WHOLE FOODS MARKET, COMPETITORS STEP UP CONVERGENCE

David Merrefield

A strange thing happened to Whole Foods Market last week. It posted what by almost any lights should be considered stellar financial results and its stock value dropped to a 52-week low.

What gives? To find out, let's first review Whole Foods' results, which are also detailed in a news article on Page 1. For its quarter that ended July 2, Whole Foods earned $53.9 million, or 37 cents a share, against $40.4 million, or 29 cents, during the like period a year earlier. That's a 34% increase. Quarterly sales increased from $1.13 billion to $1.34 billion earlier, or a 18% increase. Comparable-store sales increased nearly 10%.

Possibly Whole Foods' equity drop occurred because Wall Street is detecting indications - however faint and tenuous and whether fairly or unfairly - that the chain's vigorous growth rates are destined to slow. Indeed, analysts had expected sales to be a little higher than the quarter produced.

Be that as it may for the quarter at hand, it's more important to take a larger view to see if challenges to earnings exist, and they do. Whole Foods has embarked on an extremely ambitious growth project, the scope of which could pose a long-term hazard since capital costs sap earnings and the project enlarges the potential for something to go amiss.

Right now, Whole Foods has 185 stores. It has leases signed that will lead to 86 more units. That development, which includes 16 relocations, is to be completed by 2009. Additionally, Whole Foods intends to acquire an unspecified number of Albertsons spaces to be closed by Cerberus. These plans doubtless will be augmented by more projects. Before too long, then, Whole Foods will operate more stores than does fellow Texas-based company H.E. Butt Grocery, also known for its fresh marketing. Whole Foods was founded in 1980, H-E-B in 1905.

There's nothing wrong with ramping up quickly and operating many stores instead of few. Mass, though, can pose a danger to an idiosyncratic selling style such as that of Whole Foods. More important, the larger Whole Foods becomes - and the faster its growth becomes - the more loudly it telegraphs its success to potential competitors. In fact, during the past couple of years Whole Foods has attracted competition from a number of mainline supermarket operators that are slowly figuring out how to knock off elements of its success and use them. Notable in that is Safeway, but it's not alone. Other such companies attempting to emulate Whole Foods to some degree include Publix, Giant Eagle, A&P, Food Lion, Wal-Mart and others.

Add to that list, more direct competitors such as Trader Joe's and Wild Oats Markets atop those in the game long before Whole Foods arrived, such as Wegmans, Ukrop's and H-E-B, and the field gets crowded, if not saturated in certain markets.

What does Whole Foods intend to do about this? Top officer John Mackey is a little ambiguous. He told securities analysts that competition "will be chasing our shadow pretty soon," but also that the chain is "moving into the mainstream." The latter may refer to the chain's ambition to sharpen price points on commodity products. Convergence is bursting out all over the place.