Why Whole Foods’ ‘Whole Paycheck’ Approach Isn’t Working

A Whole Foods Market Inc. Location Ahead Of Earnings Figures
Shoppers push a cart past a Whole Foods Market Inc. store in Franklin, Tennessee, U.S., on Saturday, April 30, 2016. Whole Foods Market Inc. is scheduled to release earnings figures on May 4. Photographer: Luke Sharrett/Bloomberg via Getty Images
Photo by Luke Sharrett—Bloomberg via Getty Images

Whole Foods Market’s (WFM) “Whole Paycheck” business model is coming back to bite it.

The upscale grocer’s shares took a big tumble on Thursday after it reported its fourth straight decline in comparable sales, blaming the abundance of cheaper offerings from rivals and better presentations in its rivals’ stores.

Comparable sales, which strip out the impact of newly opened stores, fell 2.6% at Whole Foods in the quarter ended July 3 as fewer shoppers came in to shop for groceries. And things aren’t shaping up to be much better in the current quarter: comparable sales are down 2.4% so far.

Whole Foods has emerged in recent years as a fast-growing grocer by focusing on organic food and pricier items in neat, appealing stores. But many rivals, notably Kroger (KR) and regional groceries like Wegman’s have raised their own games. Add to that competition from restaurant chains and meal-delivery companies and you have the recipe for a drop in shopper traffic.

“People may not be driving as frequently or as a far as they used to because they can stop by a Krogers or a HEB or a Wegmans,” co-CEO John Mackey told Wall Street analysts on Wednesday evening to discuss its weak earnings. Walter Robb, co-CEO, added: “That’s the world we’re in, and customers have lots of choices.”

Adding to the hit on sales, Whole Foods has been contending with some negative bad publicity, including a warning in June from the U.S. Food and Drug Administration about food safety at a Massachusetts plant that makes prepared foods and other products. Those problems have been resolved or will be soon, executives said.

Whole Foods has responded in part by lowering prices on produce and introduced a deep discount promotion plan, something sure to slam profits. Robb noted that customers are “trading down” to cheaper products, too. On top of the discounts, Whole Foods has launched a pilot loyalty program as it looks to fend off stiffer competition from everyone from Walmart (WMT), which is overhauling the presentation of its fresh food areas, to no-frills, extreme discounter Aldi.

Still, the competition is daunting: Kroger has reported 56 straight quarters of comparable sales increases.

The company has opened the first two stores in its new lower-priced, fewer-frills “365” concept, but it’s still too early whether the new format will help Whole Foods win much of the lower end of the grocery market away from the likes of Trade Joe’s. Whole Foods operates 455 namesake stores in the U.S., Canada and Britain.

With grocers high and low improving their natural and organic food selection, a trip to Whole Foods seems to be losing some of its allure, Mackey conceded.

“Now there’s some overlap in our product base and other competitors. So, I think there’s no sense in denying it,” Mackey added.

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