Competition bites into Whole Foods

by Monica Watrous
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Whole Foods Market grocery store
Whole Foods Market reported it first quarterly decline in six years.

AUSTIN, Texas – Executives of Whole Foods Market outlined a comprehensive growth plan for the year ahead after the retailer posted its first quarterly same-store sales decline since 2009. Heightened competition in the natural and organic marketplace led to weaker-than-anticipated sales and contributed to an earnings shortfall for the Austin-based grocer in the company’s fourth quarter. 

John Mackey, Whole Foods Market
John Mackey, Whole Foods co-CEO

“Our partners at United Natural Foods estimated over 70,000 new points of retail for natural and organic products over the last three years,” said John Mackey, co-founder and co-CEO, during a Nov. 4 earnings call with financial analysts. “In this dynamic and increasingly competitive marketplace, we recognize we need to move faster and go deeper in creating a solid foundation for our long-term profitable growth.”

For the fiscal year ended Sept. 27, Whole Foods had net income of $536 million, equal to $1.49 per share on the common stock, down 7 percent from $579 million, or $1.57 per share, for fiscal 2014. Results included asset impairment and restructuring charges taken during the fourth quarter. Sales for the year totaled $15,389 million, up 8 percent from $14,194 million the year before. Comparable store sales increased 2.5 percent.

Net income for the quarter tumbled 56 percent to $56 million, or 16 cents per share, from $128 million, or 35 cents per share, for the comparable period. Sales for the quarter rose 6 percent to $3.438 billion from $3.256 billion. Comparable store sales declined 0.2 percent on a constant currency basis.

To rebuild traffic and sales, Whole Foods is taking steps to differentiate itself from its competition and improve its price perception. First, the company has committed to restructuring the cost side of its business, with plans to reduce expenses by a $300 million run rate by the end of fiscal year 2017.

“We recently eliminated more than 2,000 positions, are transforming our purchasing operations to allow us to function more productively, to be more competitive, and better leverage our growing size and scale, and are looking for similar opportunities in other key areas,” Mackey said. “We have also introduced a new labor-scheduling tool to our customer service teams, with plans to expand to additional teams over the next year.”

The company also plans to accelerate innovation with a focus on store brands and prepared foods.

“Totaling close to $5 billion, or one-third of our sales, our exclusive brands and prepared foods are key differentiators for us, and we plan to partner with our suppliers to widen our competitive advantage in these areas,” Mackey said. “As part of this initiative, we have created a new global vice president of culinary and hospitality position, which we expect to fill in the coming months.”

Other initiatives include increased promotional activity and strategic price reductions, enhanced marketing efforts and a deceleration in store openings over the coming year. Whole Foods said it will invest in digital strategies to convert on-line traffic into sales and in technology platforms to improve the in-store shopping experience. Additionally, the company expects to reach more consumers, particularly millennials, with the launch of its new retail format, 365 by Whole Foods Market.

“With eight leases signed to date, we plan to open three stores in fiscal year 2016, and up to 10 in fiscal year 2017,” Mackey said. “The time is right to take the high quality standards we have developed over the last 35-plus years, and make them more broadly accessible through a streamlined, value-focused format and serve communities we would not be able reach with our larger Whole Foods Market stores.”

For the year ahead, executives expect to deliver sales growth in the range of 3 percent to 5 percent, the higher end of which assumes a 2 percent decline in comparable sales in the first quarter, relatively flat sales in the second and third quarters and a 3 percent gain in sales during the fourth quarter.

“The lower end of our sales outlook reflects the possibility that comps could get marginally worse before they get better, with an inflection point later in the year,” Mackey noted.

Mackey said comparable sales are difficult to predict in this competitive landscape.

“While we have seen some stabilization in our two-year comp trend since the end of the fourth quarter, it has been only five weeks,” he said. “We are hopeful that our comps will improve over the course of the year, given our toughest comparison is in the first quarter, and many of our sales-building initiatives are still gaining traction or are planned to roll out later this year.”

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