The first move indicates Whole Foods Market, Inc. (NASDAQ:WFM)’ ambitions to expand market presence into the profitable grocery mainstream, the second indicates the company’s fashion-forward food stance and belief that consumer sentiment will stay swinging toward organic food, and the third move comes on the heels of Whole Foods’ forecast-shattering 20% second-quarter rise in profits.
Whole Foods Market, Inc. (NASDAQ:WFM)’ three bold moves rely on certain assumptions about stakeholders — and depending on how these assumptions play out, Whole Foods’ actions will either reap rewards or compound risk.
Lower margins: Risking market power?
Despite a long-held reputation as a pricey upscale grocer, Whole Foods Market, Inc. (NASDAQ:WFM) has managed to steadily expand customers, storefronts, and profits. Thus the company’s February decision to lower prices to attract more customers and discourage competitors marked a crossroads in growth strategy.
But was Whole Foods’ move the best way to compete? By focusing on lower prices at the potential loss of better branding, Whole Foods Market, Inc. (NASDAQ:WFM) risks losing market power — a microeconomics term measuring a company’s ability to raise prices without sacrificing customers. The more market power a firm has, the stronger its brand differentiation and the less sensitive its customers are to price fluctuations.
Whole Foods’ success has relied on market power from inception with brand differentiation like higher-quality food, prioritized employee welfare, wellness and cooking classes, plus investment in community and global social enterprises. For Whole Foods to focus on lower prices assumes that customers at Whole Foods are price-sensitive, and forgoes the notion that for certain consumers, buying pricey organic food is as much about displaying social status as it is about the food itself. As big-box retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) increase shelf space for organic food, Whole Foods Market, Inc. (NASDAQ:WFM) needs to separate itself from the pack by more than its products and prices.
GMO labels: Precarious game theory?
Whole Foods Market, Inc. (NASDAQ:WFM)’ March announcement that GMO-containing products will be labeled companywide by 2018 exemplifies the forward-thinking character that has differentiated the upscale grocer’s brand. Lauded by stakeholders and the media, Whole Foods’ GMO-labeling payoff depends much on consumers’ preferences, competitors’ countermoves, and politicians’ pandering over the next five years.
The USDA claims that “organic products have shifted from being a lifestyle choice for a small share of consumers to being consumed at least occasionally by a majority of Americans.” Added to the fact that “consumer demand for [organic] goods has shown double-digit growth for well over a decade,” Whole Foods’ GMO-labeling move seems one that will be well-received by customers — including mainstream customers with lower food budgets that Whole Foods Market, Inc. (NASDAQ:WFM) is targeting now.
Eager competitors have caught onto the organic wave too, and will not forgo all the non-GMO profits to Whole Foods. Not only are The Kroger Co. (NYSE:KR), Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) stocking more organic products (often in greater quantities and at lower prices than Whole Foods), they are also lobbying the government for a proactive GMO-labeling stance. In January, over 20 food companies’ executives, including Wal-Mart Stores, Inc. (NYSE:WMT)’s, convened in D.C. to discuss advocating for a national GMO-labeling framework.
A federal GMO-labeling program could also reduce the payoff of Whole Foods Market, Inc. (NASDAQ:WFM)’ move to do the same. These labels’ competitive brand advantage for Whole Foods will be diluted if Wal-Mart Stores, Inc. (NYSE:WMT) and grocer competitors can boast similar labels (and likely at no cost to the grocers, with government and suppliers shouldering the burden).
Will such a federal initiative occur before 2018, when Whole Foods’ labels will debut? It’s unclear — so while Whole Foods’ GMO labels are good conscious capitalism, the move’s boost (if any) to Whole Foods Market, Inc. (NASDAQ:WFM)’ bottom line will occur years later, hinging much on Washington’s legislation and efficacy.
Stock split: Robust future growth?
Like a cup of the company’s Allegro Coffee, Whole Foods Market, Inc. (NASDAQ:WFM)’ 2013 moves have been bold. The most recent move, a 2-for-1 stock split planned later this month, indicates that “the company believes that the stock is heading higher in the near future.”
Indeed, Whole Foods Market, Inc. (NASDAQ:WFM)’ second quarter 20% profit rise and 6% same store sales increase indicates that its lower margin strategy may be working. One quarter does not make or break a long-term investment, so only time will tell how Whole Foods’ bold moves affect its profits. Bit with these recent earnings and only 350 operating storefronts of a projected 1,000, Whole Foods seems poised to offer investors further bounty before becoming overripe.
The article Whole Foods: 3 Bold Moves originally appeared on Fool.com.
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