Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Canada’s most-awarded
newsroom for a reason
Stay informed for a
lot less, cancel anytime
“Exemplary reporting on
COVID-19” – Herman L
$1.99
per week
for 24 weeks
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Whole Foods had carved out a market for organic produce but now mainstream grocers are starting to dominate that segment.

Mike Blake/Reuters

Consumers love organic food, but they don't have to go to Whole Foods to buy it.

That may not come as a shock to anyone who has seen organic apples, carrots, eggs and milk on shelves at mainstream grocery stores, but it has taken investors by surprise.

Whole Foods Market Inc. slid 18.8 per cent on Wednesday after delivering its fiscal second-quarter results, offering an important lesson in how to avoid similar disasters elsewhere in the stock market.

Story continues below advertisement

The results weren't disastrous: Earnings missed expectations, but were merely unchanged from last year, at 38 cents (U.S.) a share. Over the same period, revenue rose 10 per cent.

Demand for organic produce is hardly fleeting, either. The company expects to increase its number of stores to 500 over the next three years, from 379 today. Over the longer-term, it can see 1,200 stores in the United States alone.

The big disappointment came from the company's outlook for 2014, where it sees lower sales growth, lower operating margins and lower growth in per-share earnings as it slashes prices.

"Our tremendous success has created more competition," said John Mackey, co-chief executive at Whole Foods, in a conference call on Tuesday evening. "So, there's a lot more competition, a lot more entrants into the marketplace, as well as conventional supermarkets copying and imitating a lot of what we're doing."

Indeed, the landscape reveals that Whole Foods is struggling to look special as organic food evolves from a high-end niche product to mainstream fare available at supermarkets such as Loblaws, Sobeys, Wal-Mart and others.

According to the Nutrition Business Journal, via The Wall Street Journal, conventional retailers controlled 55 per cent of U.S. natural and organic grocery sales in 2012, up from just 25 per cent in 1998.

Investors weren't the only ones caught off guard by the results and outlook from Whole Foods. Analysts, too, were left scrambling to update their views on the stock, along with their target prices. The average target was slashed by $11, or nearly 19 per cent.

Story continues below advertisement

The adjustment, along with the decline in the share price, suggests that Whole Foods took everyone by surprise – but that it was a surprise is, in itself, rather perplexing.

Prior to the release of the quarterly results, Whole Foods traded at more than 33 times trailing earnings, which is a high valuation typically awarded to companies with big growth potential and a clear competitive advantage. (At 26 times earnings, the stock is still pricey.)

Yet Whole Foods had missed revenue expectations for five quarters in a row – now six – indicating that the company was priced for perfection for some time without delivering on it.

More importantly, it didn't take detective work to see the proliferation of organic produce elsewhere, undermining Whole Foods and its pricing power.

However, looking back is easy. What can Whole Foods teach us about our approach to other investments?

The key lesson is something Warren Buffett has reminded us of before: Companies should have enduring moats, or natural defences against competitors. Low costs help, and so do powerful brands, which is why Mr. Buffett continues to invest in Wells Fargo & Co., Coca-Cola Co. and Procter & Gamble.

Story continues below advertisement

They probably won't dazzle you with eye-popping rallies, but at the same time they're unlikely to get shredded on the admission that, gosh, the competition is nibbling away at its market share.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies