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Flash Player 9 or higher is required to view the chart Click here to download Flash Player now See all Bulls Reasons Bulls: Reasons To Buy Trend Towards Healthier Foods Drives Whole Foods Growth 100% agree Trend Towards Healthier Foods Drives Whole Foods Growth Whole Foods Market benefits from consumers' desire for healthier food and lifestyles, which has resulted in 20% annual growth in the organic foods industry. This demand growth gives Whole Foods higher profit margins than other traditional grocery stores. View or Edit Reason 2 votes 100% agree Private Label Brands Benefit From Trade Down Effect 100% agree Private Label Brands Benefit From Trade Down Effect Whole Foods' private label brand 365 Everyday offers consumers affordable organic products at lower costs. Additionally, these products offer higher margins because of their reduced advertising expenses. View or Edit Reason 1 votes 100% agree Expansion into the U.K. 100% agree Expansion into the U.K. Expansion into the U.K. could give a good platform for the company to grow in terms of revenue in the future as the organic foods market in the U.K is expected to grow by 72 percent to reach £2 billion by 2010. View or Edit Reason 1 votes 100% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell Consumer Slowdown Points to Fall in Revenues 100% agree Consumer Slowdown Points to Fall in Revenues High inflation, a weakening employment market, falling home prices and reduced credit all bode ill for Whole Foods. Although many previously assumed that higher income consumers were immune to a slowdown in spending, WFMI's FY 2008 results have so far proven... read more View or Edit Reason 5 votes 100% agree Whole Foods' Double Digit Growth Not Sustainable 100% agree Whole Foods' Double Digit Growth Not Sustainable Whole Foods' double digit growth in comp store sales is not sustainable long-term. This can have a significant impact on the stock price as retail stock prices tend to move in line with the rise or fall in comp store sales. In fact, Whole Foods Markets Inc. (WFMI)... read more View or Edit Reason 3 votes 100% agree Wild Oats Acquisition is biting into profits 100% agree Wild Oats Acquisition is biting into profits Whole Foods may be finding Wild Oats difficult to swallow. Since completing its $565 million acquisition of the company at the end of 2007, the company has consistently reported special charges related to the closing and remodeling of Wild Oats stores. Additionally,... read more View or Edit Reason 2 votes 100% agree Add your own Bears Reason Send the authors a comment or suggestion With the current grocery prices driven by fuel costs, HOW is this going to affect Whole Foods ope... more [Dismiss] [Done] See All Suggestions

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To date, the organic movement has been confined to wealthier and more educated demographics. WFMI has been the segment’s pioneer and has made good use of the lead time by opening stores in affluent neighborhoods. However, as these areas reach saturation, Whole Foods is beginning to expand to less wealthy neighborhood. The strategy presents both risks as well as opportunities for growth, as Whole Foods expansion to less-wealthy neighborhoods is bringing it face to face with retail behemoth Wal-Mart Stores, which is expanding its organic food section in light of organic food's growth and healthy margins. Wal-Mart has a history of undercutting its competitors on price, and as Wal-Mart and other traditional grocery stores such as Safeway (SWY) enter the organic foods market it may be difficult for Whole Foods to maintain its attractive margins and premium prices.

In August 2007, Whole Foods agreed to acquire competitor Wild Oats Markets for $565 million. Although an antitrust suit against the deal was initially dismissed by a trial judge, a federal appeals court ruled the suit valid. Although Congress has given Whole Foods its support,^[1] the Federal Trade Commission will hear arguments for the suit in February 2009. In order to cover fees associated with the deal and gain additional cash reserves, Whole Foods received a $425 million investment from a private equity firm in November 2008 in return for a 17% stake in the company.^[2]

[edit] History

Whole Foods Market, which was incorporated in 1980, is considered a pioneer in organic foods retailing and enjoys a significant first mover advantage. The company is the industry leader in this segment, accounting for approximately 37 percent of total natural and organic foods sales in 2005 and enjoys strong brand awareness. The large size of the company provides it with the ability to realize economies of scale in its supply chain, which in turn has enabled it to post strong growth in profitability as well as revenues.

In 2007, sales increased 15% to $6.6 billion driven by 7% comparable store sales growth and an 18% ending square footage growth^[3].

[edit] Business Drivers

Comparable store sales, new store productivity and growth in square footage are the main drivers of revenue in the food and retail industry.

Comparable store (comp sales) or same store sales reflect the ability of the existing stores (stores greater than one year old) to generate revenue. If the comparable sales growth rises, it implies that there has been a higher turnover of goods for every square foot of existing store space owned by the company. New store productivity is measured as the ability of new stores to generate revenue (per square foot) as compared to existing stores. New stores include stores, which are newly acquired or newly opened in a year. New store performance cannot be compared with existing store sales as the former usually take more time to generate sufficient sales to catch up with existing stores’ performance. An increase in square footage growth implies that each unit would be able to store more goods and thus generate more revenue. Comparable store sales growth rate can decline over the years as stores mature. Revenue per square foot can decrease if there is high rate of new store additions. Mergers and acquisitions in particular can lower revenue per square foot if the acquired entity has lower operating metric values.

