Thoughts on WFMI & high end food markets

[DTEJD1997]

Hey all:

 

Not really an actionable idea, and it is just a couple of general observations, so I posted it here, instead of in WFMI's thread.

 

I go to Whole Foods several times a year.  They have some Indian TV dinners and a few other items that are hard for me to find elsewhere.

 

A year ago I was there with my girlfriend wandering by the deli counter.  The sharp eyed clerk had me pegged and asked if I wanted to try a piece of peppered turkey. Of course I do!  what a silly question!  It was EXCELLENT, one of the tastiest pieces of turkey lunchmeat I've ever had.  I thought I wanted to get some.  The price?  $17 lbs.  I almost choked!  I don't care how good it is, I'm not paying that for sliced turkey for sandwiches.

 

Some of WFMI's prices are just getting silly.  I can't imagine I'm the only one who thinks this.

 

A "Trader Joes" has opened up, and I shop there much more frequently than at WFMI.  Not that I'm a regular at Trader Joes....but I will go there much more often than I go to WFMI.  Probably 5 to 1.  I also think I'm not alone in this.

 

Trader Joes is going to be a major thorn in WFMI's side...

 

Any thoughts?

[ShahKhezri]

I've been short WFM since the mid-90's (price not year).  The barriers to entry are much easier to overcome now.  Most grocers are copying the success of WFM...for a very long time WFM was an exclusive provider of organic/gluten free products and I believe most grocers thought it was a trend/fad.  However, the market got bigger and now a lot of the growth in the grocery business is on the product/distribution side (WWAV, BDBD, HAIN).  I'm a loyal TJ's shopper and agree with your point, I'm also from TX and having visited many of the stores, conversations w/mgmt and new store layouts, they understand it. 

 

I think the TJ model is very powerful, the employees are very nice, shopping experience is great and I don't feel like I'm paying an arm and a leg.  I wish they were public, I'd love to see their margins.

 

 

 

 

[ItsAValueTrap]

I'm not so sure.

 

In Toronto, there are ridiculously overpriced supermarkets such as Pusateri's (and apparently McEwens).  While they sell mostly high-end items, they also sell staples such as Philadelphia Cream cheese and Patak's curry.  You can find those items at low-end supermarkets.  Yes these high-end supermarkets will charge ~30% more.  Everything at the supermarket is overpriced.  But that's the appeal of the supermarket.  It's a statement about the buyers.  They will pay markups because it's the identity they want to be associated with (pretentiousness, appreciation for quality, etc.).  It's like going to a country club with crappy and overpriced food.

 

If you appreciate high quality but don't like overpricing, you can figure out who Pusateri's suppliers are because they name their pastry suppliers on their signs.  If you go straight to the supplier's retail location, you can buy the exact same items for a lot less.  And they're probably fresher too.

 

$17 lbs.

That last 5-10% of quality costs a lot more.  If you go straight to their supplier, it will likely be roughly the same price (e.g. up to 30% less).

 

There are some people who legitimately appreciate quality.

 

---

Perversely enough, I think that overpriced supermarkets may be better businesses than efficient ones (e.g. Walmart, No Frills).  Efficient supermarkets are about operating efficiently in a commodity industry.  They will always be in a low-margin world.  The check-out process at No Frills is really efficient.  They don't make you sign your credit card receipt or to put in your PIN because they know that fraud is low.  They use really fast credit card terminals (you have to wait less time for the terminal to communicate).  You don't wait for the clerk to pass the terminal to you because it's mounted right in front of you.  A lot of other supermarkets just haven't caught on and have slower checkout processes.

 

An overpriced supermarket sells something other than food.  They sell something intangible (you can call it pretentiousness if you want).  And they have wonderful, *sustainable* margins.  If their CEO leaves though, they could be in trouble.

 

Do not short businesses with above-average return on invested capital.

[LC]

I agree: but if you're selling pretentiousness via the grocery business, you have to make sure your brand is viewed as the "most" pretentious, correct? Is Trader Joe's or Whole Foods more pretentious? In other words, how strong is the brand?

 

What makes one operator in the high-end grocery business more profitable than another?

