Whole Foods Market: Whole Lot of Loss

Fresh & Wild Ltd, the UK unit of Whole Foods Market, has posted sales of GBP35.9m for the year to September 30, 2007, an increase of 18.5%. However, it also reported a loss of GBP9.9m and, although the GBP2.9m cost of opening a store in Kensington, London, partially accounted for the fall in profitability, it does bring into question the viability of operating a large-scale luxury food concept.

Whole Foods Market’s UK business comprises the Kensington, London store, along with five Fresh & Wild stores in London and Bristol. However, the latest set of financial results reveal the extent to which the UK stores have struggled to pay their way. Indeed, despite covering only three months of trading in the new Whole Foods Market Kensington store, these results are disappointing. Moreover, when the combination of a slowdown in the organic food boom and a trend towards discount shopping are taken into account, these are indeed very worrying times for Whole Foods.

The retailer has a reputation for being expensive, and has poor value credentials. While it works as an occasional destination store, in terms of every day shopping, there is too much competition, especially from nearby Tesco, Marks & Spencer and Waitrose. However, to increase its value credentials, compete with the supermarkets’ premium ranges on price, and attract more frequent footfall, Whole Foods has recently increased the number of price promotions in store. This carries an element of risk, as increasing price competition at a time of food and cost inflation will squeeze already pressured margins, impacting profitability still further.

Another factor negatively impacting Whole Foods is that premium food retailing in the UK is becoming saturated. Premium private labels are now commonplace in all supermarkets, which is reducing Whole Foods’ differentiating properties and diluting its advantage as a premium food retailer.

In Whole Foods’ favor, however, is the fact that it is still a young business in the UK, with the full concept only operating from a single store. Furthermore, there are plans to open a further two UK outlets in Birmingham and London’s Canary Wharf, with a network of European stores on the longer-term horizon.

Nevertheless, in the short term, the outlook for Whole Foods is quite downbeat. Despite being a fantastic concept, it is not financially viable. The economics of the Kensington store simple don’t stack up, either in good or bad times. In order to make the store profitable, Whole Foods needs to trade in huge volumes, something that it has thus far failed to achieve. Moreover, and more worrying for Whole Foods, is whether the concept of premium food retailing in the UK can withstand the impact of the credit crunch, consumers switching to cheaper alternatives, the supermarkets’ continued price war, the slowdown in the organic food boom, and the saturation of the premium foods market. With all of these factors stacked against it, Whole Foods could struggle to flourish in the competitive UK grocery sector.

Source: Verdict Research