The national and organic foods industry is heating up as more small and large competitors dive into the health foods market. Whole Foods has been the national leader, with 408 stores in the U.S., Canada, and Britain and 116 more on the way. But major industry players like Wal-Mart, who can offer lower health food prices, are threatening sales at Whole Foods, which has also been known as "whole paycheck."
Now celebrating its 35th birthday this year, Whole Foods recently reported earnings that suggest ongoing success. But it's unclear whether the health food retailer will be able to sustain that success in the coming decade without strategic changes to its operations and prices.
Positive earnings, record sales, and new developments announced
Whole Foods reported first quarter 2015 earnings Feb. 11, and the company had plenty to be happy about. Most notably, the health food retail giant’s first quarter sales rose 10.2%, hitting an all-time high of $4.7 billion. Same-store sales also saw a boost of 4.5%.
Co-CEO Walter Robb said high sales were due mainly to “customers’ positive response to many strategic initiatives, along with improving consumer confidence.”
Along with positive earnings, Whole Foods announced that “it expects to open between 38 and 42 new stores this year, including relocations, for annual square-footage growth of 9% to 10%,” according to Supermarket News. In the first fiscal quarter 2015, Whole Foods opened nine new stores and remodeled 40 stores.
Plans for Canada expansion
Whole Foods has already supplied Canada with its health food products for more than the past 10 years, and the retailer runs 10 stores in British Columbia and Ontario. In addition to eight leases on upcoming U.S. stores, Whole Foods also has three in the works for western Canada, including Calgary, Edmonton, and Victoria, British Columbia.
These three stores are part of the retailer’s massive Canadian expansion plan, which Robb said in an interview with The Wall Street Journal, will include more than 80 stores over the next two years—40 stores this year and about 42-44 in 2016. In that same interview, Robb said this will equal “10% square footage growth on top of 15 million square feet of retail we already have.”
Whole Foods’ growth in Canada flies in the face of a fellow major retailer, Target, who ended up failing to capture the Canadian market. Target had to shutter all of its 133 locations in Canada less than two years after opening its first store in the country.
Robb, however, sees nothing but bigger and better as the Whole Foods continues to grow across Canada as well as the U.S., Britain, and possibly beyond. He said in a conference call, “[We] are confident we will continue to innovate and lead as we triple our store count to 1,200 over the long term.”
Whole Foods' competition heats up
But not all has been this positive along the way. Known for its higher prices and the moniker “whole paycheck,” Whole Foods has taken a blow since the recession hit. Its stock price, which rose 1,130% between 2008 and 2013, is down about 20% since that peak in 2013.
Competition is heating up in the health food retail space, both from fellow health food retailers as well as other retailers like Wal-Mart. Wal-Mart has entered the health food space by its own means—a cheaper line of organic products through a partnership with health food brand Wild Oats. A comparison between 26 national brands determined that consumers will enjoy about 25% price savings over Wal-Mart's competitors.
The Kroger Co., Sprouts Farmers Market, Inc., and Trader Joe's Company are three other direct contenders Whole Foods faces. Sprouts in particular has seen tremendous growth in the past few years for its inexpensive prices on the same products other health food stores, like Whole Foods, sell. Seeking Alpha went as far as to say Sprouts has carved out its own niche of more affordable health foods. Growing businesses like Sprouts force Whole Foods to face their prices head on and determine the best strategy to remain a leading force.
Tech and marketing strategies up Whole Foods’ game
Whole Foods continues to innovate, particularly in pricing, marketing, and technology, to keep up with and stay ahead of its competitors:
Competitive produce pricing
Whole Foods rolled out an extensive price-cutting initiative in all five of its Austin, TX, locations last year, including reduced prices on about 400 items in these stores. Mackey feels positive about the results thus far. He said on an earnings call, “We are encouraged by the pricing experiments we are running in several markets, and if results continue to be positive, we expect to expand our test to more markets during the year.”
Having partnered with online grocery delivery service Instacart, Whole Foods has brought convenient online ordering, home delivery, and in-store pickup to 15 cities already. Since September, average weekly online delivery sales topped $1 million, and in some stores, this service accounts for as much of 5% of total sales.
Produce ratings program
In an effort to promote transparency and sustainability, Whole Foods introduced Responsibly Grown, a ratings program for fruits, vegetables, and flowers. The rating system assigns foods with “good, “better,” or “best” depending on factors like use of pesticides and waste management, among other factors concerning how that produce comes to market.
On the success of these innovations, Robb said in a statement, “Changing technology has fundamentally altered how and when customers choose to connect with us, and we are rapidly building out an extended experience beyond the four walls of our stores.”
Armed with an arsenal of new strategies, dozens of store developments, strong first quarter 2015 earnings, and a positive outlook for the fiscal year, Whole Foods has a busy year ahead that may help to solidify its position atop the health food retail market, despite heated competition.
“People think we are going to sit still, but we are not going to sit still,” Mackey said on an earnings call. “We are going to rapidly innovate and improve. That's what we have done for 35 years and that's what we are going to do going forward.”