Whole Foods Market, Inc. (NASDAQ:WFM) is working to lessen being perceived as an upscale grocer by offering more deals to compete more effectively with other food retailers. It’s also moving beyond the more expensive, organic items the chain is known for to more conventional, cheaper food items.
According to the Wall Street Journal, some of the company’s sales strategies include “flash” sales on specific items promoted on social media that run for a few hours, like a five-hour sale on ice cream, where customers can buy one item and get one free. Customers can also expect to see more one-day sales on specific items.
Whole Foods Market, Inc. (NASDAQ:WFM)’ goal is to appeal to a more middle-class food shopper who may perceive the grocer as too expensive and a place that caters to affluent shoppers. Stores are also opening up in lower-income areas and in smaller markets. The focus on more affordable options in recent years has helped the company survive decreasing revenue brought on by the recession.
In late 2008, Whole Foods Market, Inc. (NASDAQ:WFM) shares traded as low as $4.27. Shares currently trade at around 12 times that amount after a stock split of two-for-one on May 29. Despite the improvement in the stock price, Whole Foods Market, Inc. (NASDAQ:WFM) has under-performed larger rival The Kroger Co. (NYSE:KR), but did beat smaller retailer The Fresh Market Inc (NASDAQ:TFM):
| Adj. close on 7/29/2013 | Adj. close on 1/2/2013 | % change | |
|---|---|---|---|
| Whole Foods Market | $55.62 | $45.31 | +22.8% |
| Kroger | $39.45 | $26.11 | +51.1% |
| The Fresh Market | $52.78 | $46.70 | +13% |
Source: Yahoo! Finance
Customer education key in maintaining loyalty
Whole Foods Market, Inc. (NASDAQ:WFM) has offered its customers money-saving tips for a while now using coupons and via information on its website. The discounts have not had much of an impact on profit margins, which have held steady at around 36%.
Co-chief executive Walter Robb discussed in the Wall Street Journal that heavy discounting will continue to match competitor prices and that aggressive pricing may negatively impact gross margins. Mr. Robb noted the importance of striking the right balance with sales, which may not have the intended effect of bringing customers into the store to buy sale and regular-priced items .
In its 2012 annual report, Whole Foods Market, Inc. (NASDAQ:WFM) noted it had decreased the pricing gap versus its competitors on value items to its narrowest margin. The company’s targeted pricing and promotional strategies achieved good results in a fiscal 2012 competitive survey, resulting in its most competitive position in more than three years.
In its latest third quarter ended July, net income increased 21% to $142 million and diluted EPS rose 20% to $0.38. Comparable-store sales rose 7.5% .
Rivals move in opposite direction
While Whole Foods moves to shed its pricey reputation, rival The Kroger Co. (NYSE:KR) has increased its natural- and organic-product selection to attract a more affluent consumer. Customers interested in products like dry-aged beef and a wide selection of cheeses and vitamin supplements.
The Kroger Co. (NYSE:KR) also recently acquired Harris Teeter Supermarkets and its 212 stores located in Southeastern and Mid-Atlantic markets. The transaction is expected to be accretive to diluted EPS by $0.06 to $0.09 in the first full year after the merger minus expenses. Long-term EPS growth is estimated at 8% to 11%. With a larger scale, The Kroger Co. (NYSE:KR) will be better able to achieve its planned annual cost savings of $40 million to $50 million over the next three-to-four years .
A more direct competitor to Whole Foods, The Fresh Market Inc (NASDAQ:TFM), maintains its focus on providing customers with “affordable luxury” by offering premium products in its smaller stores. Chief executive officer Craig Carlock finds customers are responding well and the company is focused on expanding its number of stores.
In its outlook for 2013, The Fresh Market Inc (NASDAQ:TFM) expects to open 19 to 22 stores, with four- to-six stores opening in the second quarter and 13 to 15 new stores launching in the second half of the year. Growth plans should result in capital expenditures in the range of $130 million to $150 million .
My foolish conclusion
Whole Foods Market, Inc. (NASDAQ:WFM)’ strategy of lowering its prices and altering its product line to attract less-affluent consumers should help the company expand its customer base. As more customers are exposed to organic- and natural-food options and are persuaded to buy them, prices between these products and more conventional food products should level off.
This can make price competition between grocers less relevant and they may turn their focus to other areas, like customer service or select product and service offerings. The competitive food-retailer space will continue to evolve as food and health trends alter consumer-buying habits.
The article Whole Foods Moves Beyond Organic originally appeared on Fool.com and is written by Eileen Rojas.
Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.
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