Whole Foods' challenges are wide-ranging

People pass by a Whole Foods Market in New York

People pass by a Whole Foods Market in New York

Published Apr 12, 2017

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Washington - Whole Foods Market has known for some time that it is a

business in need of course correction.

But its imperative to do so may have gotten more urgent this

week, after an activist investor and some affiliates disclosed a nearly 9

percent stake in the company and urged it in a regulatory filing to explore

dramatic moves to stage a turnaround, including possibly putting itself up for

sale.

Jana Partners, the investor, encouraged the organic grocery

chain to do a top-to-bottom re-evaluation of its strategies and practices. Jana

said it hoped to have discussions with Whole Foods management about everything

from its real estate portfolio to customer analytics to inventory management

and labour scheduling.

It remains to be seen which of those steps Whole Foods will take,

and whether any of them will make a difference.

In a statement, the grocer said: "Whole Foods Market

welcomes investment in the Company and is open to the views and opinions of all

of our shareholders. We value constructive dialogue toward our shared goals of

creating shareholder value, successfully executing on our strategic priorities

and taking actions that will position the Company for continued success."

One thing, though, seems hard to ignore: Jana has a point.

The retailer saw a 2.5 percent decline in comparable sales last year, a measure

of sales at stores open at least a year. Its forecast for 2017 isn't too

cheery, either; the company predicts it will deliver comparable sales of

"-2.5 percent or better."

That's a concerning pattern for a chain that has every

reason to be successful in this moment, in which shoppers are gravitating

toward healthy food, and when an increasing share of the grocery industry's

sales are coming from the fresh items such as produce and meat that Whole Foods

built its reputation on.

Whole Foods' challenges are wide-ranging, but one of its

biggest hurdles is attracting more customers. According to data from Kantar

Retail's ShopperScape survey, the organic grocer had a 7 percent penetration

rate back in 2009 when it had some 273 stores.

In other words, 7 percent of respondents in Kantar's

customer survey said they shopped at Whole Foods on a monthly basis. Since

then, the chain has been on a breakneck march to open more stores, its fleet

now numbering more than 430 locations. So what is its market penetration now,

with all those added stores? Just 8 percent, according to Kantar. It's

practically unchanged.

That means its major capital investments in building those

stores - and the ongoing expense of staffing and maintaining them - have not

done much to grow its share of devoted shoppers.

 Grocery industry analyst

Diane Sheehan, a grocery industry analyst with Kantar, said

this might in part reflect the fact that Whole Foods stores are sometimes

clustered close together. For example, she pointed to the suburbs of Chicago,

where the chain has three stores in a four-mile range.

That means those stores probably are not expanding the base

of Whole Foods shoppers; they're just fighting among themselves for the same

crowd.

Across the wider retail business, talk abounds of being

"overstored," the industry's term for having too many stores. Whole

Foods doesn't have that problem, exactly, but it has its own version of it. It

is overstored in certain neighbourhoods.

Meanwhile, as Whole Foods aggressively courts millennials

with in-store wine bars and date-night cooking classes, Kantar's research finds

that it has lost some Generation X and baby-boomer shoppers over the past five

years.

"They are leaking tons of shoppers in those non-core

demographic groups," Sheehan said.

Leaning so hard on millennials may have long-term benefits but for now whole foods is missing out on sales due to its weakened resonance

with older consumers.

Where are those shoppers going? Likely to one of the

competitors that has elbowed into the organics business.

Read also:  Wall Street falls as growth worries persist

Simple Truth, the private-label organics line from Kroger,

delivered an eye-popping $1.7 billion in sales last year, surely snatching some

spending away from Whole Foods. Target, Walmart and others are also ramping up

their offerings in the category. And many shoppers prefer that these outlets

allow them to get organic and conventional groceries in one place.

They can get their grass-fed beef and Coca Cola in one trip,

for example, or they can get their cage free eggs without having to shell out

for natural unbleached paper towels.

All of these problems suggest it's going to be tough for

Whole Foods to find avenues for growth in the immediate future. Indeed, check

out Kantar's forecast for its growth rate in edible grocery sales over the next

five years compared with the prospects of its competitors.

Jana Partners has had a couple of recent successes urging

change at major companies; In February, it pushed drug maker Bristol-Myers

Squibb and luxury retailer Tiffany & Co to shake up their boards of

directors.

However Jana's pressure on the grocer plays out, this much

is clear: The cultural phenomenon that Whole Foods was essential in creating is

poised to leave the chain behind. It's up to its leaders to make sure that

doesn't happen.

 WASHINGTON POST 

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