WFM - Whole Foods Market

[Liberty]

So I don't know much about WFM and this is not an endorsement of the company, but I read an interesting piece on it and thought I'd post it in the WFM thread when I realized that there was no WFM thread. So here it is:

 

http://www.peridotcapital.com/2014/05/the-death-of-whole-foods-market-is-likely-greatly-exaggerated.html

[bizaro86]

Thanks for the thread, I've been meaning to look into them since I read this article in Fortune:

 

http://money.cnn.com/2014/04/09/leadership/whole-foods-america.pr.fortune/

 

I'm always looking for companies with huge growth potential, and I think they probably have it. There are zero whole foods in the city I live in, and I'd estimate there is room for at least 5-6. I actually think their store count estimates are low for how many they can get to. I've always regretted not buying Starbucks in 08/09 (I seriously considered it but bought stuff that was statistically cheaper but lower quality, which was a mistake), and I definitely see the parallels here.

 

Does anyone know whether they own their own real estate?

 

Also, Peridot is on here, that was a great post!

[DTEJD1997]

WFM has some nice stuff, no doubt...

 

HOWEVER, two things are relevant for me:

 

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

 

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

 

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

 

In my opinion, WFM has a seriously damaged business model.

[rkbabang]

WFM has some nice stuff, no doubt...

 

HOWEVER, two things are relevant for me:

 

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

 

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

 

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

 

In my opinion, WFM has a seriously damaged business model.

 

I agree, but that doesn't mean much. The two closest Whole Foods to me are both about an hour drive, so I've only been to them about 4 or 5 times.  What I've noticed is that, (1) it is super expensive and I probably wouldn't buy much there even if it was close by, and (2) it was surprisingly crowded every time I've been there.

 

I used to have similar thoughts to yours about Starbucks, only I don't even think the product is superior.  Who is going to pay those prices for crappy coffee?  Yet, people do, and the stock has done very well (without me).

 

I'm not saying Whole Foods is the next Starbucks, but I've learned that my opinion of a product's quality or value doesn't always match what the marketplace thinks.

 

[rpadebet]

What is the moat here?

 

Starbucks has the brand, customer experience (wifi etc) and just a mind boggling number of stores around you. (True story: there were 6 starbucks within a block or two of where I work and now they opened a 7th in my building recently! ). McDonalds or Dunkin cannot compete what that sort of network or in my opinion over crowding!

 

How much does it cost to open a Whole Foods store? What is the unique experience which new comers/existing competitors cannot replicate? As I read their balance sheet, their assets-current liabilities are worth about 4.5 bill approximately. They are all pretty much recently bought/leased, so not much hidden value there. Why bother paying 14 bill to buy something you can build/create at 5 bill? Just thinking like an investor who wants to own a business like this in whole. What accounts for the extra 9-10 bill in premium over what it costs to replicate?

[Cunninghamew]

WFM has some nice stuff, no doubt...

 

HOWEVER, two things are relevant for me:

 

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

 

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

 

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

 

In my opinion, WFM has a seriously damaged business model.

 

I don't have it handy, but PlanMaestro has a good graphic comparing the two biz models (Whole and Trader J). He posted it on twitter once, but it is worth looking at if you can find it

[bizaro86]

What is the unique experience which new comers/existing competitors cannot replicate?

 

Sometimes the answer to that question is intangibles. I've been in coffee shops I liked a lot better than an SBUX. What is the unique experience that Starbucks has that others can't recreate? Is it really their ubiquitous locations?

[rpadebet]

What is the unique experience which new comers/existing competitors cannot replicate?

 

Sometimes the answer to that question is intangibles. I've been in coffee shops I liked a lot better than an SBUX. What is the unique experience that Starbucks has that others can't recreate? Is it really their ubiquitous locations?

 

I understand your point that the intangibles are subjective.

