successful through its emphasis on private label, much of which it manufactures itself. Safeway, which is rumored to be preparing for a merger or takeover, has not been able to develop a value image. A&P, which returned from bankruptcy as a private company, is seen by some as overpriced.
Among its tactics for a value reset Whole Foods currently provides coupons and pricing specials. If it ramps that up, the threat to other supermarkets could be enormous. Also there is a possibility that it will create a new model of a store which adds low pricing to the healthy food platform.
Another kind of threat comes if it does triple the number of stores. Right now the closest Whole Foods for me in New Haven, Connecticut is about a 35-minute drive to Milford. A store located closer could be a disrupter in shopping habits. This year it plans to open about 24 to 27 new stores and next year another 28 to 32.
Like Starbucks and Panera, Whole Foods has evolved into one of those “third places,” in addition to home and school/work where human beings can relax and connect. The threat is that Whole Foods could siphon off business for that from the other players. For example, Starbucks may be especially vulnerable with its dilution of its brand from serving coffee to everything from selling coffee in supermarkets to experimenting with wine, beer and appetizers in the evening. The healthy eating Whole Foods brand is so broad it isn’t easily diluted. Lots can be positioned as "healthy for you."
It’s not inconceivable that, as Whole Foods convinces Main Street it’s affordable and if it continues to grow the number of stores, families who once went to McDonald’s would pop for a snack or even a whole meal at Whole Foods and remain to linger in interesting surroundings. There’s no predicting what dining concepts reach cult status.
When a stock like Apple and now Whole Foods has a good run, immediately there are a range of investor concerns. One is if the company can continue to produce the numbers which supposedly justify the price. In Whole Foods situation, it has already had revenue growth of double digits for four consecutive quarters. Along with that, profits have gone up for three consecutive quarters. As the mindset goes, nothing fails like success. Here there also is the concrete reality of food inflation. When Whole Foods was playing primarily in the upscale sandbox those costs could easily be passed along as higher prices. In a value model, that could anger middle income shoppers. Also, could the company become a darling of The Street or of consumers to the point that the stock price overheats? Equity research collaborative Furbonacci estimates the stock could go to 94.70 by the end of FY12. While that might not appear as “overheated,” it could in retrospect if the stock price “crashes.”
Victim of Imitation
The continual challenge in retail, including supermarkets, is that it’s open. Anyone can copy an approach which works. No trade secret in stocking organic and natural food. The threat to Whole Foods is that the imitators could do it better and at a lower price. At one time Wal-Mart (NYSE: WMT) did not have fresh produce and prepared foods. When it did, that was a game-changer. If Wal-Mart, other big boxes, or even dollar stores create an extensive healthy-eating niche in their stores as well as online, that could deal a blow to Whole Foods.
What lessens that threat is that Nielsen Holdings reports that its survey of 56 nations found consumer confidence up 5 points to 94. In North America it’s up 8 points to 92. This is the highest it’s been since September 2007. Consumers might not be interested in trading down and may have a yearning to return to a more stimulating shopping experience.
For investors, success has always been problematic. The risks range from the company's stumbling like Netflix in its pricing to the invasion of the category by upstarts which happened to IBM when Microsoft's operating system won out. In order to hold for the long term, as Motley Fool supports, investors must closely follow the company as as well the competitive arena, especially for nontraditional entries.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread, Starbucks, and Whole Foods Market. Motley Fool newsletter services recommend Panera Bread, Starbucks, 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. If you have questions about this post or the Fool’s blog network, click here for information.