The comp sales of Whole Foods Market have slowed down from 15 percent in 2004 to 7 percent in 2007 as the stores matured over the years. The square footage growth has also increased by 18 percent in 2007. Including the acquisition of Wild Oats which closed in late 2007, Whole Foods now operates 276 stores total.

Further, due to the conservative advertising policy of Whole Foods Market, new stores of the company take a longer time to break-even compared to its competitors who have started to offer an organic product line in addition to their normal food and retail lines. The company relies on word-of-mouth publicity in contrast to the print, television or online media favored by its competitors. Whole Foods Market may have to change its strategy and increase its total spending on advertising (which was a meager 0.4 percent of the total revenues in 2005) to create more consumer awareness about organic products.

The table given below tracks the historical performance of Whole Foods Market.

[edit] Business Segments and Products

The product portfolio of Whole Foods Market includes produce, seafood, grocery, meat and poultry, dietary and nutritional supplements, vitamins, specialty (beer, wine and cheese) body care products, floral and household products and pet products. The company also undertakes catering of prepared foods.

The products are marketed under private labels, such as 365 Everyday Value, Whole Kids Organic, 365 Organic Everyday Value, the Whole Brands family, and Authentic Food Artisan (AFA). Store-made and regionally-made fresh items are sold under the Whole Foods Market label. Allegro Coffee Company, a subsidiary of Whole Foods Market, offers specialty and organic coffees and teas.

The products under the 365 label are positioned as value for money products as this brand provides all the benefits of organic food at lower prices. Expansion of this program to other departments, such as organic fresh vegetables is expected to pay off in the future.

[edit] Higher average sales per square foot

Because it caters to a higher-end market, Whole Foods has one of the highest gross sales per foot figures in the industry. In fiscal 2007, average weekly sales for all stores increased 7% to $632,000, translating to sales per square foot of $923.

[edit] Customer Demand

Whole Foods Market stores have chosen the most desirable locations for their premium priced products by choosing regions (especially the coastal areas) where the demographic profile of the customers, in terms of income, house value and population density is much higher than the U.S national average. However, once these markets get saturated, the company will have to relax demographic standards and expand into lower income areas. This could lead to a slow down in revenue growth of the company in the future, especially as it enters into direct competition with retailers, such as Wal-Mart.

Further, Whole Foods Market is exposed to the risk of consumer demand for natural and organic foods. There is an ongoing debate on health benefits from consuming organic foods as compared to conventional foods. If it is proven that organic foods do not provide the benefits as expected, the stocks of organic food retailers are likely to be impacted. In addition to this, decisions taken by Whole Foods Market in the past (such as to sell live lobsters) have drawn flak from animal welfare organizations and could damage the company’s image.

The expected slowdown in the U.S. consumer spending can also affect specialty retail chains, such as Whole Foods Market, as consumers may turn to lower-cost non-organic produce.

However, the company is still planning on opening 66 new stores through 2012.^[4] In order to decrease expenses and maximize revenues, the company is focusing on downsizing these stores approximately 20% to a size that the new markets will be able to support.^[2]

[edit] Operating Costs

The major component of the total operating cost of Whole Foods Market is 'Direct Store Cost', which as a percentage of sales has varied from 25-26 percent since 2004. An increase in share-based compensation to employees (USD 10.1 m in 2006) and natural disaster costs (USD 13.4 m in 2006) contribute to the high direct store cost.

Operating costs of the company could increase after the acquisition of Wild Oats is completed. Whole Foods Market management has indicated that Wild Oats stores will require significant remodeling in order to realize full synergies.

Further, historically square footage growth has resulted in higher pre-opening and relocation expenses. The planned expansion in 2007 would require USD 68M–USD 74M for pre-opening and relocation expenses, which could impact the company’s margins.

Increased costs for new store openings and relocations as well as increased administrative costs associated with the Wild Oats acquistion were both cited as prime causes for Whole Foods' 27% decrease in profit in the latest quarter.

In addition to this, the gross margin of the company could also be affected in Q1 2007 owing to the changes in the distribution agreement with United Natural Foods as well as an increase in promotion expense.

Also, the organic foods market is subject to several laws and regulations relating to health, sanitation and food labeling. Federal regulatory agencies such as the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the United States Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) have set stringent standards for the manufacture, packaging, and advertising of organic products. Failure to meet these standards could result in the confiscation of marketing and sales licenses. The compliance costs arising from these regulations would reduce the margins of Whole Foods Market.

