Success stories during the recent recession were rare. However, Whole Foods (NASDAQ:WFM) was an exception. The Austin, Texas-based organic foods retailer reported five straight quarters of growth during and after the recession.
And, it continued the growth story for a sixth straight quarter this past Wednesday.
The company’s profit grew by one-third in its most latest quarter, while revenue rose 11.6%. Most importantly, same-store sales grew by 8.6%. Compare that to competitor Safeway’s (NYSE:SWY) same-store sales growing by a meager 0.4% in the first quarter.
One would assume that, with a relatively healthy balance sheet and an uptick in the economy, the Whole Foods growth story should continue in the coming quarters. Yet the company’s chief executive officer, John Mackey, sounded a note of caution about sales during the back half of the year.
His concern can be attributed to the two factors that could possibly hamper growth: inflation and commodity costs. By itself, inflation isn’t bad news. In fact, it is welcome in an economy with zero interest rates. However, high inflation can turn away customers.
Similarly, rising commodity costs can produce headwinds for grocery retailers in the form of increased cost of operations (and reduced operation margins). The price increases coupled with commodity cost increases can produce a domino effect of price increases. For example, the Bureau of Labor Statistics’ gasoline index has risen by 27% during the last 12 months. Increased gas prices drive up transportation and storage costs for grocers like Whole Foods. The result is higher prices at the supermarket.
So far, Whole Foods has resisted a blanket price increase of its products. According to Mackey, the chain conducted a “selective pass-through” of prices for certain products.
Even with increased retail prices, Whole Foods should be able to weather rising commodity costs. It’s not that margins are unimportant to Whole Foods — they were an integral part of its price-reduction strategies in 2009 aimed at refashioning itself from niche grocer to a mass-market grocer. However, they are not as important to the Whole Foods experience, as they are to value-grocery chain such as Wal-Mart (NYSE:WMT).
Instead, Whole Foods’ business depends on a combination of brand equity and store sales. In simple terms, this adds up to margins and customers’ perceptions about the store, with the latter gaining even more importance. The good news about Whole Foods is that it operates in a niche retail space, with customers that are a mix of the relatively affluent and middle class. Both sets desire a quality shopping experience and are willing to pay a premium for environment-friendly products with low carbon footprints. That is why the company’s top line increased even during the recession.
And the company seems to be taking the right steps to cater to these consumers. Apart from opening new stores in large markets, the company recently started an initiative to further educate consumers about their carbon footprint. The Eco-scale initiative is a color-coded rating system to measure environmental impact for house cleaning products. For a store that caters to an environmentally-conscious set of consumers, that’s a step in the right direction – one that should ensure a wholesome growth of the Whole Foods story.
As of this writing, Rakesh Sharma did not own a position in any of the stocks named here.