Value shaping Whole Foods’ strategy

by Monica Watrous
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AUSTIN, TEXAS — With more competition in the natural and organic space, Whole Foods Market, Inc. is ramping up its value efforts.

Over the past two quarters, the retailer has improved its relative price positioning, expanded value offerings across the store and increased promotional activity.

“Since the recession, we have focused on improving our price competitiveness, primarily within our grocery departments,” said Walter Robb, co-chief executive officer, during a Feb. 12 earnings call with analysts. “We are now expanding our successful value efforts into our perishable areas as well. We are continuing to maintain our high-quality standards, which clearly differentiate us from our competitors, while broadening our selection to include more value.”

In the produce section, Whole Foods is adding more “high-grade” conventional offerings alongside its organic products to expand its range of affordable options. The meat department now offers fresh-packaged chicken under the retailer’s 365 Everyday Value brand.

“Our 365 products tend to be the best sellers in most grocery categories, and we believe our chicken program will show similar results,” Mr. Robb said.

While such pricing actions have weighed on company earnings in the short term, Whole Foods said its value strategy will benefit both customers and shareholders over time.

“The good news about price investments is that, in the short term it hurts comps, because if you have the same customers coming in and they’re paying a little bit less per item, that’s going to bring comps down,” said David Lannon, executive vice-president of operations. “But we found that after two or three quarters, the positive impact of lowering those prices begins to be felt in the comp base, as we begin to see our basket size increase and we have on the margin more customers shopping with us. Short term, it’s not good from a comp standpoint, but we think it’s the right strategic move for the company, and we believe it’s going to pay off for our shareholders down the road.”

For the first quarter ended Jan. 19, net income increased to $158 million, equal to 42c per share on the common stock, compared with $146 million, or 39c per share, from the prior-year period. Sales increased to a record $4,239 million from $3,856 million in the same quarter of the previous year.

Comparable store sales increased 5.4%, reflecting softer sales in December due to negative impacts of bad weather.

“We are not immune to the larger macro environment, and severe winter weather across much of the U.S. impacted shopping patterns, with customers making fewer trips and buying more items each trip,” Mr. Robb said.

The company opened 10 stores during the quarter for a total of 373, as it continues to target its long-term goal of 1,200 stores in the United States.

Based on year-to-date trends, Whole Foods has lowered the top end of its sales growth ranges for 2014. The company now expects sales growth in the 11% to 12% range, comparable store sales growth of 5.5% to 6.2%. Timing of the Easter holiday will affect comparable store sales growth negatively in the second quarter and positively in the third quarter. Additionally, the company expects to open 13 new stores in the first half of the year and 20 to 25 stores in the second half. The seven former Dominick’s locations it has acquired will reopen as Whole Foods Market stores in 2015.

“Food retailing is more competitive than ever, and with the growing demand for fresh, healthy foods, the offering of natural and organic products seems to be expanding everywhere in stores and on-line,” Mr. Robb said. “Looking at the big picture, this is a positive for us, as it affirms our mission for the last 36 years and speaks to the increasing growth opportunity. We believe our industry-leading results highlight our ability to innovate and compete, the unique power of our brand and the excitement our stores create within their communities.”
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