Whole Foods in Denial

Whole Foods (WFMI) announced major moves in the Q3 conference call to combat the ongoing consumer belt tightening. They eliminated the dividend, exited leases for new stores where they could, slowed expansion, reduced store sizes, and intend to reduce non-store expenses. At the same time they tried to convince analysts that their cash is not “running on empty.” Whole claims that they will generate enough cash to support their more limited expansion plans, and that the Wild Oats acquisition was not too much to swallow.

Whole Foods is expanding its value proposition from the center isles (packaged goods) to the perimeter (fresh and prepared foods). The problem is in the definition of value. My experience has been that Whole Foods packaged goods have been either competitive or cheaper than the traditional supermarkets. But if you want high quality conventional produce, Whole Foods only offers organic. It does not matter that Whole Foods offers a good price for organic when organic is out of the budget. It also doesn’t matter that Whole Foods offers aged, non-antibiotic beef when your budget would like high quality conventional beef.

Whole Foods is still trying to sell their customers what they envision their customer should buy. And they cannot be convinced that they cannot control their customers. I believe Whole Foods is losing touch. Good value at the wrong price doesn’t work. Whole Foods can distinguish itself by offering very high quality conventional fresh produce and meat at prices competitive or even slightly higher than the supermarkets. Quality and value, not organic fits the new economic reality.

On the positive side, I get the sense that Whole Foods better understands their markets. Upscale urban being very different than suburban. But I would prefer that they forgo international expansion. I would rather have seen them dominate New York City before venturing to London.

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