Whole Foods Market Faces A Short-Term Threat

| About: Whole Foods (WFM)


Wal-Mart has announced an initiative to sell discounted organic food.

This is relevant because pricing is the one obstacle to selling more organic food. At the same price, most people would choose organic.

Furthermore, this initiative is made using the Wild Oats brand, with which part of Whole Foods Market's clientele might be familiar.

This move is thus negative for Whole Food Market, threatening either its sales volume or pricing/margins.

Whole Foods Market (NASDAQ:WFM) is already having a bad year, with the stock having topped back in October 2013 and being down around 20% since then. Lower earnings estimates, along with a demanding valuation multiple are part of the reason.

A new threat emerges

Today, however, things have taken a turn for the worse. Wal-Mart (NYSE:WMT) has announced it is going to offer discounted organic food. This is significant, because the one obstacle to organic food is the price.

Put simply, at the same price, customers would be inclined to choose organic. Organic food usually sells at a substantial premium, but with Wal-Mart's move, there will now be the chance to buy organic at near-conventional food pricing.

This is bound to have a negative impact on WFM. It might deviate some foot traffic from WFM, or lead it to have to lower pricing on its own offerings, thus sacrificing margins. Either way, it's negative.

It gets worse

But it gets even worse. The problem with Wal-Mart's move is not just that it lowers prices on organic food, but also on how it plans on doing it.

Wal-Mart is going to lower pricing by re-launching the Wild Oats brand. Wild Oats was acquired by WFM back in 2007, but now, the brand is being independently revived to be sold as organic food in Wal-Mart. WFM again sold this chain in 2009, along with Wild Oats Intellectual property.

This thus presents the possibility WFM will be further cannibalized, because some of its own clientele is already familiar with the brand!


In short, the news that Wal-Mart is going to discount organic food and re-launch the Wild Oats brand is negative for Whole Foods Market. Not only does it represent increased price competition in the organics segment - with price being the one obstacle to increased adoption of organics - but it also targets Whole Foods Market specifically, since part of its clientele is familiar with the Wild Oats brand that's being discounted.

Whole Foods Market should have either volume or pricing/margin pressure from this move by Wal-Mart.

Disclosure: I am short WFM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.