Whole Foods' future is looking more bleak
The company said Wednesday that sales growth at stores open at least a year was 1.3% in the most recent quarter, the slowest since the recession.
There were some temporary factors that could have impacted sales - such as an earlier Easter that helped the previous quarter and an annual discount day that Whole Foods decided not to repeat this year.
But there are a number of problems that could continue to drag down sales, according to analysts.
1. New stores are cannibalizing sales from existing locations.
Whole Foods has been expanding rapidly, which helped its overall sales grow 8% in the most recent quarter. But some of its new store growth is taking traffic from more established Whole Foods stores, according to Stephen Ward, the commercial director of Columino.
So far this year just 10% of Whole Foods' new store openings have been in new markets, versus 55% last year, Ward writes in a recent research note.
"There is no doubt that the opening program this year has cannibalized sales more than it has done in the past," Ward writes.
2. Some older Whole Foods stores are looking "shabby."
Whole Foods "has focused too much on new stores to the detriment of many existing outlets," Ward writes. "A number of locations, including key stores in urban markets like New York City, feel shabby, have mediocre customer service, and are in need of reinvigoration."
Customers won't keep paying a premium for Whole Foods unless the stores improve, he argues.
"As a high-end operator in the grocery space such underinvestment reflects badly on the Whole Foods brand and inevitably makes customers question why they are paying a premium," Ward writes.
3. Whole Foods is facing increased competition in the organic foods market from traditional grocers like Kroger and Sprouts Farmers Market.
"Despite benefits from a strong balance sheet and high square footage growth, we see sales growth over next 12-months pressured by competition, cannibalization and recent pricing missteps," S&P Capital IQ analyst Joseph Agnese writes in a recent note.
Sales of natural and organic foods in the US skyrocketed from $6 billion in 1998 to $48 billion in 2012, according to The Wall Street Journal.
Co-CEO John Mackey acknowledged the increasingly competitive market in an earnings call last year.
"The growing demand for fresh, healthy foods, the offering of natural and organic products, is expanding everywhere and new stores, existing stores, and online," Mackey said on the call.
"The days when Whole Foods was unique in the type of products it sold are long since over," Ward writes. "Whole Foods still has an advantage in terms of perceptions of the quality of its produce and in the breadth of its assortment of ethical products, but it needs to balance this with a superior overall customer experience if it is to compete more effectively."
4. Whole Foods is dropping prices to better compete with its rivals, but sales aren't increasing as a result.
"The combination of falling margins and slowing sales growth presents a long term danger to profitability," Ward writes. "The whole purpose of reducing prices should be to attract and keep more customers, with a consequent uplift to the sales line. However, at present this dynamic is not working as effectively as it should."
That's one reason why Whole Foods is launching a new chain of lower-priced stores called 365 by Whole Foods market. Executives have said the store will open in markets that Whole Foods doesn't currently serve, giving the company access to a new customer base.
Ward says the concept will help Whole Foods better compete with local rivals and deal with the challenge of more value-focused players - such as Wal-Mart - getting into the organic foods market.
5. Cheaper prices at Whole Foods' new chain could backfire against the company's namesake brand, however, according to Deutsche Bank analysts.
"An obvious price spread between the two formats could create doubts with their existing loyal customer base, and this could lead to erosion of their very strong brand equity," analysts wrote in a recent research note.
We reached out to Whole Foods for comment and will update if we hear back.