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Whole Foods’ New Balancing Act

To continue to grow, the chain may need to lower its prices — but can it maintain the quality customers expect while doing so?


When I head to the grocery store, it’s a constant internal struggle. I can go to Whole Foods Market (NASDAQ:WFM), where I will inevitably spend a little more but feel a bit better about my purchases (and my soul). Alternatively, I could walk across the street to the more traditional grocery store. The lettuce might be a little more toward the wilted side and the eggs not cage-free, but I won’t be spending, as the joke goes, my “whole paycheck.”

Whole Foods has a reputation for offering a wide variety of organic food, grass-fed beef, pesticide-free produce, and other supplies for health-conscious families and fans of Michael Pollan. It also has a reputation for high prices and a snooty environment that isn’t accessible to the average working-class family.

In an attempt to reach a greater cross section of America, Whole Foods has looked beyond urban areas and has started building stores in suburbia and small towns.

The U.S. metropolitan markets have basically been conquered by WFM, leaving all regions in between as areas for potential growth. And expansion is paramount for the chain, which aims to grow its footprint to 1,000 stores in the next decade or so from about 320 now, The Wall Street Journal recently reported.

The story also noted that WFM opened six stores in the past quarter, focused on so-called secondary markets where “rent is lower…and competition for natural, organic food isn’t as heated.”

WFM management recognizes that to succeed in Middle America, they need to ditch the “whole paycheck” nickname. To do so, they have already promoted discounts and are keeping many grocery prices level despite rising commodity costs.

But will the expense of attracting new customers impact the company’s bottom line and ultimately the stock? WFM is up 74% over the past five years. Impressive by itself, and a much better showing than Kroger (NYSE:KR) or Safeway (NYSE:SWY), which have respectively lost 10% and 38% since early 2007. WFM has outperformed its more traditional rivals over the one-year and six-month time frames as well.

About a week ago, fellow InvestorPlace writer Lawrence Meyers convincingly argued that Whole Foods will destroy all rivals. But to do so, it needs to be smart about its growth plans and what it’s willing to do to attract more budget-minded consumers.

It’s a delicate formula, but one to which even a hot-dog-stand owner can relate. On one hand, cutting costs can negatively impact your profits. On the other, lowering your prices can bring in more customers.

The trick is balancing the model so the customers you attract spend more money than the amount you are sacrificing through any discounts. And speaking of balancing, Whole Foods will have to massage this pricing model while facing increased competition from the also-expanding Trader Joe’s and traditional grocers, which are encroaching on Whole Foods’ niche organic market. Even Wal-Mart Stores (NYSE:WMT) is now the largest seller of organic produce in the U.S. and has just debuted its “Great For You” healthy-food initiative.

So far, however, so good. WFM sales rose more than expected at the new smaller-market locations last quarter, and they continue to grow overall. What’s more, analysts still predict strong earnings. Last week, the company reported first-quarter results of 65 cents per share, and 2013 first-quarter estimates currently stand at 73 cents per share. So the Street thinks the company can continue to bolster its bottom line even while cutting costs.

What do you think? Will WFM be able to expand its brand while a) maintaining the quality its core customers expect, and b) committing to prices that appeal to a broader customer base?

Article printed from InvestorPlace Media,

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