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Whole foods to stop selling junk

News - Diet Articles


Whole Foods (WMFI) is, much like Starbucks (SBUX), a reflection of the out-sized personality of its CEO. Both companies expanded madly in the early part of the 'oughts, at about the same time the CEOs' waistlines were expanding, and their health was declining. Working all the time, eating Top Pot doughnuts and 365 chocolate sandwich cookies, can't be great for you. This is 2009: time for a more sober outlook. We'll close stores. We'll stop haranguing competitors in online forums. We'll tighten our belts. We'll start helping our customers eat like us. So yesterday's revelation to the Wall Street Journal, that the company will refocus on healthy foods -- reflecting John Mackey's own recent diet that eliminates refined fats-- fits the pattern.

Sure, Whole Foods has always been about (well, duh) whole foods; those foods that don't really have ingredients, or if they do, it's obvious and clear that they come from nature. Apples. Broccoli. Shrimp. Milk. Nuts. And even today, the produce and meat aisles of Whole Foods are surely some of the stores' brightest attractions. But those make up only a small fraction of the typical Whole Foods store's square footage, and probably an even smaller percentage of the profit.
If you've been keeping up on the latest food media, you know this: the stuff that's bad for you is cheap. On one end of my local Whole Foods store is the beautifully-displayed organic onions, potatoes, cabbages, Tuscan kale and star fruits; on the other end is the deli/bakery, where the foods (while yummy) are decidedly un-whole. Fried chicken shares a display with oil-roasted rosemary potatoes. Pastries range in decadence from the extreme to the unbelievable. There are plenty of refined fats over here on this side... and refined sugars and flours and chemical additives of all sorts... and in every aisle in between.

There is a whole aisle, shelf after deep-stacked shelf, both sides, of cookies and sweets. Another aisle has a dizzying array of chips, each with a dubious claim on nature -- this one is cooked without trans fats, that one is organic, the other one is baked, not fried, still another is made of dried, pulverized, and re-formed vegetables. There's a lot of "value-added" (in other words, markup) here. There's also a lot of evidence that most of the food on Whole Foods' aisles contributes to obesity, diabetes, heart disease, and other diet-related conditions.

So Whole Foods will return, as Mackey says, to its roots. "We sell a bunch of junk. We've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?" For a dedicated whole-foodie like me, this idea is thrilling. Many others don't share my excitement; Gabriella Stern spends a short post singing the praises of cheesecake and pizza, writing, "A genuine and dramatic inventory shift could send customers running back to old-fashioned supermarkets... let's not forget that good food is an affordable luxury of the sort Americans just might not want to forego as the economy recovers."

Gabriella may have a different definition of "good" than I do. But I'm drinking Mackey's kool-aid, I suppose, having just finished a "dessert" of a fresh nectarine and whole wheat honey shortbread I baked myself. In my book, "good" can taste delicious and be healthful. Isn't that the appeal of the whole foods of Whole Foods' brand?

I doubt Whole Foods will immediately jettison all of its junk food. In itsthird quarter 2009 results released yesterday -- in which the company exceeded analyst expectations, with earnings per share of $0.25, or $35.0 million, and sales up 2% over the year-ago quarter, to $1.9 billion -- Mackey made a point of the company's commitment to competitiveness in its 365 private label products (including plenty of cookies, crackers, chips, and other food making a small claim on the concept of "health"). "We have a policy that our 365 private label has to match Trader Joe's prices, unless there is a significant difference in quality, in which case it probably shouldn't be a 365 product," he said. As long as those products are on the shelves, junk will still be alive and well.

But Whole Foods was a leader in asking its suppliers to remove partially hydrogenated vegetable oils and high fructose corn syrup from its snack foods and prepared foods. Now it's harder to find those ingredients, and even mainstream packaged goods and beverage companies are foregoing the stuff. The next frontier for food purveyors (now that "local" has become an almost meaningless bandwagon on which to jump) is "refined" -- flour, sugar, fat. Clearly Whole Foods will be forging ahead and giving its customers less-refined products. Whole foods at Whole Foods. It's hardly a stunning and innovative concept, but in my opinion, it's a great place to hang one's hat.

And with pundits like Michael Pollan and Barbara Kingsolver yelling until their voices get screechy that Americans should stop defining "junk" as "food," owning up to the presence of junk -- and making strides to remove it -- could be the forward-thinking move we most need.

