Whole Foods Suffers as Organic Gains Skid

Sales growth for organic products has withered in the recession, which has made life increasingly difficult for retailers who focus on premium priced natural foods, Whole Foods Market conspicuous among them.

In April, 2008, organic product sales increased by about 20 percent after a year of bouncing in the low 20 to low 30 percent range, according to a Nielsen Co. study. But then the growth rate began to slide so by March, 2009, it had declined to about one percent.

In the second quarter, ended April 13, 2008, Whole Foods sales were up 27.6 percent with comparable store sales, those in stores open for a year, up 6.7 percent. Identical store sales, those at stores open for a year excluding relocated and remodeled stores, gained 5.1 percent. However, profits fell with earnings per share down nine percent impacted by the company’s Wild Oaks acquisition but, as it emerged, the beginnings of a shift in consumer spending as well. From that point, results declined and in the last reported quarter, ended Jan. 18, sales were flat, comps were down four percent and identical store sales were down 4.9 percent, even as earnings per share declined by 28.6 percent. The earnings decline at least represented the reversal of a trend, as in the previous quarter, earnings per share were down 95.8 percent.

Whole Foods CEO John Mackey, in releasing the first quarter results, attributed the earnings trend reversal to cost controls including capital spending cuts. In a company conference call, as reported by Seeking Alpha, Mackey said:

We implemented certain cost-containing measures at the global, regional and store levels, including the elimination of 306 positions, saving an estimated $16 million in labor and benefits annually. We reduced our planned new store openings by 50 percent for fiscal year 2009 to 15 from a prior range of 25 to 30. We terminated 11 leases in development totaling approximately 570,000 square feet and downsized nine leases by an average of 10,000 square feet each. We cut all discretionary capital expenditure budgets not related to new stores by 50 percent. We suspended our cash dividend, and we received $413 million of additional capital.

The company made store-level changes, too, introducing bargain items, price promotions and increasing the number of private label products offered by 11 percent so that own brands now represent 22 percent of grocery and health and beauty aid sales.

A year ago, in announcing weakening financial results, Mackey noted customer loyalty to its core organic products helped make Whole Foods recession resistant. However, the current slump has prompted consumers to rethink established priorities.

In introducing the Nielsen data, Tom Pirovano, the company’s director of industry insights, said:

At this point, it appears that cost beats the potential
benefits of organic products when shoppers head to the grocery store.
It will be interesting to watch if sales of organic products rebound
along with the economy, or whether that trend will be a victim of the
vast changes affecting consumer behavior.