A dismal start in the UK is the least of its woes for Whole Foods Market. And nor is the credit crunch entirely to blame, says Charlie Wright.
A foodie cathedral. Or a tower of Babel. The launch of Whole Foods Market in the UK has divided opinion ever since its launch last June.
And opinion is divided about the cause of its ills. Set over four floors of the former Barkers department store in High Street Kensington, the organic food retail store – at 80,000 sq ft the US company’s largest-single site at the time of its launch – posted losses of $18.4m (£9.4m) in its first year.
And it’s arguable that were it not for the largely unforeseen credit crunch, Whole Foods Market may actually have been celebrating this week the success of its UK debut.
Others, however, believe the launch last June was a colossal failure from the start with countless reports of high wastage, excessive ranging and confused branding the result of a poor site combined with underestimation of the strength of local competition.
Mackey’s apparent indifference may, however, reflect greater problems closer to home. Profits in the third quarter slumped by 31% to a shade under $34m year-on-year, as like-for-like sales rose just 2.6%. Meanwhle, predictions for 2009 sales growth were slashed from 25%-30% to 6%-10%.
As shares in Whole Foods fell by 18%, Mackey – who, like Sir Stuart Rose at Marks & Spencer, is both chief executive and chairman – was softening his characteristically confident rhetoric, conceding “the challenging economic environment appears to be negatively impacting our sales”.
But, as in the UK, the problems of Whole Foods aren’t all related to the credit crunch per se. Critics have been swift to draw parallels with Starbucks, arguably the definitive success story of the 90s – and one also now threatening to turn sour. The coffee house has wrestled with stalling sales amid the downturn and on 1 July announced the closure of 600 US outlets. Similarly, Whole Foods has been accused of ‘flags on maps’ syndrome – expansion for its own sake. Outlets in Aspen and Hawaii may add glamour, but detractors say the business sense behind some openings is less clear.
In response, Mackey has promised that the downturn, “combined with our commitment to financial flexibility and investing prudently in long-term growth, has led us to a more conservative approach”.
‘Financial flexibility’ meant suspending the quarterly dividend, while that new conservatism will take the form of a reduced expansion plan for the year ahead, with the number of store openings cut from 25-30 to 15, and further cuts to capital expenditure not related to new stores of 50%.
The other problem to which the Austin-based company appeared slow to react was heightened competition at home. Even before the credit crunch, the success of a company known as ‘Whole Paycheck’ was bound to attract attention. Wal-Mart has made a sustained push in the sector in recent years, with chief executive Lee Scott observing as far back as 2005 that “customers at all ends of the income spectrum want organic and natural foods”.
“Whole Foods needs to… become more affordable for most folks,” observes the US blog ValuePlays. “When they were the only game in town they could charge what they wanted. Now they aren’t, price rules.”
Now, perhaps belatedly, the company is changing its tune. The ‘Whole Deal’, launched in the US in July, highlights discounted goods, while ‘value gurus’ in selected stores give customers tips on stretching budgets.
Meanwhile, it is plotting its first-ever UK marketing campaign, aiming to position the store as an ‘everyday choice’.
But the bad news keeps coming. This week Moody’s downgraded its stock rating and warned “continuing economic pressures, trading down by consumers and/or the inability to pass along cost increases” could mean trouble.
Whole Foods’ own eye for a bargain has also been questioned. It is widely regarded as having paid over the odds for Wild Oats Market last year. Nor can a lengthy legal battle to get the $565m deal past competition authorities have helped maintain focus.
Mackey is determinedly optimistic. “You can run around, throw your hands up in despair, or see what is the opportunity being given to us right now.” But is he telling the whole truth?
A foodie cathedral. Or a tower of Babel. The launch of Whole Foods Market in the UK has divided opinion ever since its launch last June.
And opinion is divided about the cause of its ills. Set over four floors of the former Barkers department store in High Street Kensington, the organic food retail store – at 80,000 sq ft the US company’s largest-single site at the time of its launch – posted losses of $18.4m (£9.4m) in its first year.
And it’s arguable that were it not for the largely unforeseen credit crunch, Whole Foods Market may actually have been celebrating this week the success of its UK debut.
Others, however, believe the launch last June was a colossal failure from the start with countless reports of high wastage, excessive ranging and confused branding the result of a poor site combined with underestimation of the strength of local competition.