[ItsAValueTrap]

I think a lot of it is presentation.

 

Pusateri's has awful customer service.  They have some serious food safety issues (they were shut down by health inspectors).  Their aisles are cramped.  Presumably everything else they do is done very well.  The decor is very fancy.  The lighting is pretty good.  They offer valet parking.  Their food is clearly overpriced (I think this is part of the appeal).  They do have an excellent selection of high-end foods (and lots of stuff that is very hard to find).  Instead of going to several different specialist stores (e.g. a bakery, a butcher, etc.), they bring everything into one place.

 

Because Pusateri's has priced any sane person out of their stores, you only deal with "like-minded" people there (mostly old rich people).  I think that's part of the appeal and is difficult to mimic.  Loblaws sells some high-end items on par with Pusateri's (or arguably better)... but it's not the same because they also sell knock-off brands in the same store.  They don't have a high-end image even though they sell some high-end food.

[ExpectedValue]

I think the Trader Joes versus Whole Foods debate comes down to market segmentation. I live in a part of town where Whole Foods and Trader Joes are pretty much right next to each other. I almost exclusively shop at Whole Foods.

 

Why? Whole Foods (at least to me) tends to have superior produce and meat. I mostly buy vegetables and stuff from the butcher's counter, so everything else is less relevant.

 

What I've noticed, from going to both stores, is that the Trader Joes crowd tends to be made up of students. Generally they've got less income and are seeking convenience, so frozen meals, snacks, processed foods, and cheap booze of course are kind of what they're after. A good piece of meat or really high quality vegetables are less relevant to them.

 

So I don't necessarily see Trader Joes destroying Whole Foods' business, I think they can knick away at some parts of it (I see some people walk into my Whole Foods with bags from Trader Joes for instance) -- but unless it's an area that consists solely of college students I don't see it doing that.

 

 

[Guest wellmont]

I get sticker shock in a whole foods. seriously, they are pushing the far upper boundary on price. I find trader joe to offer exceptional value and do most of my shopping there.

[boilermaker75]

When I visit my daughter in W. Hollywood, I like to grocery shop at Gelson's.

[mranski]

My brother calls WF, Whole Paycheque.

[rogermunibond]

In my local area we have Wegmans, WFM, and TJ, and I find that Wegmans (which is privately owned) by far seems to draw the strongest shopper base.  Wegmans gives both the pscale high end organics and gourmet products as well as good store brand values.  We still go to TJ for some of their special items, but overall Wegmans is dominating our household shopping dollars. 

[Grenville]

I enjoy going to WF for their pizza. They have high end pizza freshly made and a great deal for two slices at $5. It might seem pricey to some, but they use really good ingredients.

[DTEJD1997]

Hey all:

 

I can remember going to Wegman's years ago.  I had family that lived in Rochester NY, which I believe is Wegman's base.  In the 90's I watched them expand their operations significantly.  I think they are arguably the best grocer in America.

 

Wegman's seems to get it most "correct" if you ask me.  They have a tremendous breadth of choices.  Wegman's has a selection of brands that is very difficult to impossible to find at other retailers.  Some are bargain, some are higher end.  They have an emphasis on prepared foods that are well above average.  Their employees seem to be motivated, at all levels.  Compare this to surly or non-existent clerks at your local Giga-Hyper Mart. 

 

if Wegman's were to do an IPO, that is one of the VERY FEW companies that I would ever consider investing in at an IPO level.

 

I don't have any problem with WFM charging whatever they think the market will bear.  More power to them.  I don't care how much money I am making, I am not going to pay $17 or $18 a pound for deli turkey breast.  Yes, it is better than Boar's Head at Kroger's...but Boar's Head is no slouch and is only $6 or $7 a pound.  Is turkey breast that is marginally better worth 3X the price?  No way, not in my book...of course, others might disagree with me and that makes a market.

 

I think Trader Joe's is going to be a thorn in their side.  At my local Trader Joe's the demographic seems to be the same as WFM.  You have elderly/older folks shopping there, but you also have students, and some in between.  Trader Joe's almost certainly has more financial muscle & depth than WFM, as they are owned by Aldi (Albrecht Brothers)...