 

In Starbucks case, it is the intangibles like brand, ubiquity, experience everything put together. In NYC for example, I have seen as many tourists as city residents going to buy coffee at Starbucks. I think it is because, there is a level of comfort in knowing that the quality and taste of coffee wont differ much from what you have probably experienced back home at another Starbucks. That is an intangible which doesn't apply to grocers as much. Also coffee spend is a small portion of the customer wallet. Yes it is over priced, but it is a dollar here and dollar there scenario. In the long term it gets expensive, but each transaction doesn't appear to bite much superficially. I might have mentioned the 7th SBUX store in jest, but ubiquity like that can potentially alter a consumer's behavior i.e. I might have that extra cup of coffee now just because the new location is ultra convenient and I don't need to walk a block to get to it. :)

 

Coke can be replicated as a product and its been tried, but replicating the brand at today's prices makes owning Coke cheaper.

 

I don't think WFM's brand is that expensive to recreate. At least it wont take 10 billion. The consumer economics of grocers is very different than a cup of coffee or even a burger. If you had a competing grocer providing the same natural food at 5%-10% less, consumers would shift their habits eventually.  There is not much network effect as consumers in one town typically don't go grocery shopping when they are vacationing or are in another town. Ubiquity doesn't help as it doesn't alter consumer behavior that much. I am not more likely to do grocery shopping for double the amount, just because there is a WFM closer to where I stay.

 

So the question again is, is the intangible in WFM's case worth 10 billion?

 

 

 

 

[tooskinneejs]

I hate shopping at Whole Foods because the prices are ridiculous and the crowds are always insane.  Therefore, I bought Whole Foods stock recently after the large drop in share price.  I guess this falls into the opposite of the "buy what you love" style of investing. 

 

I usually don't "pay up" for stocks and this is one of the most richly valued equities I've purchased.  But I think long term this investment will do well.

[yadayada]

valuation is ridicilous at more then 20x earnings. I kinda want insane growth for that price. And they are barely growing. Might as well buy an index if you buy this?

[DanielGMask]

1. 30+ years in the market with the same business model.

2. About 1B of pretax profits per year.

3. Leader in its niche.

4. Mackey receives no cash bonuses or stock option awards and has a $1 annual wage. He holds more than 700,000 shares.

5. No debt, highly profitable with sustained growth.

6. Lots of potential (less than 400 stores).

 

I think there's a clear moat even though some in this forum may don't agree with the business model (prices). I also think there's no margin of safety at current prices, but that has nothing to do with the business model or the moat!

 

Below 28 per share, I'll be interested. ;-)

[alpha231616967560]

Interview with Bud Sorenson (WFM board member):

 

http://hwcdn.libsyn.com/p/7/1/2/712c26f0660fc2c3/Tuesday_Bud_R2__MP3_128kbit_44kHz_stereo.mp3?c_id=7209263&expiration=1401243780&hwt=128e5c5d5a395287b9f658c99651bd42

 

[Liberty]

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

 

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

 

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

[Vish_ram]

I think that the market for organic foods has changed in many ways.

 

For the last one year, Costco in my area is assembling all organic foods in a one section to attract the shoppers attention. They are adding coupons to these foods too. Kroger and others have a bigger section on organic items.

 

I used to go to WFM once in a few months and now reduced it to once a year.

[Liberty]

Follow up to the original write up that started this thread:

 

http://www.peridotcapital.com/2014/05/sales-figures-disprove-thesis-that-whole-foods-shoppers-are-fleeing-to-the-competition.html

[rogermunibond]

If I remember correctly, Munger's example was that economic theory did not take into account situations higher price leads to higher demand such as when kickbacks are used to pass price increases back to the buyer.  So in those cases the "laws of supply/demand" are subverted.

 

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

 

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

 

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

[merkhet]

If I remember correctly, Munger's example was that economic theory did not take into account situations higher price leads to higher demand such as when kickbacks are used to pass price increases back to the buyer.  So in those cases the "laws of supply/demand" are subverted.