[edit] Comparison to Competitors

Whole Foods Market, until recently, faced competition primarily from direct competitors in the organic foods segment, such as Trader Joe’s and recently acquired Wild Oats Markets (OATS). However, a growing industry and attractive margins have brought new players into the organics food market.

With traditional grocers (Safeway, Kroger, and SuperValu (SVU)) as well as global and national retailers (Wal-Mart, Sam’s Club, BJ's Wholesale Club (BJ), and Costco) beginning to offer organic foods in their retail baskets, competition for Whole Foods Market is intensifying. In May 2006, Wal-Mart announced its plans to launch products in the organic segment. Wal-Mart now has an organic range, that includes fresh produce, dairy and dry food items as well as clothing. The entry of Wal-Mart can erode the market share of Whole Foods Market.

However, with the acquisition of Wild Oats, which was a direct competitor, Whole Foods Market has attempted to consolidate its position in the market. This acquisition is viewed as a strategic initiative to provide the company long term returns through synergies, reduction in costs and increase in comparable store sales. The comparable store sales growth at Wild Oats is expected to improve within 12 to 18 months, driven by Whole Foods Market retailing experience as well as its ability to make capital investments (Whole Foods Market operates at twice the store productivity in Wild Oats).

The table provided below compares the operational metrics, margins, and capital expenditure (as a % of sales) of Whole Foods Market vis-a-vis its competitors in 2006.

Source: Company Data

As evident from the table, Whole Foods Market is the market leader with higher comp sales growth, gross margin, operating margin as well as net profit margin as compared to its competitors.

 Whole Foods Market

	Select All  |  Select None Metrics Inventory Sales per Store Operating Income Long Term Debt Comparable Sales Growth Number of Stores Net Income Cancel

	Select All  |  Select None Companies Whole Foods Market (WFMI) Safeway (SWY) Kroger Company (KR) Arden Group (ARDNA) Blue Square - Israel (BSI) Casey's General Stores (CASY) Companhia Brasileira de Distribuicao (CBD) Etablissements Delhaize Freres et Cie Le Lion S.A. (DEG) Distribucion y Servicio (DYS) Ingles Markets (IMKTA) Pantry (PTRY) Ruddick (RDK) Susser Holdings (SUSS) SuperValu (SVU) Village Super Market (VLGEA) Winn-Dixie Stores (WINN) Weis Markets (WMK) Great Atlantic & Pacific Tea Company (GAP) Cancel

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Company	Data From	Long Term Debt	Comparable Sales Growth	Number of Stores	Net Income
Companhia Brasileira de Distribu… (CBD)	2006	$925K[5]	(0.1%)[6]	548[6]	$103M[7]
Kroger Company (KR)	2007	$6.15B[8]	5.7%[8]	2.47K[9]	$1.12B[10]
Safeway (SWY)	2007	$4.66B[11]	3.6%[12]	1.74K[13]	$888M[14]
SuperValu (SVU)	2007	$7.86B[15]	(1.1%)[16]	2.48K[17]	$452M[18]
Whole Foods Market (WFMI)	2007	$736M[19]	7.1%[20]	276[20]	$183M[20]

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[edit] References

1. ↑ Eight senators back Whole Foods in fight with FTC.
2. ↑ ^{2.0 2.1} Whole Foods 4Q Net Falls 96% Amid Charges, Gets $425 Million Invest.
3. ↑ www.wholefoodsmarket.com/investor/ar07.pdf WFMI 2007 Annual Report p. 3
4. ↑ {cite web|url=http://www.123jump.com/earnings-calls/Whole-Foods-Market-Earnings-Call-Fourth-Quarter-2008/30165/21|title= Whole Foods Market Earnings Call Fourth Quarter}
5. ↑ CBD,2006,AR,Item-naPage-4
6. ↑ ^{6.0 6.1} CBD,2006,10-K,Item-naPage-27
7. ↑ CBA,2006,10-K,Item-naPage-4
8. ↑ ^{8.0 8.1} KR,2007,10-K,Item-8,Page-na
9. ↑ KR,2007,10-K,Item-7,Page-na
10. ↑ KR,2007,10-K,Item-6,Page-na
11. ↑ SWY,2007,10-K,Item-8,Page-37
12. ↑ SWY,2007,10-K,Item-6,Page-21
13. ↑ SWY,2007,10-K,Item-6,Page-20
14. ↑ SWY,2007,10-K,Item-6,Page-19
15. ↑ SVU,2007,10-K,Item-15,Page-f-8
16. ↑ SVU,2007,10-K,Item-7,Page-22
17. ↑ SVU,2007,10-K,Item-1,Page-3
18. ↑ SVU,2007,10-K,Item-15,Page-F-2
19. ↑ WFMI,2007,10-K,Item-8,Page-54
20. ↑ ^{20.0 20.1 20.2} WFMI,2007,10-K,Item-6,Page-33