Whole Foods Market, historically, has not competed on price. That's been a successful strategy because its educated, affluent shoppers assume that quality must just come at a premium. They're willing to shell out significantly more for pesticide-free pears and artisanal cheese than they might for groceries at the Safeway down the road.
The price isn't simply a function of the cost of goods, though. Whole Foods' profit margins have been significantly fatter than the supermarket industry's notoriously slim margins for years now, at around 3.8 percent compared to the average of 0.7 percent. Investors have rewarded this: Whole Foods' stock trades at about twice the price of its rivals'.
Some of that comes from a product mix that skews more toward prepared foods, which command higher prices, but the chain also benefits from a squishy perception cushion that prevents customers from comparison-shopping quite as ruthlessly.
That perception game has stopped working, though. And Whole Foods is trying to figure out if it can adapt.
Other grocers, especially in the urban markets that Whole Foods has started to saturate, are getting on the local and natural bandwagon. Economies of scale are bringing down the cost of organics, which might lead consumers to adjust their expectations about how much they should pay.
And yet, Whole Foods continues to go head to head with other grocers.
For a while now, Whole Foods has been trying to strategically lower prices to match those at surrounding competitors — "price investments," in industry jargon — which reduces profits in certain stores. It's also opening new stores in low-income parts of Detroit and New Orleans with fewer employees, more frozen and packaged foods and a new message: This stuff doesn't have to cost quite as much.