The nasty recession forced consumers to trade down en masse, flocking to Wal-Mart (WMT) and discount dollar stores and shunning pricey stores like Whole Foods Market (WFMI). But on Aug. 5, after the organic and natural foods supermarket chain said conditions are looking better, investors flocked to the stock, sparking a 16% jump to 28.70.

For the first time in a year and a half, Whole Foods reported a rise in same-store sales from the previous quarter. Identical-store sales still fell 3.8% year-over-year, but that's much better than the 5.8% slide the previous quarter. Whole Foods beat profit expectations, posting earnings on Aug. 4 of 28¢ per share, compared with the 20¢ analysts were expecting.

Whole Foods executives sounded upbeat, a rare phenomenon among grocery execs these days. "You could take this as an early indicator that maybe the economy is getting better if Whole Foods has firmed up some," Chairman and Chief Executive John Mackey told analysts Aug. 4. "But," he added, "we don't really know."

Whole Foods execs said they're seeing a slight uptick in traffic and in the number of items those customers buy. "It's signs of momentum. It's signs of stability," co-President Walter Robb said, "but it's too early to call where this is going."


Whole Foods has been able to boost profit margins at a time when many other supermarket chains, including giants like Kroger (KR), have the opposite problem, says BB&T Capital Markets (BBT) analyst Andrew Wolf. The competition among supermarkets is fierce, and conventional grocery stores have slashed prices to try to hold on to customers. Whole Foods, which started losing customers earlier than most, may have stabilized earlier too, Wolf says. "The worst is over for their customer attrition," he says. "Their core customer is likely sticking with them."

At the same time, Whole Foods "really attacked the inefficiencies in their business," Canaccord Adams analyst Simeon Gutman says.

In 2008, when the U.S. economy began to plunge into recession and consumers slashed spending, Whole Foods felt the pain. Its same-store sales were the worst in the supermarket industry, Wolf says. Its stock fell from almost 40 at the end of 2007 to less than 10 at the end of 2008, a 76% decline.

But now, Whole Foods is the top-performing retailer of 2009. And since the beginning of the year, Whole Foods' shares are the fourth-best performer in the S&P 500, according to data provider Capital IQ. Following their Aug. 5 rally, Whole Foods shares have soared 204% for the year.


That's an impressive performance in a recession from a retailer specializing in expensive, high-quality products. Whole Foods has tried to offer more discounts in an effort to change its image for cost-conscious consumers.

But Mackey insists it doesn't market to an "upper-income customer" like some other premium retailers. "It's not income that drives our business. It's education," he says. "One of the reasons Whole Foods Market has held up fairly well compared to other so-called high-income retailers is because maybe we're not a high-income retailer. We're a retailer that markets to well-educated people who tend to want to continue to buy these foods regardless of the downturn."

Loyal customers may be sticking with Whole Foods, but analysts say a real rebound for Whole Foods—and a return to its previous rapid growth—will need to wait for a rebound in the broader economy. Right now, "we are seeing stabilization, maybe the glimmer of some signs of life," Gutman says. But, "I don't think you can say things have materially improved."

Though Whole Foods is managing its business well, Credit Suisse (CS) analyst Edward Kelly notes, "We remain skeptical on any near-term fundamental improvement."


Morgan Stanley (MS) predicts the consumer will remain under pressure even in 2010, with overall retail sales flat. "Against this backdrop, we don't expect a dramatic sales recovery for Whole Foods," Morgan Stanley analyst Mark Wiltamuth wrote Aug. 5.

Along with the tough environment, the fact that Whole Foods shares have already tripled in 2009 makes many analysts reluctant to recommend the stock at this price. "There's a lot of expectation built into the stock," Wolf says, with investors apparently predicting "a pretty bright future."

Noting that shares trade at more than 20 times his 2010 earnings estimate, JPMorgan (JPM) analyst Charles Grom said: "The stock is extremely rich, in our view."

For now, Whole Foods is trying to do what it can to increase profits in a downturn. Its strategies include careful discounting, cost-cutting, and trying to educate the public on the value of its organic, natural offerings.

But the chain's long-term prospects overwhelmingly depend on something that's very hard to predict or control: the direction of the economy and the ability of consumers to open their wallets again.



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