Whole Foods Inc. (WFMI): The College Perspective

College students are price conscious.  Spending more than $10 on food is quite an extravagance.  It would seem likely, then, that a company that sells high end, high priced products would experience a significant drop in revenue if it were to raise its prices slightly.

Whole Foods Inc. (NYSE: WFMI), is quite the exception.  Its consumers have tremendous brand loyalty, and the company has experienced steady growth despite the climbing prices of many of its most notable goods, especially organic food.  A company selling high-end products that can expand in a down economy could be very intriguing for investors.

Last weekend, I decided to further examine Whole Foods.  I wanted to find out if the company had policies specifically meant to expand its consumer base, and I wanted to buy pita chips.  I was also curious to know how the management operated: friendly, accessible, and quick thinking managers are always indicators of successful companies, recession or not.

Many of my friends shop at Whole Foods, even though the prices are sometimes out of reach for many college students.  Often, a college student, especially and environmentally conscious one, will buy granola and other organic foods from Whole Foods regularly but in small amounts.  Among health conscious and environmentally conscious students, Whole Foods has tremendous brand loyalty, in part because it is the only major retailer who has the economies of scale to sell organic foods at a reasonable price.  However, there is a sizeable minority of college students who feel that Whole Foods is too mainstream and that Trader Joe’s has a more small business feel.  Yet, due to strong financing and projected annual sales of $8.5 billion[1], Whole Foods is greatly posed for expansion, and it will likely maintain a much greater market share than Trader Joe’s.  Although the company experienced a drop in net income from $182,740,000 in 2007 to $114,524,000 in 2008 likely as a result of worldwide recession, its net income has rebounded in 2009 to $146,804,000.  Gross profit has steadily expanded in the past three years; it was $2,296,603,000 in 2007, $2,706,705,000 in 2008, and $2,754,310,000 in 2009.   Indeed, the company plans to open 17 stores in 2011, 15 stores in 2012, and 8 stores in 2013[2].  The company had 186 stores in 2007, but it had 275 stores open in 2009 with 15 planned for development.  Hence, despite recession, the company is in a period of rapid expansion, and it is very likely that this expansion will be reflected in its future share price.

Whole Foods markets itself uniquely.  The stores notoriety is spread word of mouth, especially amongst health conscious teenagers, college students, and young adults.  Its CEO, John Mackey, is quite visible in the media.  Through several interviews and his blog, he is unafraid to express his love of free-market capitalism, his skepticism of big government, and his disquietude over public health insurance.  While these opinions may superficially contradict those of Whole Food’s stereotypical customer, the alternative, granola-chewing tree hugging environmentalist, Mackey’s philosophy is quite similar to that of a growing number of college students.  For one thing, Mackey has the natural demeanor of a college student: he dresses casually, speaks unpretentiously, and he deftly adapts to online media and technology.  Furthermore, many college students embrace Mackey’s libertarian ideals and his belief in “socially conscious capitalism:” the idea that free enterprise is not operated by greedy barons but by entrepreneurs who truly desire social change.  Hence, Mackey has strong appeal with many college aged kids and young adults who support healthy lifestyles and free markets.

Stepping inside Whole Foods, I did not see too many young people, but the store was reasonably filled with middle aged adults and elderly people.  Considering that I went on a beautiful summer Saturday in the late afternoon, I was likely in a very small minority of teenagers who chose to spend a precious weekend going grocery shopping.  No worries, I thought, I’ll simply go talk to the management to find out whether Whole Foods was working on developing a policy of overall expansion and expansion within different demographics, especially youths.

I had no trouble talking to the management whatsoever.  I simply walked up to a sales associate, and he introduced me to the manager for the shift.  He affably told me that while Whole Foods is not doing anything in particular to attract youths, he claimed that many young people already come to the store.  He also added that many college students seasonally work for Whole Foods and that many college aged employees take advantage of a company program in which employees receive discounts for maintaining a healthy, active lifestyle.  He also added that Whole Foods was trying to attract more customers through price cuts amongst organic items.

I was surprised that even though Whole Foods did not have an official strategy to attract youth, it appeared to be doing so anyway.  This shows that Whole Foods has a strong underlying appeal with youth and possibly with many other demographics, especially suburbanites and yuppies.  I also realized that if Whole Foods can attract a large amount of customers with relatively high priced goods, the number of customers it will attract with even lower prices could be enormous. As I continued perusing the aisles, I realized that Whole Foods may be pursuing other demographics, especially the youth demographics, implicitly by offering generous deals on comparatively high-end products that are often popular among college students and that cannot be purchased at mom and pop grocery stores and convenience stores.

(my apologies for unprofessional camera work)

Case in point: the exact product I came to buy was discounted.  Pita chips are somewhat of a delicacy among college kids, a snack staple.

Once again, another popular college product discounted.  Sparkling juice has the same allure as soft drinks such as Fresca, a higher end Coca-Cola product.  My friends and I often drink it on weekends not in large but in consistent quantities.

The ultimate alternative breakfast mainstay: organic cereal.  No, it is not as cheap as a box of Lucky Charms from Wal-Mart, but considering how inelastic organic food is for nature lovers, this deal could pose some gains for Whole Foods.

I ended my day satisfied, with pita chips and hummus.

Bottom Line:

Whole Foods will never be as big as Wal-Mart or Target.  It is fundamentally a niche store, although that niche has very powerful buying power, and within that niche, the demand for many of the products sold at Whole Foods is very inelastic.  Furthermore, Whole Foods’ employees receive extensive health care benefits and are not unionized: this has likely lowered the company’s costs, and it has led to an overall positive sentiment from the employees towards the company.

At a first glance, Whole Foods’s share price may appear to be overvalued.  It’s PEG five year expected ratio is 1.69, which would frighten many Wall Street analysts as being too high.  Nevertheless, Whole Foods is a fundamentally sound company posed for growth.  Good businesses outweigh standard ratio models.

Last Note: Currently, Whole Foods Inc. does not have a large, widely “liked” Facebook page.  However, many individual stores have their own Facebook pages, including the Franklin, Tennessee store and a Las Vegas store.  Hence, although some teens feel that Trader Joes has the edge in local appeal, Whole Foods is certainly expanding in that realm through the most popular website for young people.  This strategy may also work in expanding growth among older adults, as more and more elderly people are activating Facebook accounts (yes, this may sound shocking, but quite a few of my friends’ grandparents have created Facebook accounts).  Certainly, while management may not admit to having an official policy to expand growth amongst certain demographics, I suspect that Whole Foods will expand tremendously, maybe not so inadvertently.

This article was written by Rob Boling and the CollegeStockPicks.com staff

 

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[1] Source: http://www2.wholefoodsmarket.com/blogs/jmackey/

[2] Source: Whole Foods Market Inc. Annual Report 10k SEC Filing 0-19797