Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

It's time for Whole Foods to recalculate. 

On Discount
Whole Foods fell as much as 10% after reporting a fourth straight quarter of declining sales
Source: Bloomberg
Intraday times are displayed in ET.

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.

Barren Cart
Whole Foods' year-over-year sales have dropped four straight quarters as shoppers go elsewhere
Source: Bloomberg Intelligence

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.

Pay Up
Restaurant worker wages are up 4.4% over the last 12 months, while they remain flat for grocery workers
Source: Bloomberg, U.S. 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.

Pricing Gap
Food prices are falling at the grocery store, while rising at restaurants
Source: Bloomberg, U.S. Bureau of Labor Statistics
Data seasonally adjusted; reflects CPI for urban consumers, which covers about 80% of Americans

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.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net