The organic grocery business is expected to explode in the next several years as Americans become increasingly focused on healthy diets and fresh ingredients. Interest in free-range meat, sustainable seafood and locally-grown fruits and vegetables is likely to propel sales in this category by 92 percent by 2018, according to forecasters at consultancy Jones Lang LaSalle.
And that's both good and bad news for Whole Foods Market, which has long reigned as the nation's largest organic grocery chain. While it means there's increasing demand for the kind of products the Austin, Texas-based grocer is peddling, it also means Whole Foods is facing more competition than ever from the likes of Sprouts and Fresh Market and from major retailers such as Kroger and Wal-Mart that are taking note of the category's big growth opportunities.
"They were for the longest time the only game in town for a natural, organic experience, and that's not really the case anymore," said Jim Hertel, managing partner at food retail consultancy Willard Bishop.
So far, the company has struggled to fend off these newcomers. Sales growth has slowed, and investors have taken it out on the company's stock, dragging it down about 30 percent this year.
Whole Foods reported fourth-quarter net income of $128 million, or 35 cents per share, on Wednesday, beating analysts' estimates. Sales at stores open more than a year rose 3.1 percent.
In the previous quarter, Whole Foods saw a 3.9 percent increase in sales at stores open more than a year. For many retailers, that kind of growth would be satisfying to investors. But for Whole Foods, it marks a slowdown from the impressive 7.5 percent uptick in comparable sales in the same quarter a year earlier.
Whole Foods is fighting back with aggressive expansion. It has opened 33 stores in the last four quarters in small cities such as Albany, N.Y., and Colleyville, Texas, bringing its store count in the United States to 386. It has 116 more stores in its development pipeline and believes there is long-term demand for about 1,200 stores nationwide.
The company launched its first national advertising campaign in October, an effort to build brand recognition in new markets where the company can't count on word-of-mouth buzz. The campaign includes commercials during TV programs such as "Modern Family" and "Scandal" and print ads in The New York Times and other major news outlets. The company has said its budget for the initiative was about $15 million to $20 million.
Whole Foods also plans to renovate about 70 percent of its older stores over the next year, which it believes will boost sales in those locations. But many of the older Whole Foods stores face challenges that a decor refresh cannot fix: Some of the smaller stores are more limited in the volume of shoppers they can handle. Many also have very limited parking capacity, which can be a turnoff to prospective customers.
As Whole Foods fans out across the country, it also continues to grapple with issues around its pricing. It has earned a reputation for gobbling up a shopper's "Whole Paycheck," but its efforts to get more competitive on price have so far been mixed. When the company experimented with lower prices on seafood, especially salmon, chief operating officer A.C. Gallo has said they saw "a huge lift" in pounds of salmon sold. And yet in similar experiments with packaged food items, the company has not seen as much success, Gallo said on a conference call with investors earlier this year.
The company is also testing other ways to appeal to price-conscious customers, including matching competitors' prices on key items and establishing a rewards program for regular shoppers.
Grocery retailers, including traditional supermarkets, are being tested by a shift in behavior in which consumers are purchasing groceries in a more fragmented way, doing more small trips and spending some of their grocery budget at convenience stores, dollar stores or even drug stores.
Hertel said this pattern might spell trouble for large stores such as Whole Foods. Grocery retailing is a business of razor-thin profit margins, and these big stores typically make their money on center-store foods, or the packaged goods in the middle aisles, rather than on so-called perimeter foods, such as fresh produce and meat.
"What drew people to Whole Foods predominantly was the quality of the perimeter departments," Hertel said. "Now that that is no longer distinctive, they could start to lose significant parts of the shopping trip," including those key center-store sales.