Whole Food Waits For Shoppers To Return

| About: Whole Foods (WFM)

"Assuming no dramatic change in economic trends, we are planning for total sales growth in fiscal 2009 of 6% to 10%. We expect comparable store sales growth of 1% to 5% and identical store sales growth of zero to 4%."  - Whole Foods CEO John Mackey.

OK, so, what defines "dramatic," John? (See earnings call transcript.)

I hate these conditional predictions. Essentially no matter what happens, Mackey is giving himself an "out". How about just telling us either "we have no idea" or give us numbers that investors (I am not one) can rely on. Mackey basically told them nothing...

Here is a statement that struck me, from Walter Robb at Whole Foods (WFMI). The questions he was asked were about consumer purchasing behavior.

"Its cyclical in the sense as when the economy turns back up again and customers feel more financially secure we expect they’ll probably return to previous purchasing patterns so we’ll still have the value focus and we think that will position us better competitively for the long run but we do think customer purchasing patterns will evolve as the economy evolves."

This is the "line in the sand" at Whole Foods. Simply put, they recognize that they are not a "value" proposition for shoppers. However, they think that when the economy turns (1 year? 2 years?) shoppers will resume spending more for the same items they can now get at Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), BJ's (NYSE:BJ) or every other local supermarket selling lettuce and potatoes.

Here is my problem with that. Just two years ago organic foods and grocery items were not widely available, leaving Whole Foods as the only real option. Since then offerings at all food retailers have exploded. For instance, when my boys were born years ago we had to go to Whole Foods to get the "Earths Best" baby food. When my daughter was born 18 months ago, I could get it anywhere. I no longer needed to make the trip to Whole Foods for it. The same goes for potatoes, tomatoes, and tons of other items.

Mackey expanded on Robb's claim when he said, "Competition of course is a factor and as is cannibalization but they are not any more intense right now then they were in Q2 or Q1. So although we can’t know for certain we think it’s reasonable to conclude that the deceleration in our comp store growth has primarily been due to the economy." I disagree. Just looking at the shelves in local markets tells me that more of what I want organically is available everyday. The change in the last nine months is dramatic. Is the economy a factor? Of course. I think Mackey is placing too much emphasis on it because it is an easy scapegoat.

As a shopper, I have no reason to return to Whole Foods unless I want a specific specialty item. I am in the middle. I prefer organic when I can get it but will not refuse a purchase because of it and at the same time I do not purchase solely on price. Either end of the spectrum will either avoid or solely frequent Whole Foods. Those of us in the middle need a better reason to go to Whole Foods than having a few extra bucks in our pockets. This is what Mackey and Co. are missing.

It isn't the economy that is the main driver changing consumer behavior, it is the fact that Mackey is no longer operating in a market of one, but thousands. Consumers have a plethora of choices and given the choice of the same potato at $2 vs $.75, the cheaper option always wins.

This view by management is bad news for shareholders as it clearly signals the fundamental changes necessary for the company to become more appealing to a wider audience will not be happening anytime soon.

Want more evidence? Read this Q&A regarding the last "slowdown" in 2001 and Whole Foods results:

Andrew Wolf – BB&T Capital Markets
Looking back in 2001, the last slowdown, you fared a lot better, your comps were strong and the transactions were way up and I think at the time you posited that it was you were benefiting that the chain was benefiting from the trade down from restaurants so forth. What do you think has changed, do you think it’s either the economy is tougher or people shifting where they’re spending or do you think there’s more competition for the kind of restaurant equivalent type food or close to equivalent type food that can be provided at other outlets?

John Mackey
We’re not positive what it is. We speculate two things that are different in 2008 from 2001 is one the oil prices are so high and gasoline is so expensive. Whole Foods has always attracted because we have such unique and special stores, we’ve always attracted a wider geographical radius then conventional supermarkets do. People drive further to come to Whole Foods. And we think that with the price of gasoline right now that people aren’t driving as far as frequently to our stores as they used to. So we think on the margin that’s hurting our comps.
Secondly, although we don’t want to break it out, I will say that the real estate markets that have been the hardest hit on the whole subprime mess, we have felt that. We’ve seen a greater slowdown in comps in those markets then we have in the markets that have been less affected. So I think those two things are factors, the price of oil i.e. gasoline and the markets that have particularly been hit hard by the housing downturn. Those have both affected Whole Foods comps.

Notice the key words for excuses? "Subprime, gas, oil, real estate". What is really different? The competition and consumers choices for similar products: in 2001 there really wasn't any, today there is tons.

Disclosure: Long WMT, no position WFMI


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