Perhaps the real question is, ‘Can Whole Foods Market Inc. (:WFMN/A) compete with major national chains without changing its business model?’ Some Whole Foods investors apparently don’t think so and are pushing the grocer to operate more like the competition.
This includes a push to get Whole Foods to abandon its 11-region distribution system in favor of something more centralized and national in scope.
National Buyers Versus Exclusivity
The problem for Whole Foods is that its current system, which allows for updating product offerings and keying them to the regions in which the stores operate, could be compromised. Customers who expect to walk in their local Whole Foods store and stock up on the latest food trends as well as local produce and other products could feel slighted and walk away.
Brand consultancy Theory House representative, Jim Cusson said, “Shifting to national buyers can certainly deliver cost savings to Whole Foods, but at what price to the soul of the banner?”
When customers walk into Target Corp. (NYSE:TGTC), Wal-Mart Stores Inc. (NYSE:WMTC) or even The Kroger Co. (NYSE:KRC), they are generally more concerned about prices than about products they can’t find elsewhere. For Whole Foods, the opposite is true.
In fact, a recent survey by Kantar Retail found that 25% of Whole Foods shoppers visited the chain for items they couldn’t find anywhere else. When Wal-Mart shoppers were quizzed, only 3% said exclusivity was a top reason for shopping there.
A Buyer Might Be Found
None-the-less, investors like Jana Partners continue pressure on Whole Foods to change the way it does business in order to lower prices and become more competitive. There are those who have said this tactic could result in short term earnings drop for WFM based on concentration on price.
Attitudes are also mixed when it comes to the question of whether a buyer would step in and rescue Whole Foods from its inability to stay competitive. Among potential buyers mentioned were Albertsons Cos. or foreign buyers like Metro AG (Germany), Jim Pattison Group (Canada) or Wesfarmers (Australia).
Stock Could Head Higher
For other observers, like Barrons, the feeling is that activist investors like Jana could produce gains for Whole Foods based on the investor’s aggressive approach and past history. In addition, Whole Foods has already been cutting costs in part by launching a new chain of smaller stores house-branded as 365.
What Jana brings to the table is a push for more technology, better loyalty programs and increased communication with customers, all designed to generate stronger sales.
Simply put, Jana has a proven history of increasing shareholder value. Meanwhile Whole Foods has brand cachet and is expected to show accelerated earnings growth next year.
Whole Foods is currently trading for 25 times estimated earnings of $1.34 a share for the fiscal year ending in September 2018. While that’s not cheap, Barrons notes it is below the stock’s five-year average price/earnings multiple of 29.7. As Barrons points out, ‘a sale might not happen soon, but it wouldn’t take much of a turnaround in operations for the shares to head higher.’