Why Whole Foods' stock is tanking, and why it shouldn't be.

Commentary about business and finance.
Jan. 4 2007 6:52 PM

The Whole Foods Story

Why the elite supermarket's stock is tanking, and why it shouldn't be.

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Illustration by Robert Neubecker. Click image to expand.

It's fashionable to be down on Whole Foods. In 2006, a year in which the stock markets rocked, shares of Whole Foods fell 40 percent. As upscale shoppers continued to spend with abandon, Whole Foods underperformed quotidian grocers like Safeway and Kroger. In November, analysts downgraded the company's stock, in part because its same-store sales growth fell into the mid single digits.

Whole Foods, which enjoyed two decades of growth, is catching flack from all sides. From below: Wal-Mart is making a push to sell more organic foods, and so are old-line grocers like Safeway and A&P. From above: As Whole Foods becomes mainstream, food snobs are going ever further afield, and local food aficionados have taken to joining the Community Supported Agriculture movement. Writing in Slate last year, Field Maloney argued that Whole Foods' efforts to supply organic foods year-round came at the expense of the environment. Meanwhile, purists can't abide its mixing of conventional and organic foods, and angry vegans complain about its meat-selling practices.

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Whole Foods has hit the dip that afflicts many trendy, upscale lifestyle retailers when they expand beyond their natural habitat, from Restoration Hardware to P.F. Chang's. Yet a strong case can be made that Whole Foods isn't in trouble at all, but on the verge of even bigger success.

To start with, Whole Foods enjoys a rate of same-store sales growth that virtually any other retailer would envy. According to its most recent quarterly earnings release, same-store sales rose a very healthy 8.4 percent. Yes, that's below the average rate of the past five years. And, yes, older stores are growing more slowly than new ones. But growth at stores open for more than 11 years was 7.3 percent—more than twice the rate of national economic growth.

Unlike most food retailers, Whole Foods enjoys excellent margins. For the 2006 fiscal year, operating income as a percentage of sales was 5.7 percent. At Kroger, by contrast, it was 3.4 percent.

Whole Foods is also a beneficiary of some of the most significant trends affecting retailers. In a nation increasingly divided between retail haves and retail have-nots, Whole Foods—aka Whole Paycheck—is the big-box retailer to the legions of free-spending rich. Well-heeled professionals who enjoy choosing among eight different types of shrimp, or who love to scoop expensive curries from the Indian prepared food bar, continue to do quite well and have cash to spend. Whole Foods is also a destination for New Luxury trading-uppers, sophisticates who pinch pennies on staples but splurge on items such as Meyer lemons and bresaola.

And while it is a large big-box retailer—187 stores, 2006 sales of $5.6 billion—Whole Foods generally doesn't engender the type of resistance that hinders the expansion of many category killers. Grocery stores tend to be messy, waste-producing, low-wage establishments. Whole Foods, which pays above-market wages and benefits, is generally welcomed with open arms and makes an excellent anchor for upscale shopping, housing, and mixed-use developments.

But the best bull case for Whole Foods lies in the trend described in The United States of Arugula, the fine history of American foodies by David Kamp. Slowly but surely, Americans are trading in iceberg lettuce for arugula, mache, and mesclun, Wonder Bread for baguettes, Crisco for lardo. And as much as the culture of food snobbery may seem advanced in New York, San Francisco, and Seattle, it is still in its relative infancy in the vast spaces in between the coasts. "I think the whole idea of good food and gourmet eating has begun to transcend the PBS-store bag toter," says Kamp. Costco, he notes, doesn't merely sell enormous jars of Hellman's mayonnaise, it also stocks sashimi-grade tuna and excellent wines. Organic is shedding its earthy-crunchy stereotype, and quality foods are shedding their Bobo geographical restrictions. Given that, says Kamp, "I think they can succeed beyond the yuppie liberal enclaves and the university towns."

The great challenge for a rapidly growing national chain is to continue to expand without cannibalizing existing stores. Whole Foods doesn't seem to be in much danger of doing that. Its list of stores in development shows the company has an ambitious expansion schedule. Whole Foods plans to open more than 80 new outlets. Yes, it is setting up shop in some predictable places: Madison, Wisc.; Park Slope in Brooklyn. But the list also includes plenty of virgin territory, places where Whole Foods won't compete with itself or with other high-end food purveyors: Birmingham, Ala.; Boise, Idaho; Glastonbury, Conn.; Sugarland, Texas; Richmond, Va.; and Manhattan's Lower East Side. Whole Foods also plans to open its first store in London next year. If the dollar remains weak, that store alone would be a huge contributor to rising profits.

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