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Whole Foods’ Reality More Complex Than CEO’s Portrayals

Whole Foods’ Reality More Complex Than CEO’s Portrayals

By David Orgel

Whole Foods’ co-founder, Chairman and CEO John Mackey is a brilliant retailer with a keen eye for consumer preferences. He’s also a superb deal-maker, a fact underscored by last month’s announcement that Whole Foods plans to acquire arch rival Wild Oats to create a natural and organics powerhouse.

Yet Mackey hasn’t done as good a job in outlining the chain’s competitive challenges. A student of Whole Foods would need to rely on more than Mackey’s public commentary to gain a real understanding of the competitive landscape.

A prime example is the pressure on Whole Foods by conventional retailers new to the organic party, such as supermarkets. Mackey has downplayed this assault.

For example, here is a statement he made in 2005 and has echoed since then: “Conventional operators are cherrypicking some of the organic products, but it is not hurting us. We are gaining market share at the expense of the conventional stores. That leads us to conclude they are actually a gateway experience. They introduce people to these products, and [consumers] trade up to the authentic company that has a total commitment to it. That is Whole Foods.”

If that’s the case, then why did Mackey, in a statement, cite supermarket competition as a primary reason that Whole Foods needed to merge with Wild Oats? Mackey has derided supermarkets’ organic efforts as cherrypicking, but that characterization doesn’t tell the full story. Some conventional food retailers are making notable headway in natural and organic merchandising. They include Supervalu, Safeway, Wal-Mart, Ahold USA, Wegmans Food Markets, Ukrop’s Super Markets, and Publix Super Markets.

Whole Foods is also under pressure on the supply front. The biggest conventional player of all, Wal-Mart Stores, is accelerating its organics program, which is likely to create a squeeze on product availability.

Yet you wouldn’t know it to listen to Mackey, who last year said about Wal-Mart’s buildup: “We think at the end of the day it’s going to improve supply availability.”

It’s interesting to note that Whole Foods may be hedging its bets by making loans to small farmers, who are in a position to help ensure ongoing product availability.

Mackey will need to provide more insight about the chain’s challenges if financial performance continues to hit speed bumps. In the first quarter ended in January, net income fell 7.8% while comp-store sales increased 7%, compared to three years of double-digit comp increases. Whole Foods was one of the worst performers in the stock market last year, after investors became concerned about growth prospects.

Let’s face it, Whole Foods is still one of the healthiest and most innovative companies in food retailing, and is likely to stay that way. But it’s not immune to pressures impacting all food retailers.

Mackey is already showing signs that he understands this. In an interview with PBS last month, he spoke in a philosophical tone about his company’s long-term outlook. “Someone will come along and do it better than we do,” he said. “No business stays on top in its niche forever. Everything has a life cycle. It has its day in the sun, and then it fades. And that will happen to Whole Foods, as well.”