Has Whole Foods Lost Touch with Its Customers?

by: Michael Steinberg August 06, 2008 | about stocks: WFMI    

Michael Steinberg

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Whole Foods (WFMI) announced major moves in the Q3 conference call to combat the ongoing consumer belt tightening. The company eliminated the dividend, exited leases for new stores where it could, slowed expansion, reduced store sizes, and intend to reduce non-store expenses. At the same time, the company tried to convince analysts that it is not “running on empty.” Whole Foods claims that it will generate enough cash to support its more limited expansion plans, and that the Wild Oats acquisition was not too much to swallow.

Whole Foods is expanding its value proposition from the center isles (packaged goods) to the perimeter (fresh and prepared foods). The problem is in the definition of value. My experience has been that Whole Foods packaged goods have been either competitive or cheaper than the traditional supermarkets. However, if you want high quality conventional produce, Whole Foods only offers organic. It does not matter that Whole Foods offers a good price for organic when organic is out of the budget. It also doesn’t matter that Whole Foods offers aged, non-antibiotic beef when your budget would like high quality conventional beef.

Whole Foods is still trying to sell its customers what the company envisions its customer should buy. In addition, the company cannot be convinced that it cannot control its customers. I believe Whole Foods is losing touch. Good value at the wrong price doesn’t work. Whole Foods can distinguish itself by offering very high quality conventional fresh produce and meat at prices competitive or even slightly higher than the supermarkets. Quality and value, not organic fits the new economic reality.

On the positive side, I get the sense that Whole Foods better understands its markets: Upscale urban is very different from suburban. However, I would prefer that the company forgoes international expansion, and would rather have seen the company dominate New York City before venturing to London.

Disclosure: None

 

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This article has 9 comments:

  •  
    Aug 06 06:52 AM
    If you think the economy and stock market are rebounding, you have to buy it. If you think we will spiral down, stir clear. This may seem simplistic but I bet it's valid.
    Reply | Link to Comment
  •  
    Aug 06 08:52 AM
    Unfortunately Whole Foods is geared to the 'wannabees' or as they are tagged by marketing experts - the 'aspirationals' . I think when all is said and done we will find this group is the one that was the most indebted and therefore the ones who are really cutting back. Not good for places like Whole Foods
    Reply | Link to Comment
  •  
    Aug 06 09:37 AM
    We have a local chain called Market of Choice that is very successful with exactly the model suggested here -- high-end organic and conventional foods offered side by side, plus inexpensive store-brand staples. Unlike WF it also emphasizes locally grown and produced foods and calls them out when it has them. I would love to see WFMI results broken out by metro area (ha) -- I bet other areas have similar nimbler competitors.
    Reply | Link to Comment
  •  
    Aug 06 10:14 AM
    Whole Foods to me is like Starbucks, cute, but not necessary.

    But I wish them the best of luck!
    Reply | Link to Comment
  •  
    Aug 06 01:00 PM
    "The Nordstom of food"
    Reply | Link to Comment
  •  
    Aug 06 01:07 PM
    There defintley losing touch. Before, WholeFoods was able to call the shots because there were the only player, but now price rules and the game has changed. Whether they learn to adapt to this or not is the question. Unless WFMI is able to deliver a more affordable image, I don’t see consumers rushing through there doors. Do they have good management? And can they overcome there previous perception? These are gonna be crucial questions in the months to come.
    I think this was a pretty obvious one to see if you even been paying attention to any sort of news. Clearly “luxury” groceries and coffee (SBUX) would be the first to go in our economic situation. Sentiment for WFMI dropped dramatically yesterday (predictwallstreet.com... and I don’t see it recovering anytime soon. Until people feel comfortable spending money again and the economy recovers (which could be another year at least) I don’t think will see any major improvements in WFMI.
    Reply | Link to Comment
  •  
    Aug 06 01:45 PM
    I agree with the author. Well done. I think many of their prices have increased over the last couple years. Rather than phasing out items that became too expensive for them to buy and sell to customers, they just kept increasing prices.

    The ones that come to mind are $30.00 per pound for dry aged beef. $30 per pound for beef? I could get an entree at a very nice restaurant in Los Angeles for what it would cost me to cook my own dinner.

    Get a clue.
    Reply | Link to Comment
  •  
    Aug 06 02:01 PM
    In addition to have they lost touch with the customer you must add have they lost touch with themselves. I know they are reducing new store openings which is good, but which stores. I recently commented on another article about two locations, Basalt (Aspen), Co and Kahului, Maui, Hi. Neither of these locations fit the demographic mold designed to make WFMI successful. These are what I call trendy locations that upper management can prattle on about at dinner parties. They will not make money and will drag the profitable stores down. I call this the SBUX affliction. Build a store and they will come. WFMI needs to get back to basics and get back in touch the original successful plan and get out of this we need to open a store on every corner attitude.
    Reply | Link to Comment
  •  
    Aug 06 02:23 PM
    Whole Foods is going down the tubes. Overexpanded like Starbucks. Why in the world we need two Whole Foods stores in Ann Arbor (a town of 100,000) is beyond me. Grocery shopping as an 'experience' is overrated, especially if you've got kids.

    I find it ironic that a company which is all about organic, eco-friendly, sustainability, etcetera is expanding like the white man into Indian Territory. When your core values contradict your corporate growth strategy, you've got a serious identity problem.

    I'm with Jenny. When the economy goes south, I'll switch from organic to conventional foods. When it gets worse, I'll choose store-brand generics or shop at (gasp) Wal-Mart (WMT) or Target (TGT).
    Reply | Link to Comment
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