Has Whole Foods' Growth Peaked?

For years, Whole Foods Market has been growing by leaps and bounds, opening up one new store after another—32 stores in 10 new markets in 2013 alone.

Whole Foods Market owes its success to the organic food craze, which has allowed the company to charge premium prices for its products, compared to conventional products.

Wall Street took notice, chasing after the company’s stock — which reached one high after another.

The trouble is this: Whole Foods Market doesn’t own the organic farms that produce the products it sells at its stores. It buys them from others.

And so are scores of competitors, who now claim a piece of the organic food market.

Simply put, competition has caught up with Whole Foods Market on both fronts — the resource market, where Whole Foods Market buys organic food; and the commodity market, where it sells it.

That’s just one of Whole Foods’s problems. The other problem — more serious in our opinion — is that the company is running out of affluent neighborhoods to sell its produce in, which makes the competition’s pricing pressures worse.

The end result? A slow-down in the company’s sales growth, and narrowing profit margins.

Here is a quote from the last conference call. “Our 3.9 percent comp increase reflects continued headwinds from our value efforts, cannibalization, competition and the economy. Our comp increase was driven by approximately equal increases in transaction count and basket size. Our average price per item growth was approximately 2 percent. We continue to see signs of trading up, and inflation remains a factor. On the cost side, we saw spikes in some categories; however, our overall cost increase was in line with last quarter. Reflecting our ongoing value efforts, this was the 10th consecutive quarter in which our retail price increases were less than our cost increases. Our value efforts were also reflected in our gross margin results. The 31 basis point decrease from our record 36.6 percent result last year was driven primarily by an increase in cost of goods sold as a percentage of sales.”

Whole Foods Market  is discovering the hard way that not all consumers are equal in terms of income, even if they have the same preferences; and prices do matter, even for organic food fads, when income is not there.

The solution?

Whole Foods should take a lesson or two fromStarbucks , which faced similar problems a decade ago: close unprofitable stores, and focus more on innovation rather than pricing.