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Whole Foods: Where Both the Food and Profits Are Healthy

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The ultimate combination of natural foods and capitalism.

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Editor's Note: Welcome to Love It or Hate It, a regular dual-column feature that will capture the love-hate relationship America has with some of its biggest, most controversial companies. For past columns, click here. For the opposing view on Whole Foods, see Whole Foods: Junk in a Healthy Wrapper.


Whole Foods Market's
(WFMI) cachet is its key competitive advantage.

That may be like saying Paris Hilton is famous for being famous, except for one thing: Whole Foods defines its niche. That alone is reason enough to love the company.

Market clout allows Whole Foods to charge premium prices for quality goods, and its customers eagerly pony up. And that, if you'll pardon the expression, is red meat for investors.

Whole Foods, the leading stand-alone organic retailer with about 280 stores in 38 states, the District of Columbia, Canada, and the United Kingdom, plans to boost sales by moving into less affluent neighborhoods. The tactic will put Whole Foods in direct competition with major supermarket chains such as Safeway (SWY), Kroger (KR) and Walmart (WMT), the nation's largest grocer.

The trick: Whole Foods must expand without diluting its carefully crafted image as a superb upscale niche marketer.

Whole Foods is taking a hit in the recession, but nothing close to a fatal blow.

Third-quarter comparable store sales fell 2.5% compared with a 2.6% increase for the same period a year ago.

Like other major chains, Safeway, which also markets under the Vons and Dominick's names, has expanded its offering of health food, but third-quarter comparable store sales fell 6.3% overall and 3% excluding fuel.

In any given metropolitan area, Whole Foods' market share is small, but its mindshare -- buzz, positive view of customers, and hordes just hanging out at the sushi bar on weekends -- is huge. That sets the company apart from major competitors, and even upscale counterparts such as Trader Joe's.

Whole Foods has little in common with Walmart, but is smart enough to learn from the world's largest retailer. Like Walmart, Whole Foods does little newspaper advertising and instead relies heavily on direct mail. This allows the company to target its pitch by zip code and eliminates the cost of reaching people who are unlikely to buy organic food or don't live close to a Whole Foods store.

Long-term, Whole Foods looks like a good bet. Endless chatter about the nation's "obesity epidemic" will make the company's all natural products -- free of chemicals, trans-fats, and hormones -- increasingly attractive to greater numbers of shoppers.

Traditional supermarkets realize this and offer a greater selection of organic food, but the one-size-fits-all approach of major supermarket chains will never match Whole Foods' underlying advantages: its devoted following and impeccable reputation for quality.

In that context, Whole Foods' move into less affluent neighborhoods is spreading the gospel while making a buck. Increasing the number of "value" offerings in an effort to pick up new customers is likely to reduce each store's contribution to the company's future growth but opening new stores will increase total sales.

Whole Foods deftly combines natural food and capitalism. In August 2007, the company agreed to acquire competitor Wild Oats Markets for about $55 million. The Federal Trade Commission fretted that the deal might reduce competition. The company settled the FTC's lawsuit by agreeing to divest 12 Wild Oats stores and one Whole Foods outlet. But the long-term outlook remains strong. In November 2008, a private equity firm invested $425 million in Whole Foods in return for a 17% stake in the company.

John Mackey, Whole Foods' CEO, is one smart cookie. But he naively assumed that politics has anything to do with efficiency and that the health plan he built for employees would be of interest to Washington. His opinion column last summer in the Wall Street Journal prompted hysterical yowls from those who believe more government is the answer to everything.

Horrors: Employees at Whole Foods vote on their benefits while many retail grocery workers don't get any medical coverage. Worse, Mackey capped management's pay at 19 times that of the company's lowest paid workers. The rapacious capitalist then offers the bulk of the company's stock options to workers rather than upper management. Such market-driven apostasy sparked an absurd "Boycott Whole Foods" page on Facebook.

The US may not be much of a market for ideas these days, but there's still a place for a well-run company like Whole Foods. Its CEO has tested market-driven ideas with his company and suggested -- ever so gently -- that his efforts to provide solid health coverage to his employees might be relevant to the national debate.

Such naiveté is charming. Hasn't this guy ever read a major general interest newspaper? Oh well, you've got to love a company that inspires yuppies, greenies, and aging Baby Boomers alike to part from their money, even if its CEO appears to live in Never-Never Land when it comes to politics.

Pass the alfalfa sprouts -- and the profits.

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No positions in stocks mentioned.
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