Whole Foods Feasts on Profits as More Consumers Embrace Healthy Living

Whole Foods Market (WFMI) CEO John Mackey has been in the news so much this quarter -- including a nuanced, often harsh New Yorker profile -- it's hard to remember that there's a whole company steadily ringing up sales of natural body products, organic food and assorted bags of junk in his shadow.There is: Whole Foods reported earnings that fed analysts to bursting Tuesday, with results for the fiscal first quarter 2010 exceeding expectations. Sales of $2.6 billion soared 7% over the year-earlier quarter and earnings were $49.7 million or 32 cents per share, compared to analyst consensus of 26 cents per share and 2009 earnings of 20 cents per share.

Fervor for the company is high and the stock is up over 200% in the past year. By market close Tuesday WFMI was up another 77 cents to $30.52, and once earnings were announced, extended-hours trading had the stock vaulting up $2.45 to $32.97. Whole Foods' management was proud of the swing in today's results from those of the first 16 weeks of fiscal 2009, when the company was hit unexpectedly with the full weight of the recession. After ordering gourmet holiday perishables in grocery and fancy soaps and other luxuries in the Whole Body department last year, the company was left with too much inventory and spoilage amid plunging consumer traffic.

Americans Slowly but Surely Embracing Healthier Eating

The remarkable turnaround is, say executives, part of a life-cycle of changes in the way Americans eat; a slow but steady march toward more local, more natural and more organic foods. Whole Foods launched its "Healthy Eating Initiative" to much acclaim and scrutiny into Mackey's own diet (he eats no sugars, vegetable oils, or processed foods, and he's vegan) at the same time that farmers began to grow more quantities and varieties of organic produce and raise more grass-fed, pasture-raised, organic and humanely treated meats.

More supply meant lower prices, which Whole Foods says it passed on to consumers. Customers were happy to clang the demand bell, and not just the wealthy ones; those who typically shopped for just a small portion of their grocery "cart" at Whole Foods were noticing the low prices in the produce section and piling more in.

According to COO Walter Robb, customer happiness was only the beginning. Everyone is coming up rosy-faced, he said on the analyst conference call held Tuesday afternoon: "Suppliers are increasingly positive just because they're seeing their sales go up," adding that this dynamic was generating "all kinds of positive energy," though it was "intangible and subjective, it's definitely happening. It's got our energy up."

Mackey said that his healthy lifestyle campaign is working, explaining that "people are focusing in on our produce," pointing to a "dramatic increase in the amount of green vegetables we're selling." It's exciting, because customers are not just reacting to the healthy eating initiative but to an overall sense of goodwill, "from October to the end of January we saw a 10% lift in people's perception on the positive end of the spectrum" of opinions toward Whole Foods, with a simultaneous decrease in bad feelings.

Analysts wondered which customer group was responsible for the increase in comparable-store sales, up 3.5% from the year-ago quarter for established stores; was it wealthy customers? Budget-conscious consumers buying cheap apples and greens? Something else again? Yes, yes, and yes, says Mackey. Employees have explained that "customers have been returning, saying 'I didn't buy my Thanksgiving turkey from you last year because I didn't think I could afford it, but this year I realized it was worth it and came back.'" It wasn't just the customers who'd shied away during the recession, but new customer groups and old ones who were spending more of their grocery dollars at the newly budget-friendly Whole Foods, Mackey went on.

Competition Pulls Back, Leaving More of the Organic Market to Whole Foods

Assisting Whole Foods in its stronger results among organic and natural foods shoppers is much of the competition, which has "pulled back" on the market due to the economy, leaving the growth rate of 5% to 6% ("down from historical double-digit growth rates but significantly higher than conventional growth rates") in organic foods ripe for the picking.

In the end, says Mackey, Whole Foods -- and the concept of spending a little more for quality, local, organic, healthy foods -- is "a choice people will continue to make even in the darkest of times." One indicator of this underlying paradigm shift in consumers' attitudes toward food is the meat counter -- even though Mackey himself eschews the stuff, customers are showing up in ever-greater numbers. "The meat department is undergoing an evolution," he told analysts. "We're selling a lot more 100% grass-fed organic beef, sourced locally, from vendors with humane animal practice standards. We're seeing similar things in chicken, in our pork sales, lamb -- more local, more organic, more 100% grass-fed or pasture raised, we're starting to see some good share shifts in that category. That's just going to continue to grow in the future."

It's a position I've argued many times over the past few years; the more consumers' eyes are opened to standard practices in the conventional meat industry, to the harmfulness of pesticides and the chemicals in processed foods, the more they'll be eager to spend a little more for good, natural, locally sourced, humanely raised food. It's working decidedly in Whole Foods' favor and to the detriment of other, larger supermarket chains whose attempt at organic and local foods is roundly dismissed as less-than-mediocre.

"We continue to be an authentic organic retailer, and those numbers show that," say Whole Foods executives. In a rare bit of love for the executives on these analyst conference calls, I have to agree.
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