Whole Foods started a food fight - The Buffalo News

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Whole Foods started a food fight

On the same day last week that local shoppers were beating the drum in celebration of the news that Whole Foods plans to open a store in the Buffalo Niagara market, investors were beating up on the supermarket chain’s executives and its stock.

Whole Foods’ arrival in the Buffalo Niagara market, possibly in the Northtown Plaza in Amherst, will send powerful ripples throughout the supermarket industry’s competitive landscape and continue a trend that emphasizes organic and unique products over conventional supermarket fare.

“Whole Foods opening in Buffalo is going to be a spectacular success and is long overdue,” said Burt P. Flickinger III, managing director of Connecticut-based retail and consumer brands consultant Strategic Resource Group.

Those trends prompted Tops Markets to open its Orchard Fresh concept store in Orchard Park and led Trader Joe’s to open one of its cult-favorite stores in Amherst last year. The same trends led Walmart to announce last month that it will introduce Wild Oats organic products – and sell them at a 25 percent discount – at half of its roughly 4,000 stores. And it’s why Target has added its own “Made to Matter” organic product line.

“Our tremendous success has created more competition, and that’s the way capitalism works,” Whole Foods’ co-chief executive officer John P. Mackey said during a conference call last week. He even mentioned Wegmans as one of the conventional grocers that “certainly have upped their game in natural and organic foods.”

For most of the last 35 years, Whole Foods was able to charge its customers higher prices for the privilege of buying food it billed as being fresher, healthier and more nutritious. And it worked, even though some consumers looked at Whole Foods’ prices and gave it the nickname “Whole Paycheck.” Its $14.6 billion market capitalization made it the most valuable specialty food chain in the country.

But with mainstream grocers getting in on the act, Whole Foods no longer is the only game in town, and that has hurt the company’s performance. Whole Foods’ sales now have missed analyst targets for six straight quarters and its profit growth stalled out in the first quarter.

Whole Foods has been fighting back, cutting prices on some of its items and embarking on an aggressive plan to open stores in new markets, including Buffalo, all as part of a push that could see the chain grow from 374 stores today to more than 1,200 eventually.

“It’s just gotten to be a very big niche, and in some ways, it’s gone mainstream. So there’s a lot more competition, a lot more entrants into the marketplace, as well as conventional supermarkets copying and imitating a lot of what we’re doing,” Mackey said.

“For a long time, Whole Foods had the field to ourselves, pretty much. That was nice,” Mackey said. “But we don’t any longer.”

While trouble has been brewing for Whole Foods for a while, it wasn’t until last week that it all spilled over, with the grocer’s shares tumbling by 19 percent as investors worried that Whole Foods was losing its grip on a market it once dominated.

Kenneth B. Goldman, a JPMorgan Chase analyst, told Whole Foods executives during the conference call that he wondered if they fully grasped just how much their market has changed.

“I’ve got to be honest, I’m not really hearing anything that’s suggesting management is taking this situation as some investors want you to,” he said. “There’s a lot of talk about what’s going well, not a lot of talk about what it takes to win in the changed market.”

Mackey’s response: Whole Foods has been cutting prices, but probably should have been doing it more aggressively over the last five years.

To which analyst Charles Grom from Sterne Agee said he wondered if the company was doing enough advertising to let customers know prices have come down. “Is it safe to say that that’s still to come, or it’s not part of the strategy at all? You’re just going to lower prices and hope that the customer starts to recognize it over time?” he asked.

That’s the big picture, but on a local level, Whole Foods still will make a big splash.

Whole Foods’ entrance to the Buffalo Niagara market is bound to squeeze just about every grocery store in the region, mainly because the population here isn’t growing, so any sales Whole Foods makes will come at the expense of sales at Tops, Wegmans, Dash’s or any other supermarket locally.

But Flickinger doesn’t think Whole Foods’ arrival, coming on the heels of Trader Joe’s opening its Amherst store last October, will cause excruciating pain for Tops, Wegmans and other local supermarket chains.

“Historically, Whole Foods has tried to steer clear of Wegmans,” Flickinger said. But with Wegmans now opening a third store in the Boston area, one of Whole Foods’ biggest markets, the two chains have learned how to coexist.

Flickinger also thinks Tops’ strength in national brands and its promotional pricing strategy should help it withstand the challenge from Whole Foods.

“Tops should be OK,” he said. “With Tops having so many stores in Western New York, as well as Wegmans, they should weather the storm reasonably well, although it will be quite challenging for every retailer in the Niagara Frontier [within a six- to 10-mile radius of the new store] in the first year that Whole Foods opens.”

Flickinger also believes Whole Foods could put a competitive squeeze on an unlikely group of businesses – restaurants and food service suppliers.

“I just got back from seeing the new Whole Foods prototype format in Phoenix, and the Whole Foods store had a devastating impact on restaurants in a three- to five-mile radius because they’ll have bistro cafes literally serving people three main meals a day, plus mid-morning, mid-afternoon and mid-evening breaks,” he said.

“It’s exciting when you have two of the best retailers anywhere in the world – Whole Foods and Wegmans – going at it. They’ll make each other better retailers, better merchants, and it will result in better prices,” Flickinger said. “It’s a win all the way around for consumers of every income level.”

email: drobinson@buffnews.com

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