WFMI Moves from Whole-Paycheck to Partial Paycheck

Published by clickbroker.blogspot.com

Whole Foods (WFMI) emphasized that customers are beginning to recognize its value proposition during its recent Q3 earnings call. Customers that purchased the company’s “investments” in value items had larger baskets at checkout and visited their stores more frequently. At the same time management disagreed with analysts that the stores focused on a wealthier clientele.

Whole Foods claims they target the more highly educated, not necessarily the wealthiest customers. But along the way they ventured from being the basic organic grocer to the gourmet shop. The newer stores required ever higher capital expenditures and carried increasingly more expensive delicacies. Consciously or not, Whole Foods required an ever more high-margin (read wealthy) customer base to feed its growth.

Then came the worst recession since the Great Depression and as President Obama coined, Whole Foods had a “teachable moment.” CEO John Mackey unveiled the company’s new emphasis on customers that appreciate higher quality food rather than foodies that desire high priced gourmet.

Less high-margin customers translate into simpler stores that require lower capital expenditures. The marketing direction is to drive higher volume from lower cost outlets by convincing lower margin customers of the value in shifting their grocery dollars to Whole Foods. And when the customers’ grocery budget is not high enough for Whole Foods, the company needs to convince them to shift money from other expenditures.

When is it worth buying cheaper clothes, paying less rent or keeping your home appliances a little longer to enable you to shop at Whole Foods? With less discretionary spending available, that is the make it or break it question for the company. John Mackey realizes that Whole Foods can no longer depend on wealthy customers alone, and aspirational consumption has become out of favor. Look at the travails of the middle to high-end department stores like Macy’s (M) and Saks Fifth Avenue (SKS).

Whole Foods does not claim to know whether their better than expected results are a harbinger of an improving economy or unique to the company. Mackey repeated emphasized that more moderate growth led to higher margins, as established stores have the volume to profitably cover their fixed cost.

I think that Mackey is on target. If you believe consumer spending will be stagnant over the next few years, each retailer has to establish greater importance to its merchandise to gain a greater share of their customers’ wallets. Creating more average income customers that value Whole Foods definition of quality food is the only way for Whole Foods to continue to grow.

Previously I wrote that Whole Foods was in denial; I no longer think so.

No disclosures.

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