Whole Foods has a rather compelling proposition : upscale destination marketplaces offering carefully selected & prepared gastronomic delights accompanied with friendly education on topics in nutrition, all with the goal of helping you feel better physiologically & psychologically.
And indeed the Whole Foods story is playing well with increasing numbers of nutrition-conscious Americans, as aggressive store expansion plans seem to easily attract new converts to the nutritious lifestyle.
Whole Foods success has translated into a stellar financial performance as WFM has emerged one of the top growth stocks of the past decade.
I personally love Whole Foods and shop in their markets multiple times per week. But could it be that the Whole Foods' "shortcut to eating right" is peaking in popularity just as its stock (WFM) reaches for new all-time highs ?
Unique store layouts, carefully screened products, ultra-fresh high-quality produce, nutritious, delicious & diverse prepared foods, maintaining an educated positive-thinking workforce, and embedding full-service cafes, delis, prepared foods cafeterias, casual eating areas, and even personal beauty care adviser kiosks, makes for extraordinarily high fixed-costs per store relative to a simple "fill up the cart" grocery.
These high costs are well-reflected in Whole Foods' prices, thus earning Whole Foods its underground nickname "Whole Paycheck".
What exactly is the proposition that compels consumers to pay-up for the "Whole Food Experience", often paying twice as much as they would elsewhere for nearly the same food item ?
I break-down the motivation/justification to over-pay for food into 3 categories :
1. outsourcing the complexity of personal nutrition
2. grocery shopping as a destination social event
3. elitist self-separation from the ignorant "fast-food victims" who do not subscribe to "you are what you eat"
( I myself personally am a stellar example of a Whole Foods customer who subscribes to each of these propositions. )
However, a number of factors are gradually conspiring to downgrade the Whole Foods experience :
1. Commodity costs are sky-rocketing.
Average nationwide gasoline prices are approaching $4/gallon and oil industry analysts see a good chance $5/gallon gas will happen in 2012.
Although Whole Foods has aggressively expanded their footprint, for most shoppers it is still the case that another grocery store is closer-by. Added driving costs reduce motivation to pursue a destination event, and is a well-known limiting mechanism for theatres, restaurants, upscale shopping malls, theme parks, and ski resorts.
Simultaneous with gasoline's push towards previous highs, we are in the midst of an extraordinary ramp in meat prices propelled recently by higher fertilizer-driven feed costs within a longer-term trend of accelerating global demand for high-protein diets as wide swaths of rural peasants attain middle class status in China, Southeast Asia, and India.
Many of Whole Foods tastiest, most expensive, and highest-margin items are based on choice cuts of the most expensive organic beef, pork, poultry & fish.
2. Cheaper alternatives are becoming more compelling.
For pre-packaged items, such as frozen foods, Trader Joe's is a clearly superior value proposition. For produce, local farmers' markets and upstart organic grocers such as Fresh Choice offer comparable quality at much cheaper prices. Plus, traditional grocers are gradually ramping-up their selection of organic items.
Whole Foods may have the ultimate formula for total experience in nutritious grocery shopping, but this can not stop competitors from slicing-and-dicing the components and compelling consumers to break-down their shopping lists across stores -- a key danger to any experience-oriented retailer.
( I increasingly find myself avoiding buying items Whole Foods that I can purchase at Berkeley Bowl - the East Bay's low-priced organic alternative grocery stores. )
3. Whole Foods aggressive expansion is in some respects its own worst enemy.
Destination experiences lose some of their cachet allure if the destination becomes too easily attainable. Indian casinos, skate parks, Peets Coffee, microbreweries, internet cafes, and Costco are all retail concepts that were once relatively rare but are now common features of the local landscape
Whole Foods are hardly on every street corner, but no longer do you find only a single Whole Foods store in a few choice urban markets. Today, in many parts of the US, Whole Foods is rather well-known -- even Las Vegas, hardly an organic bedrock, now sports three Whole Foods locations.
Additionally, the greater number of stores has led to a natural dilution of the quality of the Whole Foods worker. Until recent years, perhaps the best part of shopping at Whole Foods was the pleasant surprise at finding friendly, cheerful, knowledgeable staff who seemed to be genuinely enthusiastic about their job and helping you with your nutrition needs.
Part of the genius of co-founder/CEO John Mackey was to provide higher wages and professional-level benefits & stock options to Whole Foods employees who gladly joined-up with a cult culture of "we're doing something new & cool with food that's good for the world".
However, over the past couple of years, I have noticed a discernable trend at the Bay Area stores I frequent of a pronounced degradation of Whole Foods employee quality. Increasingly, I find examples of typical grocery store workers : disinterested, resentful, bored, rude, lacking real knowledge, over-focused on efficiency, and under-focused on interacting with customers in any sort of genuine manner.
In a word, Whole Foods is sufferring from "corporate-itis".
This is a natural evolutionary path. Whole Foods first opened in 1980 and has grown-up with the US organic food movement. Niche markets of Santa Cruz vegan hippies have been assimilated into a wider base of educated professionals. As the US "organic food chain" infrastructure has achieved real profitability, the best talent naturally has migrated to opportunities more lucrative & interesting than grocery clerk.
Now turning attention to WFM, the equity, we find a number of worrisome developments :
1. WFM has risen 8-fold since the market bottom in March 2009, implying that some long-term investors are sitting in huge paper profits and must be looking seriously at diversifying their holdings.
2. WFM has advanced from a cult stock into a mainstream staple of growth portfolios. It is well-analyzed by Wall Street, over-loved by analysts, and over-owned by mutual funds.
3. WFM pays only a 0.7% dividend as management instead chooses to re-invest profits in expansions. As such, the stock loses a decent chunk of its allure as a defensive staple -- especially relevant as the ROW ( Rest Of World ) is clearly already in recession or soon entering one, potentially dragging the US along.
4. While cachet luxury brands such as Tiffany (TIF), Louis Vuitton (LVS), & Coach (COH) tend to display good resilience in economic downturns, this is largely due to the rich being price-insensitive when it comes to status symbols. But a grocery store's products are quickly consumed and therefore can never command the extraordinary margins of luxury jewelry or attire/accessories.
If we discount the appeal of Whole Foods products themselves as in a peaking parabolic trend due to serious competition from other organic vendors, we are left with a somewhat unique destination upscale shopping experience. It's not an exact analogy, but high-end retailers, fine restaurants, and luxury vacation hotels, resorts & cruises are all categories that suffer drastically reduced revenues in economic downturns.
With WFM attacking new highs, and the broad market rally increasingly showing signs of exhaustion as artificial liquidity from the world's central banks appearing to have peaked, shorting WFM may now offer decent reward/risk proposition.
It is difficult to short a "go to" growth name, as the play is getting in front of a bout of profit-taking ( as opposed to the traditional short-sell of riding a broken business model down to zero ), but hot money is quick to evacuate a hot stock on the first signs of trouble, and the profits can be quick and lucrative.
If the broad market corrects, WFM should suffer a sharper correction, with potential for a nasty sell-off to gap-fill at 63.5 just below the 200sma on any poor earnings news.
