Whole Foods' (WFM) stock was all but dismantled yesterday, plummeting more than 20% after an earnings miss. But perhaps it goes deeper than that. Maybe yesterday's move on Wall Street says something more about the flaws in Whole Foods' model.
The Austin, Texas based chain was among the first on the scene of the organic food craze. According to Business Insider, organic food sales in the U.S. were about $11 billion in 2004. That figure is estimated to be $35 billion this year. In short, everyone else jumped on the band wagon and Whole Foods' high-priced organic model got undercut by everyone from your local grocery chain to Walmart.
Word out of Bentonville last month was that their new in-house organic brand would cost 25% less than other organic brands they sell.
Last night Whole Foods said it won't engage in a price war and they aren't going to leave their niche as the high-end grocer of choice in urban areas.
In a way Whole Foods is a victim of its own success. Walmart's expansion validates the business of organic even as it marks the end of the Whole Foods as a growth story.
That's nice a little business but it's not a growth story.
Retail is a tough industry in general, and selling produce is the hardest of all. A good grocery chain has a net profit of about 1%; in other words for every $100 you spend a company like Safeway (SWY) or Krogers (KR) gets to pocket a buck. For years Whole Foods was able to bank almost five times as much. Those days are over. For Wall Street that means Whole Foods looks a lot like Krogers and Safeway. That makes the stock expensive even after yesterdays discount.
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- Consumer Discretionary
- Organic Foods