 

Another possible thorn in WFM side could be "The Fresh Market".  They seem to be a similar competitor of WFM.

 

I am just surprised there is this much of a sustainable market for very high priced foods. 

[CorpRaider]

Bought it after it cratered when the CEO was found to be posting on yahoo message boards pumping the stock, think it was in the 30's.  Wish I had held it through the financial crisis but I didn't. 

[Kraven]

My wife is someone who only buys organic if available.  She used to shop at Whole Foods primarily, but has shifted most of the shopping to Trader Joe's.  The prices are much better and the selection is fine.  There are still certain things that TJ's doesn't have that she gets at WF's, but her preference would be to shop at TJ's at this point. 

 

There is a new kid on the block too in this space (at least until TJ's goes public).  They have the awful name of Natural Grocers by Vitamin Cottage (NGVC).  Around 60 stores open so far and with big plans to compete in this space.  They are opening stores at a good, but measured pace, and I believe not taking on debt to do it (or not much anyway).  I am pretty sure they just opened one or 2 in Omaha in fact.  They are trying to carve out a niche by not having any prepared foods and such and cater to the earthy crunchy crowd which is going mainstream.  It's an interesting concept. 

[fareastwarriors]

I will offer my biased opinion.

 

I worked 4 years as a part-time casher during college at a Whole Foods in a wealthy New York suburb.

 

I think the moat is stronger than what some of you might think.  Yes people complain that is pricey and call it Whole Paycheck but somehow, some way they keep coming back.

 

But I think if people bought selectivity and avoid the pricey prepared items and/or novelty items, the prices at Whole Foods are not that expensive and can be competitive. I think their cereals, grains, grocery items, and most produce items are priced competitively, if only a bit more expensive.

 

People get burned by the prices when they start buying the $30/lb cooked wild salmon from the hot deli or that expensive hand-made candy/chocolate from Belgium, etc.

 

Trader Joes is great for what is but the selection and variety is not as diverse or rich as a Whole Foods. The TJs I been to never had a full meat counter, seafood counter, hot/cold deli, olive bar, prepared hot/cold food bar, full sized bakery, full-scale coffee shop. 

 

 

 

[ragnarisapirate]

This debate seems eerily similar to one that was had on this very board over Red Robin a while back... Different companies and situations, but similar niches in their respective markets.

[Guest deepValue]

I tend to judge grocery stores by their fresh meat and seafood selection. In Texas, Central Market (owned by HEB) beats out Whole Foods in my opinion. I'm sure the prices are equally insane, but who really pays attention to how much they're spending when you just have to slide a plastic card to get your groceries?

[Packer16]

Wegmans is by far the best.  It appeals to many different types of folks and has developed a culture of customer service and employee appreciation bar non in the grocery business.  They are always in the top 5 best places to work (which is quite a feet for a grocer).  They have a great selection and are always willing to adapt to local tastes.   

 

For example, when I moved back to Rochester, NY from SoCal I really missed Tri-Tip (a type of steak that originated in Central California (Santa Maria area)).  I had to go to a meat market to get these before Wegmans started to carry them.  No other grocer in the area even knows what Tri-Tip is.   

 

They provide alot of training (sort of like the Disneyland of grocers) before employees can interact with customers and have the food lay-out thing down cold.  The food is also not expensive.  For example, my wife picked up some awesome fish $6 dollar meals that would have cost multiple times the price at a restaurant.  There may be a reason WFM can't be found around many Wegmans.  With the decline of Kodak and Xerox, Wegmans is by far the fastest growing company out of Rochester.

 

Packer

[Kiltacular]

Tri-Tip...mmmmmm

 

Most under-rated cut of beef on cost per pound.  I don't think there's much of it per head of cattle.  It is becoming more popular.  Great after good marinade and then grilled. 

[fareastwarriors]

http://www.businessweek.com/articles/2013-05-08/whole-foods-profits-by-cutting-whole-paycheck-reputation#r=rss

 

 

Whole Foods Profits By Cutting 'Whole Paycheck' Reputation