It's time for Whole Foods to recalculate.
The grocery chain on Wednesday evening reported a fourth straight quarter of declining sales at established locations, and its shares fell as much as 10 percent Thursday morning. Whole Foods missed Wall Street's revenue estimates and said sales in the current quarter are running 2.4 percent lower than a year earlier.
Whole Foods' struggles come even as grocery stores seem to have a lot going for them: Americans are spending less at restaurants, choosing instead to hunker down and make their own food. Lower commodity costs and food prices have allowed grocers to cut retail prices, helping attract more customers.
Restaurants haven't been cutting prices, mainly because their labor costs have risen as higher minimum wages have spread across the U.S. Grocery stores, in contrast, use lower-skilled, lower-paid workers. Indeed, average hourly wages over the past year have stayed essentially flat at grocery stores, while rising 4.4 percent at restaurants, according to the Bureau of Labor Statistics.
Prices at restaurants, meanwhile, were up 2.6 percent in June from a year earlier, while grocery store prices fell by 1.3 percent -- further encouraging consumers to make their own food.
The problem for Whole Foods is that these trends have hit right as the infamously expensive grocer was trying to cut prices to attract more shoppers. Now all its competitors are cutting prices, too.
Last November, I cautioned that cutting prices wasn't the answer to the question of how to turbocharge Whole Foods' flagging sales. No one goes to Whole Foods -- also known as "Whole Paycheck" for its high prices -- looking for bargains. Customers go to get healthy, quality food they can't find elsewhere. As conventional supermarkets such as Kroger and Walmart have gotten into the natural and organic game, Whole Foods needs to respond by offering more differentiated products and a better shopping experience.
But Whole Foods went ahead and cut prices, hurting its profits. And it cut staff -- which doesn't help the shopping experience. It took on more debt to buy back stock. And it spent big on advertising spots encouraging customers to come in and cherry-pick sale items. What does it have to show for all this? A fourth straight quarter of declining sales and operating margins. It's further evidence that, unless you're Walmart or Amazon, price wars simply don't work.
Whole Foods spoke on Wednesday of encouraging results from its new, lower-end line of "365" stores. But an early read from Silver Lake, California, where Whole Foods opened its first "365" store in May, suggests the discount stores might be hurting regular Whole Foods.
After the "365" store opened, the traditional Whole Foods in the area cut its prices to be more in line with the cheaper store, according to preliminary pricing studies from Wolfe Research analyst Scott Mushkin. Whole Foods opened a second "365" location this quarter and has plans for 20 more in the near future. If Whole Foods rolls out hundreds of these stores, it risks wreaking havoc on its profits and cannibalizing its sales.
Whole Foods should pause and rethink its pricing math. Because right now it just doesn't add up.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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