Every Sunday morning, I head to my nearby Whole Foods and beat its 8 a.m. opening by several minutes. They let me in anyway.
I guide my cart to the produce section, filling it with a host of berries (straw-, blue-, rasp- and black-), peaches, bananas, broccoli, carrots, cauliflower — all of which outfit my breakfast and lunch each day for the week. Those berries are expensive, but the cost average of about $5 for each breakfast and lunch is still less expensive than a trip to McDonald’s or Starbucks.
The thing about Whole Foods is that I can’t quite reconcile the store’s popularity (the ones I frequent are always crowded, less so at dawn on Sunday) and its high prices with the unpredictable stock price. My instinct tells me that something so popular, fun and universal (groceries!) must be profitable and, therefore, a good stock to own.
I asked Mark Ordan, a turnaround specialist and an expert in food retail, to demystify the Whole Foods saga. Ordan, 58, was founder and chairman of Fresh Fields Markets, a Maryland-based natural foods grocer that merged with Whole Foods in 1996. At the time of the merger, Fresh Fields had 22 stores and more than $200 million in sales in four markets: Washington/Baltimore, Philadelphia, New York/New Jersey/Connecticut and Chicago.
Ordan has also served as chief executive of Balducci’s, a gourmet food store chainlet with six locations in Maryland, Virginia, New York and Connecticut.
How is Whole Foods different today than when you guys merged?
It’s a vastly bigger company with much larger stores and much more inventory in each store. It has higher prices than when I was at Fresh Fields. Back then, we tried to keep major items at prices that were in line with conventional supermarkets. Whole Foods doesn’t do that. You can take a like-item at Whole Foods and pay much more than you would at Giant or Safeway.
Can Whole Foods afford to see its profit margins diminish?
They will more than make up for it in efficiencies. Whole Foods is too expensive. They should lower those prices. Retailers can’t sustain high prices versus the competition. That is a big reason their competitive store growth has gone down. I would say volume will pick up.
What was broken at Whole Foods that they were bought by Amazon.com?
Two things. It was hard for them to continue their longtime, same-store growth rate. [That is a common industry metric that measures sales at a specific store this year against the same store sales as last year, and the year before, and the year before that.]
Whole Foods continues to be unique. It’s the only place where you can get a truly great assortment of really fresh, natural food. But competitors were nibbling away at that sales growth. Harris Teeter, Giant, Safeway were all getting better at perishable foods. Trader Joe’s was expanding with a roster of clever items.
The second problem is that Whole Foods was never as efficient an operator as some of these world-class retailers are. The key to being a great retailer and great merchant is being incredibly efficient in terms of logistics and inventory management. You have Walmart and Costco and every major supermarket chain working on their logistics because they had such low margins that they had to grind out every bit of efficiency that they could.
There are no patents in retail. If you admire what Whole Foods is doing, you can copy it. There are a lot of good companies out there. And if you are better at logistics when you copy them, you can be more profitable.
So the competitors got better and better. Costco gets better and better and Walmart is an enormous seller of groceries. They are all more efficient. Then you come around with Amazon, the most efficient merchant of all time.
How can Amazon fix it?
Amazon has two strengths. Amazon knows what customers want and knows how to offer customers choices with very good descriptions and follow-up service. The shopping experience gets better.
And Amazon is able to get what you want to your door so rapidly that they have it as convenient as most brick-and-mortar operations. People might say you go there and get it, but that’s only if you have it in stock. Too often, you go to brick-and-mortar retailers and what you are looking for isn’t in stock. You never have that problem at Amazon.
How big can Amazon-Whole Foods get?
Enormous. Conventional grocery stores have operated on low margins for years. They have to squeeze out efficiencies and inventory management. Whole Foods was able to rest on its laurels because they always had much higher margins. They were never as efficient as these conventional supermarkets.
Now you have a good merchant like Amazon, who is far and away the best at logistics, far more efficient than any supermarket chain. Now Amazon has a hold of a supermarket that enjoys the wealthiest demographics of any company in retail. People shop there several times a week. Amazon has the know-how to make shopping a better experience. They will absolutely revolutionize the way Whole Foods manages its logistics and inventory.
Do grocery stores as we know them now have a future?
The whole experience is going to be very different. Grocery stores are going to revolutionize the way people buy items, the way they pay for them, the way they handle inventory, the way they distribute to stores — all to compete with Amazon, they are going to have to find news ways to be efficient.
It’s an enormously competitive industry, which will drive so many innovations. Very soon, you are not going to get your items, go to a cash register, stand in line and check out. Soon, and Europe is way ahead on this, you will pay as you put them in your basket and you will walk out the store fully paid.
When you go in Whole Foods, is there any legacy of Fresh Fields that is visible?
It’s substantially different. Many people who worked at Fresh Fields are still there. Whole Foods has evolved considerably over time. I was on the board of Harris Teeter, and it has really improved over the years. It has way better fresh food than they used to have and a much bigger selection of natural and organic food. The biggest revolution was led by Whole Foods, Fresh Fields and others. People want more natural, less processed, tastes better and healthier.
Why is Amazon/Whole Foods discounting prices?
I guess there’s a new boss — and he can. This is Amazon 101. The biggest gripe with Whole Foods is that prices are too high. Amazon says we will grind it out on lower prices to get market share. They aren’t doing this to dabble. They are doing this to make a major move into the food retail business.
Does the Amazon takeover mean Whole Foods will do its own delivery?
I don’t know. I would suspect so. Amazon has limitations on delivery. Not everyone wants a package dropped at their door, and it’s not so easy to send packages back. So having drop off and pick up bins in their own (Whole Foods) stores is very powerful. The odds are that when you drop and pick up, you will buy something. The whole experience will be very different.
Source: Washington Post