While demand for organic foods and organic products is arguably only growing, Whole Foods Market’s (WFM) dominant role in this arena is on the wane.
The organic market is so hot right now that it has attracted a slew of competitors, from local mom-and-pop shops to grocery stores carrying more organic products, all of which can easily compete with WFM — known for its more expensive food — on price.
And all a time when, while consumer spending is on the rise, consumers are increasingly savvy about price comparisons.
The bottom line is while an organic-loving consumer may be willing to buy a more expensive organic product over a non-organic product, they are certainly not likely to pay more for an organic product they can find for a better price elsewhere — a trend putting pressure on Whole Foods stock.
Whole Foods Hacks 1,500 Workers
To help offset costs, Austin, Texas.-based Whole Foods announced Monday that it will trim 1.6% of its workforce, or 1,500 workers, over the next eight weeks in what it describes as a “very difficult decision … to be able to maintain low costs for customers as its upgrades technology,” Whole Foods Market co-CEO Walter Robb said in a statement.
Whole Foods stock retreated about 1% in response early in Monday’s session, but shares were trading closer to flat in the afternoon. The stock is down nearly 40% year-to-date.
WFM is in a very vulnerable position against an onslaught of new players to the fresh and organic foods market, which include even Google (GOOG, GOOGL) getting into the game with a two-city trial run for fresh-food delivery service launched earlier this month. While Google is partnering with Whole Foods on the endeavor, GOOG is ramping up competition with its similar partnership with Costco (COST).
Not only does WFM have a growing number of competitors, but its existing competitors seem to be doing much better business. Trader Joe’s, a private company that also sells upscale organic groceries, sells twice as much per square foot as Whole Foods, according to September 2014 data from real estate investment firm JLL. Whole Foods sells about $930 per square foot versus Trader Joe’s at $1,734 per square foot.
At first glance, Whole Foods stock may look like a bargain now, with the stock well trading near 52-week lows of $30.18 — well off its peak the past year of $57.57. But the selloffs have merely driven WFM shares back down to Earth, where it holds a valuation merely on par against its peers.
Whole Foods stock, with a market cap of $11.09, has a price-to-earnings ratio of 18.5, whereas The Fresh Market’s (TFM) price-to-earnings ratio is 16.1, Kroger’s (KR) is 18.3 and Weis Markets’ (WMK) is 19.4.
And Whole Foods has no other arena to buffer its losses in the organic market space as its natural and organic foods supermarkets are its only operating segment.
Bottom Line
Investing in faltering Whole Foods stock now would be a mistake, especially as the company has provided very little explanation on how it will maintain a competitive edge in an increasingly crowded market place, when layoffs will only take its bottom line so far.
WFM needs to outline an aggressive strategy for drawing new customers, dramatically change its grocery store model to a more successful one like Trader Joe’s has with its no-service-departments stores, or forge a whole new, compatible business line that can hedge against its organic market share losses before investors consider putting their money into Whole Foods stock.
As of this writing, Rebecca McClay was long Google.
