Whole Foods Market (WFM) is a natural and organic grocery store, which operates hundreds of locations across several countries. For many years, Whole Foods Market was considered an attraction for young and trendy individuals seeking to eat healthy foods while promoting small businesses who seek to organically provide produce. It is my belief that Whole Foods Market's popularity and market power have reached a peak and in the coming years it will decline to be a sub-marginal business.
Whole Foods Market has long prided itself in its ability to act out its mission and satisfy and delight its customers by purveying organic and natural foods. This pride was based in its ability to expand steadily from its founding in Austin, Texas, in 1978 to its current 331 supermarket locations. Despite its handsome 20-year stock price return of 2,672%, competitors have been steadily creeping in and stealing market interest. One of the primary public competitors to Whole Foods Market is Kroger (NYSE:KR). Kroger is a normal grocery provider that has set its sights on Whole Foods Market's territory. According to a recent article in USA Today, a journalist found that Kroger is aggressively expanding into organic and natural food selection while also attempting to compete on price. This expansion coupled with its current market presence of nearly 2,500 stores positions Kroger nicely to directly compete on the turf of Whole Foods Market. Whole Foods Market recognizes this threat and according to a recent Wall Street Journal article, it is attempting to slash prices and offer discounts in order to preserve customer loyalty in the face of growing opposition. Additionally the article also notes that Whole Foods Market is facing tough competition from those seeking to capitalize in the organic and natural industry.
This competitive situation normally would lead to an environment in which Whole Foods Market gradually suffers attrition to opponents. However, there is another factor at play in this specific industry and that is simply put, a decline in interest. It is frequently said that a picture is worth a thousand words and in light of this statement, please consider the following Google Trends search for the phrase "organic food."
As can be seen in the chart above, public search interest for organics has been declining over the past six years. This decline could possibly be caused by an increasing existence of public awareness, new research in the health properties of organics, and a decrease in demand for this once faddish industry.
As previously mentioned, Whole Foods Market is facing competition from industry rivals seeking to steal its turf. If industry demand is waning and Whole Foods Market is faced with increasing competition, I believe that it will eventually become a sub-marginal business. In a typical business environment, competition drives prices down so that each firm eventually operates at its marginal cost of production. In an environment in which customers are losing interest however, this greatly expedites the business lifecycle as firms do not have the time to gradually adjust along with their competitors. For this reason, I do not believe that any firm that steals the territory of Whole Foods Market warrants any sort of buy recommendation. Any firm that acquires a greater share in a difficult and diminishing industry is bound to face the same problems that their competitors face. However, given Whole Foods Market's current position as industry pioneer, I believe that these factors have caused it to reach a peak in its business, and over the course of the next business cycle I see its strength greatly diminishing due to competition and fledgling interest.
With this in mind, I prefer to develop my thoughts fundamentally and execute my investments technically. I have found that this allows me to enter at a strategic moment and hopefully reduce the volatility of my investment. The below chart shows the history of Whole Foods Market from 2005 constructed from weekly trading data. Through this chart, the investor can see how Whole Foods Market experienced a gradual decline from its 2006 peaks and bottomed out a few months before the overall market did during the financial crisis. Following this, Whole Foods Market experienced a truly dramatic increase in which it has gained 800% in the past three years. Since it has rallied this strongly over the past three years, any sort of technical entry essentially must be based on a market topping pattern, mainly the head and shoulders pattern. As can be seen in the chart, this pattern could potentially be developing within the next few months. A short trade will be valid as soon as the neckline of the head and shoulders pattern is broken below $80. In the meanwhile, it is very important to be keeping an eye on the organic food industry and the competition facing Whole Foods Market to ensure that this analysis is still valid.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.