This is definitely the longest summer for Whole Foods.
The natural food retailer's acquisition of Wild Oats was challenged by a federal appeals court panel, and Whole Foods was sued by Stop & Shop over the use of a slogan, which prompted it to change the name of one of its blogs.
Legal issues are thorny but can always be settled. The bigger challenge for Whole Foods is in the economic realm. In the company's third quarter, earnings fell sharply due in part to costs from the Wild Oats merger, and comp-store sales were up only 2.6%, far below the company's historical numbers. The company's stock price declined sharply. Whole Foods is suffering because its high-price image has led to reduced sales growth in a slumping economy.
“I've never seen our comps this low in the 30 years since I started the company,” acknowledged John Mackey, chairman and chief executive officer, in a conference call with analysts.
In response, last week Whole Foods unveiled a sensible cost-cutting action plan that includes a reduced number of new store openings. The retailer also emphasized its ongoing moves to drive home a value proposition with consumers, probably its most crucial challenge. The company has increased value choices in food and nonfood and is striving to communicate this message through signage, coupons and educational efforts by associates. The latter includes educational “value tours” for shoppers.
Whole Foods says the program is beginning to gain traction. However, the effort is still more subtle than pronounced, which was apparent during my recent walk through a New York City Whole Foods store. There is indeed signage promoting messages such as “Everyday Value,” “Sale!” and “More of the Good Stuff for Less.” Yet, the overall promotional impact is far less than what is experienced at a conventional grocery store, and certainly at a discounter.
The value tour is a good idea. However, the store I visited advertised tours on two upcoming Thursdays from 10 to 11 a.m. That wouldn't be possible for many people who have to work for a living.
Whole Foods may be correct that gradual shifts in its value strategy will get it through this economy, but it will need to raise the volume if the downturn gets significantly worse. Mackey may also be correct in arguing that Whole Foods' business is driven by loyal, core customers rather than by discretionary spending. But loyalty will have limits if outside economic factors continue to deteriorate.
Moreover, Mackey may be on target in contending that once the slump is over, Whole Foods will probably return to strong comps. But it's also possible that consumers won't bounce back to prior spending levels so quickly, given that this decline has impacted the retailer far more than the last one, in 2001.
The retailer isn't saying what it would do if signs continue to point downward. One would hope there's a good Plan B that includes ramping up the price message and at least considering the addition of lower-tier product lines — something the retailer has been unwilling to do up to this point.