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Whole Foods Pricing Drives “Healthy” Results

Whole Foods just announced some surprising results for the fiscal further quarter, 2010 that give some good insight into the health of the natural and organic channel.  I know from experience that these earnings calls can be long and tedious, but I typically find some interesting nuggets in the numbers.  Reading a little bit between the lines, it became clear that Whole Foods needs to continue to compete on price, a strategy that will invariably impact natural and organic suppliers in several ways.

First, the raw boring numbers:  for Q4, same store sales for average weekly sales per store increased 9% and Whole Foods saw identical store sales grow by about 7% by transaction and 2% by basket size year-over-year.  All rosy so far, but what came as a bit of a surprise to me was that average price per item actual decreased.  This indicates that customers are still seeking value (as reflected by the fact that Whole Foods saw strong year-over-year growth in promotional and store brand items).  There are some signs of stronger consumer confidence also, as branded product sales growth actually outpaced store brand growth.  And if anyone is worried that the luster is wearing off the organic train, the retailer also saw sales growth for organic product outpace sales growth for natural products year over year.

What was clear from the call is that there are two primary drivers behind the great results for the quarter.  First, Whole Foods has put a concerted effort behind getting more price competitive, and their customer base has remained incredibly loyal throughout the recession.  The first piece about pricing is worth exploring a bit further, since it has a direct impact on suppliers.

Whole Foods emphasized that it sees the producers price index (PPI) increasing, but would prefer not to pass that increase along to the consumer.  They used an example where meat producers attempted to raise prices a few months back, but consumers wouldn’t accept the higher prices, forcing the supplies to drop their prices back down (even if their cost of goods remained elevated).  Whole Foods talked a lot about how it can help lower prices by improving operation efficiencies, but alluded that it will need to continue to lean on suppliers to keep prices low.

Any time there is a significant gap between inflation seen by suppliers and inflation to the consumer (as we started to see in 2008), the suppliers and not the retailers are the ones bear the brunt.  Whole Foods has the final say on pricing at the shelves, and especially smaller suppliers need a good understanding of pricing through distribution to the retailer to keep a good handle on their own pricing and promotions.  Whole Foods expects to see little impact from inflation through the rest of this year, but expects it may have a 2-4% impact on pricing next year – an important forecast for Whole Foods suppliers to keep in mind as they do their promotion planning for the coming year.

The bottom line is that Whole Foods knows that at least half the natural and organic sales now happen at conventional supermarkets.   They can compete partially on convenience and customer loyalty, but price will increasingly put pressure on suppliers for promotional and everyday low prices.  The good news for everyone though is that basket size is increasing along with sales – a continued positive sign for natural and organic suppliers.