Whole Foods Market started its fiscal year 2012 with a bang, according to the numbers released Feb. 8 in its first quarter earnings report. The retailer’s profits jumped 33 percent to $118.3 million for the quarter, while its comparable-store sales grew 8.7 percent and its sales per square foot hit a record level of $929.
As Whole Foods’ latest numbers show (and as industry analysts were eager to hear), the company continues to build on its sales momentum—which is fueled by its ability to cater to both high-end and more value-conscious shoppers. “Whole Foods continues to gain share by broadening [the store’s] appeal to a wider range of income, education and age demographics,” Karen Short, an analyst with BMO Capital Markets in New York, told Supermarket News.
Serving customers across the economic spectrum is increasingly important for all natural products retailers. A closer look at Whole Foods’ latest earnings report reveals five other important takeaways that food grocers should pay attention to in 2012.
1. Health and wellness is a sweet spot for food retail
At its core, Whole Foods Market has always been about enabling people to live healthier and richer lives. It’s this focus on bringing healthier, higher-quality products to shoppers—while also providing consumer education and messaging geared toward healthy living—that is helping to drive the retailer’s current sales success.
“[Whole Foods] is in a really good spot,” Canaccord Genuity's Scott Van Winkle told the Medill News Network following the latest Whole Foods earnings report. “The most significant growth trend in the U.S. retailing industry is health foods, and Whole Foods is the retailer most associated with healthy, cleaner, natural and organic foods. I expect them to continue to grow.”
Other stock analysts agree. “More people want healthier options, and this is especially true in areas with younger demographics,” Justin Weinstein noted in his review of Whole Foods’ first-quarter earnings. “As evidenced by the company’s new and smaller format, [Whole Foods] is taking advantage of this opportunity to capitalize on the growing portion of the world's population looking for the shopping experience [Whole Foods] provides.”
Certainly, Whole Foods is never likely to become the place where most Americans do the majority of their food shopping. And yet, as Weinstein points out, the company’s ability to cater to those who want cleaner and healthier products, in at least some product categories, is expected to keep the retailer on a very healthy sales growth trajectory for the foreseeable future.
2. Suburbs are home to opportunity
During the first quarter of its 2012 fiscal year, Whole Foods Market opened six new stores in Folsom, Calif.; Jamaica Plain, Mass.; Minnetonka, Minn.; Yonkers, N.Y.; Oklahoma City and Scotland. As Walter Robb, Whole Foods’ co-CEO, noted during a call with analysts, the latter marked the first stores to be opened in Oklahoma City and the country of Scotland.
The opening of the Folsom store also proved noteworthy, Robb said. “We had 1,000 customers waiting for our [Folsom] doors to open, with some even camping out the night before,” he told analysts.
Located about 20 miles from Sacramento, the new Folsom store demonstrates how successful “smaller, more suburban markets” can be for retailers such as Whole Foods, Robb added.
“In many cases, these markets offer less competition, allowing our differentiated store experience to stand out even more in the marketplace than it does in some of the larger, more competitive markets,” he said.
3. Expect to see more Whole Foods stores
With eight new leases signed since its fourth quarter 2011 earnings release, Whole Foods is on track to meet its reported goal of opening between 24 and 27 new stores in 2012—followed by 28 to 32 more the following year. The overall goal is to reach 1,000 stores.
“We currently have 69 stores, or 2.4 million square feet, in development equal to 20 percent of our 12 million square feet in operation,” Robb told analysts.
In total, Whole Foods currently runs 317 stores—with a growing number of those operations located in secondary markets, where the uniqueness of the Whole Foods concept is proving enough to lure in shoppers and keep them coming back.
“[Whole Foods] is doing everything right in terms of helping consumers live better … Whether it is New England or New Orleans, people will get on their bikes and go to [Whole Foods Market],” Burt Flickinger, managing director of Strategic Resource Group, told Bloomberg.
4. Big things can come from smaller stores
Smaller format stores are nothing new to natural products retail, and “going small” is a concept that has been tried by even the biggest of players, including Walmart and Tesco.
Whole Foods Market is also finding success through smaller stores that are less costly to build and deliver a higher per-square-footage ROI—while still providing enough draw to attract a healthy combination of long-time natural products shoppers and crossover consumers who are just beginning their journey into healthier eating and living.
As Whole Foods reported, its average new store opened in 2011 returned 29 percent more profit per square foot than its stores built in 2010. The 2011 new stores were also 17 percent smaller in size compared to last year’s class of new stores, averaging 38,000 square feet, Robb said.
The smaller store formats are proving to be a particularly successful strategy in secondary markets. “While sales per square foot may not be as high as in the more densely populated markets, the economic case is compelling because rent is significantly less; and with the smaller size, our capital spend is less as well,” Robb added.
5. Food inflation is moderating
Nicknamed “Whole Paycheck,” Whole Foods Market has long fought the reputation of being an expensive place to shop. Its ability to strategically lower prices in some key categories—such as meat and dairy—while providing higher-priced but hard-to-find-elsewhere items in other areas of its store has enabled the retailer to change how shoppers view Whole Foods as a place to shop.
Last quarter, the retailer continued to prioritize balancing rising product costs with maintaining the company’s relative value propositioning, Robb said. “During the holidays, it was important to get the center of the plate in order to get the rest of the holiday meal, so we were very sensitive to maintaining the right price levels in our meat departments despite sharp cost increases in beef,” he said.
As Robb told analysts, he doesn’t believe food price inflation is going away. Still, he said the expectation is that inflation will moderate, thus giving Whole Foods the additional flexibility to consistently deliver the gross margin that has become expected by the market—within the range of 34 percent to 35 percent—while also maintaining its sales growth momentum.
Like all good retailers, Whole Foods says it will continue to pay close attention to balancing rising prices from both inflation and commodity costs with providing good value for its customers. In fact, it was the latter effort that helped to fuel the retailer’s growth last quarter, says Whole Foods President and Chief Operating Officer A.C. Gallo, who noted that the company’s Whole Deal coupon promotion guide brought in customers who spent twice as much and purchased more than two times as many items as customers not engaged in the promotion.
“We were very concerned with customers’ reaction to [inflation], so we worked on very strong promotional programs,” Gallo said. “We held our pricing in various places. And I think that reach out had the effect of bringing new customers in.”