Mackey’s piece of the pie

John Durie
SEPTEMBER 17, 2015
THE AUSTRALIAN

When a company boasts on its ­annual report that it created the highest standards because they weren’t previously available it is a little embarrassing when it falls into the same traps as others.
While Whole Foods Markets fell into this profit trap, analysts say the lag in its stock prices performance is more due to increased competition from like-minded and positioned stores than a flurry of class action law suits.
Whole Foods Market shot to prominence in the US due in part to its stellar growth and the work of co-chief John Mackey in his landmark text, Conscious ­Capitalism.
The notion, in simple terms, is that companies should care for customers, staff, the community and shareholders and not sacrifice the first three for the last objective. The idea is that profits and ­purpose go together and those that do will outperform.
Putting to one side the fact that New York authorities are investigating complaints the company had repeatedly overstated the weight of its pre-packaged goods, a trip to the Whole Foods landmark store at global headquarters in Austin, Texas, shows Australian supermarkets have a way to go if they really want to push the limits of so-called responsible retailing.
However, in its most recent quarterly profit report the company missed on its earnings before interest and tax by a hefty 6 per cent in part because gross margins fell by 35 basis points.
A recent Goldman Sachs note pointed to same-store sales growth of 1.3 per cent against consensus expectations of 2.8 per cent.
Goldman analyst Stephen Grambling noted that “while we believe in the strength of the brand and acknowledge the unique experience instore we are sceptical of a significant top-line re-acceleration in the near ­future”.
The company is suffering a slowdown in sales, higher costs on new store openings and “weaker margin due to competition”.
The likes of Fresh Market, Sprouts Farmers Market, David’s Tea and United Natural Foods are starting to hit its core franchise. The effect is by no means terminal as shown by Goldman’s estimates that sales growth this year will be 8.6 per cent falling to 6.9 per cent next year.
Net income growth will collapse from 4.7 per cent this year to 1.5 per cent next year before bouncing to 5.5 per cent growth in 2017.
Over the same period earnings per share growth will fall from 7.2 to 4 per cent before bouncing back to 9.3 per cent growth.
A look around the Austin headquarters shows an extraordinary range — from fresh fruits, vegetables and meat to vitamins, cosmetics and prepared goods.
House brands account for 14 per cent of total sales but appear to dominate the shelves.
ACCC chief Rod Sims, who is a big advocate for correctly labelled free range chooks and eggs, would be interested to see plenty of claims that the chooks were “raised without antibiotics” or fed an “organic vegetarian diet”. But very few “pasture-roaming whole chickens”.
The region labels for fresh fruits were prominent, making it clear the pineapples are coming from Costa Rica, the tomatoes from Mexico and California and the pears from Washington State.
The prevailing claim was the fruit was “responsibly grown”, which implies — as the company claims — that it wants “people, animals and the places our food comes from to be treated fairly”.
The frozen-foods counters ­included a US-based distributor selling “Boomerang Pies”, which are “handheld Aussie pies”, in myriad assortments from curry and vegetable to spinach and mushroom to steak and potato.
In the cheese section is a sign that states: “We support artisans, farmers and makers of the cheese and we source from five producers we know personally.”
The cosmetics department supports products made with “fruit stem cells”.
By the time you get thirsty there are coffee selections, an array of wine and a selection of “Flowers pumpkin ale”, which is akin to a liquid pumpkin pie.
As a brand name Whole Foods is a strong one in US retailing — even if comedians label its product as “Whole Pay Cheque” as a play on the prices charged .
Co-CEO Mackey recently moved to offset that image by opening stores in towns like Detroit where 40 per cent of people live below the poverty line.
In stark contrast to the naysayer fears the store there traded profitably into its first year.
Mackey wants to extend the social capitalism concept into a much deeper involvement in the way its produce is made, ensuring all involved are treated well.
His shareholders will be hoping this also translates into profits because the share price at the $US32.37 level is at the bottom of the 52-week range of between $US30.18 and $US57.57 a share. That has something to do with the competition that comes with the capitalism Mackey embraces so tightly.