The saga of Whole Foods Market, Inc. (NASDAQ:WFM) has been rather unexpected, to be honest. For many years, I believed WFM to be the category killer for organic food. WFM had everything going for it: brand name, decent footprint, secular tailwinds and solid financials.
Then something happened that I really did not expect, and it blew my conception about WFM out of the water.
The thing about category killers is that they are massive one-stop shops for what are effectively commodities. Home Depot Inc (NYSE:HD) wiped out the local hardware store because it carries everything at lower prices, which it can obtain via economies of scale.
WFM, however, is not quite the same concept. At first, and up until recently, it was moving in that direction by opening de novo stores and by rolling up small organic grocery stores. The key point, however, is that WFM was not selling commoditized products. It was selling specialized products, which meant it was building itself into the primary supplier of those products — organic and “responsible” food.
WFM Stock Stumbles
However, in the past couple of years, everyone has gotten into the organics game. Grocers of every stripe, Wal-Mart Stores, Inc. (NYSE:WMT), and even the dollar stores started selling organics.
Originally, I thought that this would not present any real competition to WFM. My faulty assumption was that the Whole Foods shopper was loyal to Whole Foods, and had no reason to shop anywhere else. WFM patrons fit a certain upscale demographic.
Where I went wrong was that organics have effectively become commoditized. You can find organic chicken and meat and vegetable and fruit in just about any large grocery store. It doesn’t matter if it is “lower quality” organic or not compared to WFM. The point is that labeling something “organic” is evidence enough to the general consumer.
With organics now commoditized, the Whole Foods shopper no longer has loyalty, as we would expect of a commodity business. Thus, consumers have bailed on the substantially higher prices of Whole Foods and deign to visit the regular grocery stores more often. The result has led to lower same-store sales, and other struggles for WFM stock.