Where Will Whole Foods Be In 10 Years?

By Markets Fool.com

Where willWhole Foods Market, Inc. be in 10 years? That's become a much tougher question to answer recently.

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The company was a stock darling for much of the last generation, but its leadership in organic grocery has been challenged by the likes ofKroger,Costco,Trader Joe's, and others, and as a result customers have been deserting. Comparable sales have fallen for three straight quarters, dipping 3% in its most recent report. The company's reputation for high prices seems to have been its undoing, as customers can now find similar organic goods at lower prices, at a plethora of stores. Whole Foods management seems to be scratching its head for a solution. Despite efforts to lower prices, a loyalty program, and other moves to spruce up the business, customers are not coming back.

Is this just a speed bump for the popular high-end grocer, or a permanent shift in the industry that will continue to hinder the company's profit growth? We asked three of our top retail analysts to peer into their crystal balls. Here's what they had to say about Whole Foods' future.

: For decades, Whole Foods benefited from the general shift toward healthier eating and organic foods -- but now that competition has caught up, there's no doubt that the company is facing some serious challenges. That's especially true when millions have come to know the company by its nickname, "Whole Paycheck"; its history of charging premium prices for its higher quality offerings is likely keeping a large portion of shoppers away from its stores.

In an effort to appeal to value-conscience shoppers and shed its unfortunate label, management has been "investing in price," which is a roundabout way of saying lowering prices in order to attract and retain customers.

As you can imagine, this strategy has hit the company's financial statements hard. Last quarter same store sales actually declined by 3% on the back of lower traffic and a decrease in basket size. If that wasn't bad enough, gross margins also fell by a full percentage point too.

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Despite the short-term headwinds, I'm a believer that this strategy is the right move in the long term. With other supermarkets dramatically stepping up their organic options and offering lower prices, Whole Foods faces a real risk of consumers choosing their grocery store based on convenience and price alone. With only 446 stores in operation, the company still has only a tiny footprint when compared to its larger rivals (Kroger alone has 2,778 stores), so I think it needs to do everything in its power to increase its value proposition.

Ten years from now I could easily see Whole Foods stores being known for their high-quality offerings and competitive prices, which would make all of this short-term pain worth it. However, making the transition won't be easy, so success is far from guaranteed.

Demitri Kalogeropoulos: As excited as management is about the new 365 brand store launch, Whole Foods' true growth engine will remain its traditional markets. Yes, these 40,000 square foot buildings have a high cost structure, stuffed as they are with wood-burning pizza ovens, juicing stations, espresso cafs, and wine bars. Those luxuries, and the labor expenses they require to maintain, mean that Whole Foods needs to charge higher average prices, which put it at a disadvantage to many rivals.

The grocer is no Costco, after all, which brags about its bare-bones approachto retailing: "Our warehouses are not elaborate facilities.... because shoppers are attracted principally by the quality of merchandise and the availability of low prices." Whole Foods locations areelaborate facilities, and that's the point. "We strive to transform food shopping from a chore into a dynamic experience," the company says in its 10-K.

Executives believe that the market will eventually support 1,200 traditional stores, almost three times the current base. The 365 brand should contribute extra growth, but a decade from now shoppers will still associate Whole Foods with ahigh-quality, service-heavyshopping experience that's more expensive than a lap around a warehouse club. If the company can't win over a large enough segment of shoppers on that basis, then it has a bigger problem on its hands than just falling profit margins.

Jeremy Bowman:Whole Foods has learned some tough lessons recently. The company that pioneered organic grocery has seen the concept taken mainstream and co-opted by larger competitors. The most valuable lesson in its current predicament seems to be that customers just aren't that interested in paying premium prices for Whole Foods wares when comparable products are available for less elsewhere.

That's why I think Whole Foods' new 365 chain will be a big part of the company 10 years from now. The new budget-priced stores seem to borrow liberally from Trader Joe's, a juggernaut of an alternative grocer known for high quality, unique products, and low prices. The new chain will also feature partner businesses such as a vegan restaurant in the Los Angeles location set to open May 25, which seems like a smart move to differentiate the brand and drive traffic.

I think Whole Foods will have to borrow from other competitors to continue to thrive, as the grocery industry is under assault on multiple fronts. One niche industry that seems like a direct threat is the packaged dinner delivery from companies such as Blue Apron and Plated. Blue Apron is only three years old, but is valued at $2 billion; rival HelloFresh is worth near $3 billion.Whole Foods would seem to have the brand and customer relationships to take this concept to the next level. And why shouldn't it? After all, these are Americans who are willing to spend for the convenience of a high-quality dinner they can prepare themselves, but don't have the time to go shopping -- just the kind of folks Whole Foods is losing.

Similarly, I expect it to expand its partnership with Instacart, as delivery is becoming increasingly important as e-commerce options continue to transform consumers' convenience expectations. Through a combination of those kinds of strategic moves, I think Whole Foods will be in good shape 10 years from now, well on its way to opening 1200 stores or more nationwide.

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The article Where Will Whole Foods Be In 10 Years? originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.