A Blog by Jonathan Low


Feb 18, 2017

The Reason Whole Foods Is Now Struggling

The company earned the nickname 'Whole Paycheck' for the seemingly outrageous prices they charged for what, they argued - and their loyal customers seemed validate - was worth it for healthier, better tasting food.

But with organics having gained mass market acceptability, fewer people want - or have to - pay as much anymore. JL

Caitlin Dewey reports in the Wonkblog:

Whole Foods reported its worst performance in a decade, announcing its sixth consecutive quarter of falling sales. The company is closing nine stores. Organics have become so thoroughly mainstream that organic chains now have to face big-box competitors. Mass-market retailers were responsible for 53.3% of organic food sales in 2015. Whole Foods created this space and had it all to themselves for years but now there's a lot of competition.
Organic food has never been so popular among American consumers. Ironically, that’s bad news for the brand that made organic a household name — namely, the Austin-based Whole Foods.
Whole Foods reported what is arguably its worst performance in a decade, announcing its sixth consecutive quarter of falling same-store sales and cutting its outlook for the year. The company is closing nine stores, the most it has ever closed at one time. A mere 16 months ago, Whole Foods predicted it would grow its 470 U.S. locations to more than 1,200.
The problem is one that chief executive John Mackey probably didn’t predict when he first opened Whole Foods as a neighborhood natural foods store 36 years ago: Organics, then a fringe interest, have become so thoroughly mainstream that organic chains now have to face conventional big-box competitors. Mass-market retailers were responsible for 53.3 percent of organic food sales in 2015, according to the Organic Trade Association; natural retailers clocked in just north of 37.
And Whole Foods is hardly the only store feeling the squeeze: Sprouts and Fresh Market, the second- and third-largest publicly traded organic stores, have also seen falling stock prices.
“Whole Foods created this space and had it all to themselves for years,” said Brian Yarbrough, an analyst at Edward Jones. “But in the past five years, a lot of people started piling in. And now there's a lot of competition.”In many ways, the story of Whole Foods's decline is also the story of how the organic movement took over the United States. Between 2005 and 2015, sales of organic food increased 209 percent, according to the Organic Trade Association. Last year, organic sales topped $43.3 billion.
The driving force behind this growth, most analysts agree, is none other than millennials: Consumers aged 18 to 34 are the largest buyers of organics, and they’re the most likely to consider themselves “knowledgeable” about their food. As they came of age, mainstream grocery chains have been forced to adapt, too.
Walmart ramped up its organics selection in 2006. Kroger introduced its Simple Truth brand in 2012 — the store’s chief executive, Mike Ellis, later said it was the store’s “most successful brand launch ever.” Earlier this week, Aldi announced plans for a $1.6 billion U.S. expansion, with much of that growth aimed at offering “a wider range of organic and gluten-free products.”
By volume, the largest organic retailer in the United States is believed to be Costco, which in 2015 sold $4 billion of organic produce and packaged foods. Like Walmart, Kroger and Aldi, Costco sells organic produce for considerably less than do natural food stores, farmers markets or Whole Foods. In fact, lowering prices
has been one of Whole Food’s primary strategies for dealing with competitors.
Apart from shuttering stores and stalling expansion plans, the company is continuing to focus on 365 by Whole Foods, a two-year-old division aimed at launching stores for “value-conscious” consumers. It’s also been dropping prices at its regular locations and mailing out national discount circulars, something it had not previously done. Speaking to investors Wednesday, Mackey indicated that he did not want to see “too big of a gap” between the prices at Whole Foods and those at stores like Costco and Kroger.
But some organic advocates are concerned that lowering the prices of organic foods — an apparent prerequisite for mainstream popularity — can only happen at the expense of the movement’s early principles. This fear is not entirely new: Michael Pollan fretted about it in the pages of the New York Times when Walmart began selling organic Rice Krispie treats 11 years ago. But with results like Whole Foods's, it is becoming more urgent, said Ronnie Cummins, the co-founder of the Organic Consumers Association.
Cummins pointed out that some of the most successful, most mainstream organic products don’t meet his organization’s strict definition of what organic should be. Those include the ubiquitous Earthbound Farms, which grows its lettuces in monocultures, and Aurora Organic Dairy, which has been criticized for running its operation like an industrial factory farm.
“If you’re a publicly traded corporation, you have no choice but to maximize short-term profits,” Cummins said. “But we are going to be complaining to Whole Foods if they decrease their quality to keep up with the competition.”
That approach may be most profitable now, he acknowledges — but Whole Foods needs to think long-term. After all, when the company was founded, there was barely even a market for organic foods.


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