Seeking to shed its "Whole Paycheck" reputation, Whole Foods over the last few years has been offering more discounts, brought in less-expensive products, and held prices in a bid to appeal to a broader range of consumers. But Wall Street is wondering whether Whole Foods has already lowered prices enough.
Shares of Whole Foods slid $9.40 to $87.50 last Thursday after management, in reporting first-quarter results, warned that it expects profit margins for the next three quarters to decline compared to last year. The declines were attributed to particularly tough year-ago comparisons but also to continuing investments to improve its pricing message. Better appealing to price-conscious shoppers is said to be more critical as Whole Foods enters smaller, more suburban markets.
In its 2012 annual report, Whole Foods attributed much of its success in the past few years — including grocery market share gains and 11 consecutive quarters of comp growth of 7.8 percent of better — to "visible value efforts which have positively impacted our price image."
But first quarter results indicted that those share gains may have slowed. While comps grew an impressive 7.2 percent, they were less than its range of 8.5 percent to 8.9 percent seen over the past year. Management blamed the moderation on a decline in consumer confidence and the macro environment. Top-line projections were slightly lowered for the year although EPS targets were kept the same.
Some analysts appeared to question whether the price cuts were still paying off. On the call, BMO Capital Markets' Karen Short asked, "Given the quality of your offering, and everything that you guys have been working towards in terms of price investments, do you really need to keep investing in price?"
Pointing to increasing competition around the country, David Lannon, EVP, operations, answered, "Yeah, we're going to keep investing in price. You say the gaps narrowed, that's true. We would like to eliminate it while maintaining high quality. We think that's a competitively very strong position to be in."
Walter Robb, co-CEO, added that the value-message is critical for the long-term to broaden its appeal as the organic/fresh opportunity grows.
"The market is getting bigger and we're going for the big prize which is, those folks that are not eating as healthy," said Mr. Robb. "The fresh healthy food market is very large, and we think by continuing to improve our position we have actually got a much bigger market than we're currently serving. So, this is an important point that giving our self the room to continue to do this."