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Grocery Price Wars: Whole Foods Discounts, Walmart Increases


Why the upscale grocer has quietly lowered prices while the big box retailer has done the exact opposite.

In a research report released yesterday, JPMorgan analyst Charles Grom asks rhetorically about Whole Foods (WFMI), "Whole paycheck? Not anymore."

The usual knock on the upscale grocer is that prices are too high. However, those prices seem to be dropping.

Grom writes:

While the company's prices are still higher than Kroger (KR), Safeway (SWY), and Harris Teeter by roughly 14%, on average, this is down from last December (about 19%).

Money manager Ryan Krueger, co-founder of Houston's Krueger & Catalano, conducted his own study recently, and found that the "whole paycheck" concept was off-base. In a recent letter to clients, he wrote:

I spent time with a store manager putting together a basket of everyday items -- stuff like chips, bread, and peanut butter. We compared 10 average products to the closest big grocery chain and it was closer than you would think: $25 vs. $21. The unknown might be that the $21 basket came from Whole Foods, and its private labels. Traditional grocery stores typically sell other company's products after the slimmest of 1% or 2% margins. Resellers in any business will tell you the real money is made by those creating a proprietary product, not a shelf to put it on. Whole Foods' private labels are now on plenty of those shelves. If they make their own peanut butter they keep all the profit, and I am inclined to choose it because I trust them and their ingredients.

"We've long said that if you compare like for like items, Whole Foods is actually less expensive, especially in organic grocery items," Libba Letton, a spokeswoman for Whole Foods tells Minyanville. "In general, over the last couple of years, it's been a focus of ours to be competitive on price and highlight the value that's already in our stores."

As an investor, Krueger likes Whole Foods for a variety of reasons. His letter continues:

I overhear the butcher talking to another customer who obviously does not come in every weekend. The rookie asks about an all-natural and organic (two different things to learn about) sausage they make right here. As the butcher is explaining exactly what goes in it, he wraps one in brown paper and hands it to her, smiling. "Try one on me this time, and let me know if you like it." I smiled too, and shook my head, thinking about everyone who assumes this place is too expensive. I am guessing that woman likes it (I've tried them all) and comes back and pays for many more. I might even guess that she tells somebody how unusually generous the butcher was. I should have been miffed. Here I was, a regular paying full price, standing right next to this lady who paid nothing. But I was glad. I choose to spend my money here and think I get an incredible return on that investment. I actually like paying one fair price here instead of keeping an accordion-style coupon folder and janitor-sized keychain for discount cards at other grocery stores. The other reason for the two smiles is that the butcher and I are both shareholders of Whole Foods, and unusual experiences are good for business.

Whole Foods butchers are shareholders, as are produce managers, cashiers, and shelf-stockers. Full-time employees may purchase shares of Whole Foods stock at a discount from the day they start work. Part-time and seasonal workers are eligible for the stock purchase plan after 400 hours of service.

Krueger is also bullish on Whole Foods as a continuing growth story:

Tens of millions of people in some of the largest cities in the US have never even heard of Whole Foods. Yet. The biggest unknown of all just might not be any one of these pieces, but the entire story. As wildly popular as they are in current locations, realize there are still only 273 stores in 38 US states and the District of Columbia. If they become more popular as I believe, and more profitable as I believe, there may be one final unknown left -- potential -- that even the company underestimates.

While Whole Foods becomes more affordable, JPMorgan's Grom points out that prices at Walmart (WMT), another big name in groceries (among other things, like, well, pretty much every other consumer product known to man), "actually increased 2.3% over February levels based on our 31-item basket," which follows a 1.9% increase in January.

In an email message to Minyanville, Walmart spokeswoman Linda Blakely said:

Our customers need the absolute best value, and we're committed to giving it to them. This month we are stepping up the Rollbacks -- adding new rollbacks and deeper price cuts. Each week, our shoppers will see hundreds of new Rollbacks added throughout our stores. We've stepped it up where our customers need us to -- with the basics of consumables and food. As the program continues, every category across the store will see meaningful Rollbacks.

Meaning, Walmart is now committed to rolling back prices to where they were two months ago.

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