Whole Foods' dream transformed into its worst nightmare

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Whole Foods pioneered the organic food movement in the US decades before it was popular, betting on the idea that people would pay a premium for the label.

The idea paid off: sales of organic food more than tripled between 2005 and 2015, from $13.8 billion to $43.3 billion, according to the Organic Trade Association.

Whole Foods' business should be booming as a result.

But customers are abandoning the supermarket chain, as retailers like Kroger and Walmart ramp up their organic food offerings to meet growing demand.

"The more conventional mainstream supermarkets have upped their game," Whole Foods CEO John Mackey said on a call with analysts on Wednesday. "We're going to do the best job that we can to keep our core customers from migrating back over to those guys."

Whole Foods' longtime dream — that organic foods would eventually appeal to everyone — has become its worst nightmare.

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11 best things to buy at Whole Foods
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11 best things to buy at Whole Foods

Freshly baked bread 

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365 Everyday Value Greek Yogurt

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Speciality cheeses

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Oats, grains and beans in the DIY bulk section

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Frozen foods, i.e. pizza and turkey burgers 

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Alternative milk products

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Frozen berries

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Raisins and dry fruit in the DIY bulk section

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Spices in the DIY bulk section 

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365 Everyday Value Olive Oil

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Freshly baked goods from the bakery section 

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The company's same-store sales have declined in each of the past six quarters.

The chain saw a 2.4% decline in that metric during its most recent quarter, with transactions — which is used to measure traffic — falling 3.9%.

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Whole Foods is now battling a wide range of competitors including specialty grocers like Sprouts Farmers Market, as well as traditional grocers like Kroger, big-box retailers like Walmart and Target, and discount grocers like Aldi.

"We were ignored for most of our history. Nobody paid any attention to us," Mackey said on the call with analysts. "But we continued to expand and grow and we got more and more successful, and then the conventional supermarkets... began to pay more attention."

Traditional grocers have been offering "good enough" alternatives to Whole Foods, and the company has watched its sales decline as a result — particularly on the weekends, he said.

"Many of our stores where people used to drive long distances on the weekends and do big shops, we're seeing a little bit of a decline on that," Mackey said.

Kroger started expanding its private-label "Simple Truth" organic food brand several years ago, and now devotes multiple aisles in its store to organic and natural foods.

Walmart also now devotes a section of its fresh produce department to featuring organic and locally sourced products.

It has been rapidly growing its Neighborhood Markets stores, as well, which are much smaller than its Supercenters and focus solely on groceries and pharmacy.

The German chain Aldi, which is even cheaper than Walmart, invested heavily in organic food last year by expanding organic-food brands, removing some artificial ingredients from its products, and adding more gluten-free items.

This year, Aldi is spending $1.6 billion to redesign 1,300 of its US stores to feature softer lighting and bigger produce sections.

The new stores look a lot like Whole Foods' new chain of stores, called 365 by Whole Foods Market, which the company launched last year to better compete with the increasingly crowded market for low-cost organic goods.

The stores are cheaper to build than Whole Foods' traditional stores, so it has more flexibility in pricing.

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