Traditional grocery stores heating up competition for Whole Foods

Citing competition in the natural and organic foods market from mainstream rivals like Walmart and Target, Whole Foods saw recently their largest one-day fall in the last five years recently, dropping almost 19%.

It’s the third time they’ve fallen since the start of 2014 and, coupled with the Easter holiday, the Texas company has seen sales growth at their established locations drop from almost 7%, to a low of 4.5% in the second quarter.

John Mackey, Whole Foods CEO, recently told analysts on a conference call that “For a long time, Whole Foods Market was this small niche . . . It’s just gotten to be a very big niche and in some ways it’s gone mainstream,”  Mackey added that “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.”

The company, for the third quarter in a row, missed Wall Street’s flat net income expectations and lowered its outcome for its full-year profit forecast. Their comparable sales growth forecast was also reduced to 5.5% which, according to Mark Wiltamuth, was “an admission that competition will keep [comparable sales] from returning to the 7-8 per cent historical norms”.  Wiltamuth also cut his rating on the stock from buy to hold.

The grocery chain began in Austin, Texas as a single store but, with consumer’s increasing concerns about eating a healthy diet, quickly spread across the United States, Canada and even into the UK. What began as a niche product however has become much more competitive as consumers are looking for healthy products at a discount and loyalty to the retailer has dropped. (The fact that they already have a reputation as being expensive hasn’t helped. Critics don’t call them “whole paycheck” for nothing.)

The fact is that traditional grocers across United States including Kroger, Publix, ShopRite and Wegman’s are all offering their customers a wider variety and selection of organic and freshly prepared foods. At the same time smaller “natural foods” markets are expanding and is expected that, by 2020, at least 1000 more will open in the US, more than doubling the amount of markets now open.

Sprouts for example is one of several new, smaller competitors that are expanding rapidly. In their initial public offering back in August of 2013, Sprouts raised just over $330 million.

As most retailers do when faced with a similar situation, Whole Foods has recently begun to cut prices, offer limited time sales and also offer conventional products at lower prices alongside their organic offerings.

Their recent drop in sales notwithstanding, Whole Foods hasn’t changed their long-term plans to open 900 more stores in smaller, less affluent and “less urban” markets like Detroit and Boise. Mackey says that their numbers still show a demand for that high an amount of Whole Foods locations.

Even as the demand for organic products accelerates across United States, the fact is that specialty stores like Whole Foods accounted for just over 40% of sales in 2013, leaving nearly 60% of the market to mass-market retailers including Target and Walmart, both of whom have announced plans to sell more organic foods in the near future.