Whole Foods Markets: Victim of a structural shift


Time was, we all felt rich. And we all felt entitled to spend money on ridiculous items at chocolate stores like Godiva, coffee shops like Starbucks (NYSE: SBUX) and, yes, upscale supermarkets like Whole Foods (NASDAQ:WFMI).

Those days are long gone, and even today's reduced expectations for this extremely well-run company are possibly too optimistic. EPS for 2008 were down 20% and company shares, floating in the $7-$10 range, are well off of 52-week highs.

Why? Whole Foods is selling to a shrinking market, namely -- the middle class. Not shrinking in numbers but shrinking in pocketbook. At the same time, organics and "healthy" foods are now available even in the likes of Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST). Not to mention in the aisles of competitors of more discount-oriented companies like SuperValu and Safeway, who are willing to operate on lower margins and have significantly more negotiating leverage with suppliers.

Does it feel warm and fuzzy to shop in a store like Whole Foods? Most definitely. But warm and fuzzy doesn't fill your belly. It is precisely the things that drove Whole Foods rapid growth over the past decade that will lead to its decline, namely -- cutbacks in purchases of marginal but very expensive items and, alas, cutbacks in organic items that are non-core to Whole Foods customers. Whole Foods is hardly alone in its troubles.

Whole Foods may look cheap on a valuation and historical basis but that's not factoring in the new reality of an American consumer who is desperately trying to save money and desperately cutting back on semi-frivolous purchases. The company is great. I love their stores. It's a beautiful place but it's hard to see Whole Foods gaining the same traction it had in the past, let alone returning to its years of boffo growth.

Alex Salkever is the Director of Research of Piqqem.com, an online stock research and voting tool that harnesses the "wisdom of crowds" to better predict stock prices.

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Last updated: February 13, 2012: 07:09 AM

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