Whole Foods Is In A Whole Lot Of Trouble

| About: Whole Foods (WFM)

Summary

Shares of Whole Foods are down 32% over the past year.

Whole Foods is losing its hold on the organic market due to intensifying competition.

Whole Foods has made the fatal mistake of trying to compete on price,.

Whole Foods Market (NASDAQ: WFM) is barely (w)holding in there. After a rough past year, things are not looking up for the supermarket specializing in natural and organic foods. With shares of Whole Foods down 32% over the past year, the company was the second-worst performer in the S&P 500 heading into Wednesday's earnings report. Comparable store sales growth has slowed to its worst pace in over four years. And with a forward PE of 22.14, the future does not look bright. Whole Foods is losing its hold on the organic market due to intensifying competition.

The competition in the natural/organic supermarket sector is growing at a rapid pace. Whole Foods' CEO Walter Robb said that at least one new competing store opens every other day. Besides the new competitors, conventional supermarket giants such as Wal-Mart (NYSE: WMT) and Kroger (NYSE: KR) have entered the organic market. Existing niche players like Trader Joe's and Sprouts Farmers Market (NASDAQ: SFM) are also picking up steam. The combination of these competitors as well as private specialty food stores are beginning to steal market share from Whole Foods. Consumers who are interested in organic foods, but are also price conscious, are beginning to leave Whole Foods in favor of the lower-priced competitors.

Whole Foods is losing its competitive advantage in the market, as evidenced by the slowing store growth rate. Whole Foods has been lowering prices in an attempt to win back customers. I see serious flaws in this strategy. First, and yes, obviously, it is going to hurt the margins. And despite the lowered prices, it will still not be able to get the prices quite as low as Wal-Mart or Kroger. Second, and more importantly, this contradicts how Whole Foods has positioned itself.

Whole Foods has positioned itself as an elite, high-quality food provider. It should not be competing on price. The customers aren't shopping at Whole Foods because it's cheap - they are shopping there for the quality food and the overall "experience" that Whole Foods provides. Lowering prices could potentially lead consumers to believe that the quality of food is going down as well, even though that is not the case.

Whole Foods should shift its focus to once again differentiating its stores in the market. The company has plans to launch its first-ever national media campaign this fall. The campaign will focus on Whole Foods' corporate values and advantages over rival chains. It also plans on offering a delivery service and customer loyalty program. I see strong potential with the delivery service and customer loyalty program, but I do not foresee the campaign being successful without these services implemented yet.

Although I am rooting for my favorite grocery chain, I am not optimistic about Whole Foods' future. I believe that serious investments need to be made in differentiating itself in the market and not trying to compete on price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.