Whole Foods Market, Inc. (NASDAQ:WFM), tired of being valued as “just another grocery store,” has named founder John Mackey its sole CEO in a bid to reclaim its former glory.
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The company announced the move on Nov. 2 along with earnings that beat analyst estimates, and a dividend hike. The company said it earned $88 million, 28 cents per share, on revenue of $3.5 billion, beating estimates on the bottom line by four cents. But the top line showed no growth at all, with sales for the September 2015 quarter at $3.49 billion versus $3.44 in the year-ago quarter.
The company projected sales growth between 3.5% to 4.5% for the next fiscal year and earnings of at least $1.42 a share.
The problem Mackey is coming in to fix is with comparable store sales, which fell 2.6% for the quarter and seem to be falling further. The shares, which peaked at over $63 in 2013, when Whole Foods traded like a technology stock, are now trading at a level more comparable to slow-growth rival Kroger Co (NYSE:KR), with a price-earnings multiple of 19 that is no longer an attractive premium to the market.
The Millennial Dilemma
The challenge for Whole Foods is changing demographics, summed up by the problems of millennials, typically defined as people born between 1980 and the end of the century.
These younger customers are less prosperous than their elders, they have less room (and time) to cook in, but they’re also highly idealistic and suspicious of large institutions, which Whole Foods has become.
The assumption is that these consumers want convenience, lower prices and clear directions on food preparation. Under Robb, Whole Foods has been trying to do all of that, signing a deal with Instacart for home delivery and launching a rewards program in which customers can get access to special pricing if they shop at the stores regularly.
Robb’s answer to the price problem is 365, a smaller store offering somewhat lower prices, pitched to younger consumers. Just three of the stores are open now, but another 16 are due to open next year. It is unclear what Mackey’s answer will be.
The company has also tried to attract millennials by testing vegan meal kits from Purple Carrot, with all the ingredients of a meal for two, and directions, for $19.99, at a store in Massachusetts.
What Can Mackey Do
Mackey led WFM stock in its glory days, but had become controversial for his libertarian political views and stepped back in favor of Robb in 2010.
In the New Yorker profile Mackey revealed himself to be impulsive, immature and at odds with the leftist political image the chain was trying to project. It came to a head in a piece he wrote for The Wall Street Journal in 2009, called “The Whole Foods Answer to Obamacare,” a conservative wish list on reforming the health system through deregulation.
By this time, Whole Foods had also gained a reputation as “Whole Paycheck,” offering quality food but at very high prices to upwardly mobile professionals. It was deemed a hypocrite by many of the liberal consumers that had been its biggest fans, sort of like when Elvis Presley began singing country music.
Mackey was vague about his plans in taking back control, saying “we’ve got to up our game” and offering no specifics.
The initial response to Mackey’s promotion was positive, the stock gaining nearly $1/share in overnight trading. But Mackey must now put some meat on the bones, detailing a plan that will boost same-store sales as well as profit margins, which peaked at 4% in 2014, but which now average closer to 3%.
If he can do it, he’s a hero. But his innovations are no longer as unique as they were, he’s no longer as young as he once was and neither are the grocer’s biggest fans.
Frankly, I’d rather own stock in Kroger.
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in KR.