Just before the holidays, I was reading about Whole Foods (WFMI) on Phil Town’s blog. After looking over Whole Foods, I did not agree with Phil Town’s assessment of Whole Foods’ moat. I decided to join the conversation about Whole Foods, and I shared the following on Phil Town’s blog:
[Phil], I’m not sure I agree with you about Whole Foods having a wide moat. I agree that they have a good business with good management, but I’m not sure they will be able to maintain a sustainable competitive advantage in the future.
I think Whole Foods is just starting to develop a unified brand. Here in the DC area Whole Foods is often still referred to as Fresh Fields. In addition, the professional crowd here is starting to refer to Whole Foods as WholePaycheck! Whole Foods definitely has the reputation of being the high priced grocer in this area. It will be critical for them to maintain quality and service in order to maintain their current business.
A small niche grocer called Trader Joes is starting to [compete] in the premium grocery sector in this area. Many people around here are starting to view Trader Joes as the reasonably priced alternative to Whole Foods.
In addition, Harris Teeter and Giant have upgraded their organic foods selection and also started providing higher quality freshly prepared food in order to better compete with Whole Foods. They are not as high of quality yet, but they are starting to catch up.
Lot’s of competitors are already attacking Whole Food’s moat. I’m just not sure as a high priced premium grocer that they will be able to stave off competition in the future. In the sort run, their stores are packed and WholePaycheck is definitely making a nice profit.
I also added:
I just saw a good TV ad last night by Giant promoting their new affordable organic/health store brand products. The assault on Whole Foods begins.
Will their moat will be wide enough to hold back the invaders? I’m not to confident it will.
Phil was kind enough to provide a detailed response to my analysis (even though I some how referred to him as Jim in my comments :-) ). In his response, Phil states he believes that I’m mistaken on Whole Foods moat and that Whole Foods has a strong brand moat.
I agree that Whole Foods has a strong brand and is competing on quality versus price. However, as I discussed in an earlier post, brands do not always result in a sustainable franchise. I think the grocery store retail business is a brutally tough business. There is a lot of competition in the grocery sector and slim profit margins. It is very easy for fickle customers to switch to another store at any time, especially if someone offer a better quality/price blend.
If Whole Foods created higher switching costs for its customers, such as Harris Teeters’ loyalty rewards program that gives you a large reward for shopping 15 out of a 16 week period at their stores, then I might be more apt to assign a larger moat to Whole Foods. Imagine a Whole Foods with a CostCo type of club membership system. Now if Whole Foods could get their customers to join a lifetime membership club, I’d be all over this stock and label it a wide moat company.
I really enjoyed this online blog community debate. The potential to engage in rich online discussions regarding stock research is one of the reasons why I created my blog. I hope you also enjoyed this exchange. I would love to keep this discussion alive. Please share your thoughts on Whole Foods in the comments section below or even back on Phil Town’s blog.