 

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

 

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

 

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

 

He first talked about how a few people will use heuristics to figure out that you can price some goods at higher prices to lead to higher demand (like some luxury goods) -- but that there's an easier solution to use the higher prices to fund kickbacks.

[Guest ajc]

One minor - but I think somewhat important - point to add on the Starbucks similarities is the price paid relative to your weekly or monthly earnings.

 

For Starbucks, you're getting luxury, #1 status and a fix on the cheap (at least relatively speaking).

Same goes for stuff like Coca Cola, Wrigley's or a number of other products. As a result, it's easier to justify an expensive coffee to yourself even if times are tough.

The higher the percentage of your weekly spend this item becomes though, the less that holds and the more likely you are to switch brands to a cheaper more affordable version if you need to (like with Tesco vs Lidl in the UK).

 

There will be exceptions of course, but generally people find it easier to rationalize a little luxury each week than they do a whole lot.

So maybe that's something to keep in mind regarding Whole Foods.

 

 

 

[ukvalueinvestment]

Starbucks is luxury, #1 Status???  ;D

[Gamecock-YT]

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

 

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

 

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

 

There's a chapter in Cialdini's Influence on the subject. I think it related back to a jewelry store unable to sell a stone at a discount but when they mistakenly put it with a much higher price they sold it in droves.

[rkbabang]

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

 

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

 

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

 

There's a chapter in Cialdini's Influence on the subject. I think it related back to a jewelry store unable to sell a stone at a discount but when they mistakenly put it with a much higher price they sold it in droves.

 

I remember either reading or watching something about when Martha Stewart first started out, she was selling pies that she was making in her kitchen. She couldn't sell any of them until she raised her price significantly, after that she couldn't keep up with demand.

 

[Guest ajc]

Starbucks is luxury, #1 Status???  ;D

 

 

Yeah, I'd say that's pretty much exactly what Starbucks represents. At least to the majority of the people around the world with a decent awareness of the brand.

 

That doesn't mean I don't think it's a bit of a kitschy product, but this is an investing forum not a high school art contest so leaving personal biases at the door is never a bad move.

 

Otherwise, shit just ends up going nowhere. Besides, every smart person knows an intelligent discussion is where the real value always tends to be at.

 

 

[NomadicRiley]

I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

 

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

 

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

 

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

 

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

 

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.

[rpadebet]

I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

 

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

 

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

 

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

 

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

 

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.

 

Exactly. The analogy doesn't hold very well when you dig slightly deeper into the respective business models.

 

It is far easier for your local grocer to setup a "natural" food section within their store and undercut WFM margin's and take their business away. Margin compression will at some point overcome the growth from increased stores and the current multiples might seem appropriate at that point for a grocery business.

 

I am not suggesting it is a short candidate, but it is not a "layup" long as some are suggesting.

[CorpRaider]

I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

 

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

 

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

 

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

 

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

 

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.

 

W/r/t your last point; do you shop at whole foods now?  Whole foods customers are highly unlikely to swing by the Kroger because it is closer, in my observation.  They walk by dozens of gristedes and other nice/organic grocers to get to the whole foods in union square and have done so for years.  Also, concerning the differing selections in different markets: that is accurate but one might argue the brand equity is in the store's curation of preferably local, organic foods supplemented by worldwide, vetted suppliers.  So if you visit san diego and want the "good" local stuff you go there just like you do at home in Chicago, despite the vendors being different.  Alternatively, wouldn't the store brand "365 value" provide the consistent labeling you're seeking on many items?  Not saying its a buy here, just that most value investors are probably not the target market.  Disclosure:  I bought this thing back in the depths of financial crisis and sold it way too early, but it took care of all my losses from other investments in short order; so I'm sure I have some personal affinity/biases for the company.  It's a good business (for a retailer) with good management, but I'm not comfortable with the valuation right here, given competitive threats.  Which, btw are TFM and Trader Joes and some of those guys; not Walmart.  People who shop here pay a premium so that they don't have to encounter people of Walmart....ever, imo.