People have become highly health conscious and prefer having natural and organic food rather than anything else. Therefore, specialty grocer Whole Foods Market (NASDAQ:WFM) benefitted largely from this trend since it was the first one to provide such products, that too at a premium price. Consumers did not mind paying higher prices for its products since organic products were not available elsewhere.
However, this is no more the case now and Whole Foods Market’s leadership has been affected by the emergence of a large number of companies offering similar products. As a result, the specialty grocer’s performance is being affected. In its recently reported quarter, the company witnessed lower than expected revenue and flat bottom line over last year. This is mainly because of premium price charged by the retailer, which made consumer shift to other players.
Whole Foods is having a tough time, trying to overcome competition from other similar players such as Sprouts Farmers Market (NASDAQ:SFM), which made its debut last year. This company has expanded its wings since its inception and provides stiff competition to Whole Foods. Even Sprouts Farmers posted its first quarter numbers recently which were quite ahead of Street’s estimates.
Its revenue climbed 26% to $722.6 million over last year, boosted by a same-store sales growth of 13%. The company opened four new stores during the quarter, which helped in driving revenue higher. Also, higher demand for its healthy and organic food boosted its top line. Its adjusted earnings grew to $0.23 per share from $0.14 per share in the prior year. Moreover, it raised its outlook for the year, delighting its investors and sending its share price north.
Not only new entrants, but also existing retailers such as Wal-Mart (NYSE:WMT) has entered Whole Foods Market’s space and are eating into its customer base. Because of high demand for organic products, players such as Kroger and Wal-Mart have started offering similar products. Also, they provide these items under its local brands and come at a much lower price than Whole Foods. Moreover, these companies have a strong delivery network and offer services such as home delivery of groceries. Although Whole Foods too has made delivery options available at some of its stores, it will be interesting to see how it will be able to outperform others.
Also, Wal-Mart plans to launch 100 organic products under the Wild Oats brand. These products will be available in 4,000 store network of Wal-Mart’s U.S. division. It will cater to the lower income group people since these organic products will be priced at a discount of 25% in comparison to other branded foods. Moreover, Wal-Mart’s website provides recipes and tips on nutritional food which will help people to keep healthy. These efforts should provide stiff competition to Whole Foods.
Whole Foods Market is indeed undergoing a difficult phase. Also, increased competition has been a major point of concern wherein lower prices are forcing budget constrained customers to shift to cheaper rivals. Moreover, lowering product prices have been hurting its top line. Investors should stay away from this company until it starts making efforts to win back lost customers.