Whole Foods Market, Inc. (WFM): A Differentiated Business Model in a Tough Industry

Whole Foods Market, Inc. (NASDAQ:WFM) is a growing company in an industry that’s been struggling for years. It’s made its mark by charging more for better quality and service. It’s a winning combination.

The grocery isle

From a distance, Whole Foods Market, Inc. (NASDAQ:WFM) looks like a grocery store. That’s been a pretty horrible industry to be in for the last decade or so. Not only does the industry suffer from low margins, but big box retailers like Wal-Mart Stores, Inc. (NYSE:WMT) have been using groceries as a loss leader to get customers through its doors.

Wal-Mart Stores, Inc. (NYSE:WMT) can do this because it sells so many other items. If enough people come for groceries and leave with a few non-grocery items, it makes out. Companies that sell nothing but groceries have to lower prices to compete, which just squeezes their margins even more.

Different but equal

Whole Foods Market, Inc. (NASDAQ:WFM) sells groceries, but it has taken a different approach. It sells organic and “healthy” fare. That’s allowed the company to ride a growing trend toward healthier lifestyles. The interesting thing about that is that people are willing to pay more for this type of food, so Whole Foods’ profit margins tend to be in the mid-single digits. Grocery industry leader The Kroger Co. (NYSE:KR) boasts a profit margin that tops out at around 3% or so.

With such thin margins, two percentage points makes a big difference. For example, The Kroger Co. (NYSE:KR)’s sales in its just ended fiscal year reached nearly $97 billion, its net income was about $1.5 billion. In its most recent fiscal year, Whole Foods posted sales of about $11.5 billion with net income of just under $500 million. The Kroger Co. (NYSE:KR) had nearly nine times the revenue, but only a little over three times the net income.

Kroger is a good company in the grocery space, it just isn’t as good as Whole Foods.

Service

The type of products that Whole Foods Market, Inc. (NASDAQ:WFM) sells aren’t the only differentiating factor. It focuses on the store experience just as much as product selection. That’s increasingly important, particularly at the higher-end price points where the grocer operates. While you can get cheap groceries at a Wal-Mart, the experience of shopping is going to feel just as cut rate.

Although Macy’s, Inc. (NYSE:M) operates in a different industry, a change the company made after the 2007 to 2009 recession shows just how important Whole Foods Market, Inc. (NASDAQ:WFM)’ customer centric model is. After the recession, Macy’s initiated what it calls “magic selling.” It trained its floor staff to be more responsive to customers and “celebrate” their purchases.