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This Troubled Organic Foods Maker Is a Risky Prospect

June 23, 2014 | About:
jaggom

jaggom

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Whole Foods Market (WFM) has had a disappointing year, with its stock down around 35%. In fact, it is the worst performer in the Standard & Poor’s 500 Consumer Staples Index. Moreover, the company did not add any value for investors by releasing tepid results for the second quarter, and also curtailed its earnings forecast for the year.

Difficult challenges

Whole Foods has to face tough competition from its peers such as Wal-Mart and Kroger, which are looking for a chance to grab a share of the organic foods market. Because of this, the performance of Whole Foods might deteriorate even further. However, management is working hard on different strategies to bring Whole Foods back on track. Only time will reveal whether these strategies will actually work or not.

After the company reported its second-quarter results, its stock fell around 20%. There are various issues around the company, which has led to such weak results. Whole Foods' products are priced higher than its peers, due to which customers are trying cheaper options in the market. According to analysts, management has not put in any effort to make its prices more competitive.

Well, it did not come as a big surprise for the Street as the company reported its weak results. This was the third time in just six months that the company had cut its outlook. Its growth is slowing down as same-store sales are expected to increase just 5% to 5.5% this fiscal year, which is below its historical average of 8% growth.

Turnaround efforts

But, management is putting in a lot of effort to turnaround its present situation. Whole Foods is going for a proactive value strategy that will increase its store sales in the future by slowing down the rate of price increases of its offerings.

Whole Foods has also planned an aggressive expansion strategy for the future. Currently, it has 374 stores across 41 states in three countries, which it plans to increase to more than 500 stores by 2017. Moreover, on the back of the U.S. becoming the largest organic foods market globally, management believes that the U.S. alone has an opportunity for 1,200 stores. And if Whole Foods is able to combine its price control strategies with store expansion, then it will be able to capture a bigger share of the market.

The company has already started reaping the fruits of some of its strategies. In Austin and Boston, two of its oldest markets, the company recorded market share gains as it accelerated square footage growth. These markets had 20% higher sales last year, and are expected to carry the same momentum ahead.

The competition

The key to Whole Foods' success in the future would be tight price controls. Much emphasis is laid on more competitive pricing because Wal-Mart has entered the organic foods market by launching Wild Oats organic food items. In fact, Wal-Mart is re-launching Wild Oats with a new, more affordable price point, which is expected to be 25% lower than other national organic brands. At the same time it is not compromising on the quality of the product and covers a wide array of categories, which includes salsa and pasta sauce to quinoa and chicken broth. This is a strategic move from Wal-Mart.

On the other hand, Kroger's Simple Truth organic brand has put in a solid performance and management anticipates a billion dollars in sales by the end of the current fiscal year. It has added more than a hundred items to the Simple Truth brand in the previous fiscal year.

Conclusion

All in all, Whole Foods is in troubled waters as it is under pressure from different sides, with bigger players entering the organic foods market and offering lower prices. It is very important at this stage that the company focuses on pricing and expansion plans. Management taken various initiatives to improve its performance.

Moreover, the stock is trading at its 52-week low, which could be a good investment opportunity. However, in this case, it will be prudent for investors to wait and see if the strategies implemented by management are able to reap results.


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