The Whole Truth
Whole Foods reported a 21.6% increase in third-quarter sales to $1.84bn (£977m)
But like-for-like sales rose just 2.6%, among the lowest in the 28-year history of the Austin-based company
Net profits in the third quarter were down 31% to $33.9m (£18m)
With profits for the year to date falling by 24% to $113m (£60m) from $148.8m (£79m) for the previous year, on sales up 27% to $6.16bn, margins have fallen to less than 2%
The value of the company’s stock fell by 18% to $18.84 (£10) per share
The latest growth targets for 2008/09 have been slashed from 25%-30% to 6%-10%
High-profile chief executive John Mackey seemed unfazed by the UK losses. Announced the company’s results, he argued that Whole Foods lost money when it entered Canada as well and that long-term growth in the UK would be much greater. A second site was recently identified in Birmingham. Whole Foods reported a 21.6% increase in third-quarter sales to $1.84bn (£977m)
But like-for-like sales rose just 2.6%, among the lowest in the 28-year history of the Austin-based company
Net profits in the third quarter were down 31% to $33.9m (£18m)
With profits for the year to date falling by 24% to $113m (£60m) from $148.8m (£79m) for the previous year, on sales up 27% to $6.16bn, margins have fallen to less than 2%
The value of the company’s stock fell by 18% to $18.84 (£10) per share
The latest growth targets for 2008/09 have been slashed from 25%-30% to 6%-10%
Mackey’s apparent indifference may, however, reflect greater problems closer to home. Profits in the third quarter slumped by 31% to a shade under $34m year-on-year, as like-for-like sales rose just 2.6%. Meanwhle, predictions for 2009 sales growth were slashed from 25%-30% to 6%-10%.
As shares in Whole Foods fell by 18%, Mackey – who, like Sir Stuart Rose at Marks & Spencer, is both chief executive and chairman – was softening his characteristically confident rhetoric, conceding “the challenging economic environment appears to be negatively impacting our sales”.
But, as in the UK, the problems of Whole Foods aren’t all related to the credit crunch per se. Critics have been swift to draw parallels with Starbucks, arguably the definitive success story of the 90s – and one also now threatening to turn sour. The coffee house has wrestled with stalling sales amid the downturn and on 1 July announced the closure of 600 US outlets. Similarly, Whole Foods has been accused of ‘flags on maps’ syndrome – expansion for its own sake. Outlets in Aspen and Hawaii may add glamour, but detractors say the business sense behind some openings is less clear.
In response, Mackey has promised that the downturn, “combined with our commitment to financial flexibility and investing prudently in long-term growth, has led us to a more conservative approach”.
‘Financial flexibility’ meant suspending the quarterly dividend, while that new conservatism will take the form of a reduced expansion plan for the year ahead, with the number of store openings cut from 25-30 to 15, and further cuts to capital expenditure not related to new stores of 50%.
The other problem to which the Austin-based company appeared slow to react was heightened competition at home. Even before the credit crunch, the success of a company known as ‘Whole Paycheck’ was bound to attract attention. Wal-Mart has made a sustained push in the sector in recent years, with chief executive Lee Scott observing as far back as 2005 that “customers at all ends of the income spectrum want organic and natural foods”.
“Whole Foods needs to… become more affordable for most folks,” observes the US blog ValuePlays. “When they were the only game in town they could charge what they wanted. Now they aren’t, price rules.”
Now, perhaps belatedly, the company is changing its tune. The ‘Whole Deal’, launched in the US in July, highlights discounted goods, while ‘value gurus’ in selected stores give customers tips on stretching budgets.
Meanwhile, it is plotting its first-ever UK marketing campaign, aiming to position the store as an ‘everyday choice’.
But the bad news keeps coming. This week Moody’s downgraded its stock rating and warned “continuing economic pressures, trading down by consumers and/or the inability to pass along cost increases” could mean trouble.
Whole Foods’ own eye for a bargain has also been questioned. It is widely regarded as having paid over the odds for Wild Oats Market last year. Nor can a lengthy legal battle to get the $565m deal past competition authorities have helped maintain focus.
Mackey is determinedly optimistic. “You can run around, throw your hands up in despair, or see what is the opportunity being given to us right now.” But is he telling the whole truth?
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