The rise and rise of Whole Foods Market, the US-based organics retailer, has been one of the industry’s true success stories in recent years. However, with the US embroiled in an economic downturn and shoppers chasing value and shunning the company, can the former Wall Street favourite bounce back? Dean Best reports.
Tofu or not tofu? That is the question for cash-conscious consumers in the US right now – and Whole Foods Market, the country’s largest natural and organics grocer, is suffering as shoppers tend towards the negative.
Under chairman and CEO John Mackey, who co-founded Whole Foods back in 1980, the retailer has enjoyed a buoyant couple of decades, expanding rapidly first across the US, then into Canada, and then across the pond into the UK as demand for organic food boomed.
The company became a Wall Street favourite as sales soared. Now, however, with consumer confidence in the US down to its lowest level since 1992, Whole Foods this week acknowledged to the market that it is not immune from the economic headwinds facing the rest of the industry.
When Whole Foods announced a set of disappointing quarterly numbers on Tuesday (5 August), Mackey’s typical ebullience seemed tempered by a realisation that the company is going to have to take stock.
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By GlobalData“Today’s economic environment is the most challenging I have experienced in my 30 years in retail,” Mackey told analysts. He pointed to the perfect storm affecting all in the industry to some degree: lower consumer spending, higher fuel prices, higher food prices and a slump in the housing market.
That storm has battered Whole Foods; operating income during the three months to 6 July tumbled by 19.5% and sales, on an identical-store basis, inched up by only 1.9%. And there was more: Mackey said the company would rein in its expansion plans and suspend its dividend payment.
“We believe that the economic hardships consumers are facing are impacting their behaviour in various ways, from making fewer trips to making more conscious value decisions,” Mackey said.
Whole Foods Market chairman and CEO John Mackey |
Whole Foods has been making some conscious value decisions of its own. For a company known in the US as Whole Paycheque, an economic downturn does not present the most fertile of business conditions. The company is busy trying to convince consumers that they can find value at Whole Foods stores.
“I’m getting a little tired of that tag around our neck,” Whole Foods co-president Walter Robb told The New York Times last week, referring to the company’s nickname. “We are a lot more competitive than people give us credit for. We challenge anyone on like items.”
The challenge for Whole Foods is whether anyone will believe them. With consumer confidence low, shoppers are trading down and the value retailers are reaping the benefits.
Nevertheless, some industry watchers believe Mackey and Whole Foods have done the right thing with the reappraisal of the business. From an investor perspective, the move to cut back on capital expenditure should improve returns in the long run, although the decision would have been a tough one for Mackey, a proud advocate of his business, to make.
“Our company will emerge stronger and better positioned to realise our growth potential and fulfil our long-term mission and core values,” Mackey insisted.
Mackey’s confidence was highlighted last year when it emerged that he had anonymously used online financial forums to attack Wild Oats Markets, a one-time rival of Whole Foods, which the company acquired last year.
Although the comments were made between 1999 and 2006, their exposure last summer was something of an embarrassment to Mackey and Whole Foods, which was then in the middle of a legal battle with US regulators over the company’s plans to buy Wild Oats.
The merger got the go-ahead and all seemed well but, just to compound Whole Foods’ current business problems, late last month a US appeals court reversed the ruling that had cleared the deal. Whole Foods will be mulling its legal options and will be anxious about whether the US$565m deal could unravel.
And with US consumers less keen on their tofu than before, that anxiety will not stop there.