While parts of Wall Street get excited because Whole Foods modestly beat their rather dismal revenue and earnings forecasts, the reality remains that the iconic grocer is in decline and is struggling to turn itself around. Both the sales and profit lines attest to this fact.
The 1.9 per cent dip in comparable sales is certainly a less harsh decline than that posted in recent quarters, but this is only because it comes off the back of a 2.6 per cent fall in the same period last year.
In any case, the figure underscores the problem that Whole Foods continues to lose market share at many of its established stores. Although total revenues rose, they did so by an anemic 0.6 per cent. This uplift is well below the rate of cost inflation, which has created a significant squeeze on operating income which fell by 13.9 per cent. Although Whole Foods remains profitable, the deterioration in its financial position gives it much less headroom for maneuver in terms of future investment and sharpening prices.
Against this backdrop, it is fortunate that Amazon has come to the rescue. Despite the recent management changes and some sensible steps to restore the business to health, Whole Foods is facing the prospect of several years of further decline and worsening financials. As an independent company, this would have been extremely challenging and would have meant the business taking at least three steps back before taking a step forward.
Amazon’s takeover does not solve all of Whole Foods’ woes; nor does it fix the broken elements of the proposition. However, it brings two immediate benefits. First, it removes investor scrutiny and pressure, something that allows Whole Foods the breathing space it needs to reinvent. Second, it will ensure that investment in the business continues, even against the backdrop of a deteriorating balance sheet.
Longer term, Amazon brings a whole host of other benefits. Foremost among these is the advantage of scale. Although Whole Foods is a sizeable business it remains niche and has nowhere near the scale of larger grocery rivals. This means buying power on branded and own-brand products is weak, which feeds into an inability to reduce prices without severely damaging margins. As much as Amazon will not be able to shift this at a stroke, using its platforms to distribute some Whole Foods brands and widening customer reach with a better e-commerce offer, will benefit volumes.
As much as the Amazon deal is helpful, it does not mean Whole Foods can relax. The company has lost much of its appeal and needs to think more carefully about its proposition and the uniqueness of its offer. As much as Whole Foods is a good grocer, it is far from being a great grocer, especially when the premium it charges is factored in.
The truth is that many large grocery players have improved and are providing experiences on par or similar to those of Whole Foods. Meanwhile, local players – like Bashas’ owned AJ’s in Arizona – are just as good if not better than Whole Foods in terms of selection, quality, and experience. All have nibbled away at Whole Foods’ market share.
The blunt truth is that the bar has been raised in the grocery market, and Whole Foods has not moved with it. Addressing this is arguably the biggest challenge Amazon will face as it takes ownership.
This story was originally published on sister publication Inside Retail Asia. Neil Saunders is MD of GlobalData Retail.
