US: Whole Foods losing dominance
Competitors such as Wal-Mart are selling organic products.

Safeway Inc.'s Lifestyle store in Bowie, M., offered a new look in August: a bigger organic-produce selection, wood flooring and more prepared meals. "They are doing it not because they want to but because they have to," said shopper Elisabeth Shindler.

With organic-food sales forecast to climb 11 percent a year through 2010, Safeway and Wal-Mart Stores Inc. are chasing consumer tastes — and customers of Whole Foods Market Inc. The results are giving the largest seller of natural foods in the United States a bitter taste of competition. Whole Foods said Nov. 2 that fourth-quarter sales at stores open at least a year posted the smallest gain in 31/2 years, the second straight quarter sales missed estimates. The next day, the shares plunged 23 percent.

"Whole Foods is the established leader in that space, and they have a target on their back," said Edward Aaron, a Denver-based analyst with RBC Capital Markets. "Supermarkets are getting more competent at merchandising natural and organic food." Aaron downgraded the stock to "sector perform" from "outperform" on Oct. 30.

Wal-Mart, the world's largest retailer, is selling organic products such as Earth's Best Baby Food and Heinz Organic Ketchup in all 2,142 of its supercenters after adding items in April, and Target Corp. says it has similar plans. Safeway has remodeled 600 of 1,767 stores to the Lifestyle format.

Forecast cut

Partly because of the competition, Whole Foods on Nov. 2 lowered its sales forecast for this year and said same-store sales may rise 6 percent to 8 percent, down from 11 percent last year. They grew 8.6 percent in the fourth quarter. The company operates 188 stores in the United States, Canada and the United Kingdom.

Shares of Austin, Texas-based Whole Foods have dropped 40 percent this year. Kroger Co., the biggest U.S. grocery chain, gained 14 percent and Safeway, third largest, climbed 21 percent in the same period. Wal-Mart shares rose 1.6 percent. "The conventional markets, seeing how successful Whole Foods has been, are copying us," Chief Executive Officer John Mackey said on a conference call Nov. 2. "That is having an impact."

The growth slowdown has continued into the current quarter. Comparable sales are up 6.8 percent in the first five weeks of the period. "There probably is a certain customer that was driving to Whole Foods to buy their organic milk, and now they are buying it at Wal-Mart, so you can't say there is zero impact," said Glenda Chamberlain, chief financial officer at Whole Foods.

Discount pricing by Bentonville, Ark.-based Wal-Mart is one of Whole Foods' challenges. A 20-bag package of Tazo Organic Chai Tea cost $3.38 at a Wal-Mart in Turnersville, New Jersey, and $4.69 at Whole Foods in Manhattan. Whole Foods is not standing still. The company, founded by Mackey in 1980, is moving to a larger-store format, such as its 80,000-square-foot (7,432-square-meter) flagship in Austin.

It's coming at a cost. The company said profit will be hurt as spending to open stores will increase 98 percent to as much as $74 million for the addition of 18 to 20 new outlets this year. The Austin store, complete with a gelato bar, hosts a farmers market in the parking lot every Wednesday. It also offers 100 varieties of seafood and 400 types of beer.

Sales of organic foods rose 16 percent in 2005 to $13.8 billion and represented 2.5 percent of total U.S. food sales, according to the Organic Trade Association, a Greenfield, Mass., trade group forecasting 11 percent annual growth from 2007 to 2010.

Source: mcall.com