Breaking Tradition, Whole Foods (WFMI) Becomes A Discounter

For years, Whole Foods Market (WFMI) was a fast-growing company with an ever-increasing stock price, buoyed by increasing demand for all-natural and organic foods and consumers who were willing and able to shell out big bucks to eat healthy.

Times has changed. The stock is down more than 70% from the high it reached in 2005 and, in spite of mid-single digit same store sales growth, Zack’s Research is calling 2008 a "throwaway year" due to higher than expected costs related to integrating the Wild Oats acquisition. Economic woes and rising commodity costs could also impact that company’s bottom line as Americans who have watched their homes decline in value feel poor and opt to spend less on organic foods.

But The New York Times reports that "Now, in a sign of the times, the company is offering deeper discounts, adding lower-priced store brands and emphasizing value in its advertising. It is even inviting customers to show up for budget-focused store tours."

Whole Foods has a long way to go before it sheds its upmarket image and I’m not sure that would be such a good thing anyway: the company grew successfully for a long time as a high-end chain targeting less price-conscious consumers, and continues to display very strong gross margins and solid sales growth in a tough economic environment. Whole Foods has to be very careful about remaking its image permanently to improve its performance in the short-term — once you move down market it’s hard to move back up, and the company risks giving up its long-term competitive advantages if it starts competing aggressively on price, sacrificing quality and service in the process.

Zac Bissonnette