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Will Whole Foods’ Competitors Steal the Organic Market?

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Some background on WFM’s financial performance

Whole Foods Market (WFM) has long reaped the benefits of changing customer preferences toward organic foods, with no real competition. Its sales per square foot and same-store sales were an envy of other food retailers, and its margins outshined most of its peer group.

The company’s sales per square foot were higher than Kroger (KR), Fresh Market (TFM), or Walmart (WMT) and lower than Costco (COST). Costco is a wholesaler that typically has higher sales per square foot but lower margins. WFM’s same-store sales were best in the peer group. It boasted one of the highest EBITDA (earnings before interest, taxes, depreciation, and amortization) margins. For comparison, please refer to the table below.

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Competition puts margins under pressure

Whole Foods Market’s (WFM) financial performance has faded with the rising competition. It reported an EBITDA margin of 8.4% in 1Q16, which is its lowest in the last 16 quarters.

Whole Foods is still among the best

Whole Foods’ margins still continue to be among the best in the food retail peer group. Kroger’s last reported EBITDA margin was 5.1% for the quarter ended November 7, 2015. Costco’s (COST) and Sprouts Farmers Market’s (SFM) EBITDA margins were 4% for the quarter ended November 22, 2015, and 8.4% for the quarter ended September 7, 2015.

So who’s the organic retailer’s real competition?

Looking at the figures in the above table, we could probably assume that Whole Foods’ toughest competitor isn’t Kroger (KR) or Sprouts Farmers Market (SFM) but rather its own strong past performance. While WFM is taking all necessary steps to push back Kroger and Sprouts Farmers Market to their original places, getting back to its own original place is WFM’s biggest current challenge.

Whole Foods Market has been working hard to overcome the roadblocks. It’s been taking several initiatives to bolster profitability and improve its price perception. We’ll take a look at some of the company’s initiatives in the next part of this series.

Whole Foods Market (WFM), Fresh Market (TFM), Kroger (KR), and Sprouts Farmers Market (SFM) are part of the Vanguard Consumer Staples ETF (VDC) and account for 3.1% of the fund.

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