It plans sales increases of 25%-30% this year — with 10% from Wild Oats. How does it compete so well? And could it get any better?

“ ...And we’re going to grow our sales by 56% over the next three years.”

Know any retailers in their right minds who would say anything like that today? Sure. Whole Foods.

In a recent conference call with securities analysts, Whole Foods chairman and CEO John Mackey said the Austin, Tex.-based chain is on target to reach its goal of $12 billion in sales in 2010. Annual sales are tracking at $7.7 billion today, including $1.2 billion from the newly acquired Wild Oats stores.

Based on plans to open 21 new stores this year, rising comps, and remodels of tired Wild Oats units, Whole Foods expects sales to climb by 25%-30% this year alone. (It would need to average only a relatively paltry 16% annually to reach its $12 billion goal on time.)

Whole Foods has reportedly had excellent results in reinvigorating Wild Oats stores thus far. There’s clearly room for improvement: In the fourth quarter of last year, Wild Oats stores averaged $457 per square foot; Whole Foods stores came in at $892.

We couldn’t find anybody who felt Whole Foods would not attain its goal. The only real question seemed to be how long it can continue at its present pace, with a few concerns about organic/natural supply issues down the line.

Says one frozen food vendor, “Because there are so few WFMs in each metro area, they can effectively skim the market for the best-matched consumers. The target is so identifiable and narrow, they are not compelled to offer all things to all people. They typically do not charge large up-front fees for advertising or new items, so interesting new concepts have a better chance of being carried by the stores.”

Further, with about 275 stores at this writing, Whole Foods appears to be in no danger of saturation. Even in markets where their own stores’ trading areas overlap, cannibalization historically has been minimal.

Clearly, Whole Foods does plenty of things right. And, like any retailer, there are a few areas where it might be able to improve. We asked a cross section of industry observers — including frozen and refrigerated food vendors, consultants, brokers and competitors — for their thoughts. Their responses will give you ideas on what you might want to try, and pitfalls you might want to avoid.

Here’s What Whole Foods Does Well...

1. Store associates know their stuff.
One vendor sings the praises of “the knowledgeable and enthusiastic cheese mongers behind the case. They love to tell stories about farms or cheeses they are passionate about and believe this helps create customer loyalty for small manufacturers. If not loyalty, it entices the customer to try a brand/cheese they are not familiar with just based on intrigue. They are also willing to help a customer choose an item to entertain with, whether it be based on the meal or the wine. This is definitely not the service you will see at your typical grocery chain even though they may have copied Whole Foods’ display techniques and variety.” Other vendors say they enjoy chatting with store associates, getting ideas on how specific promotional, merchandising or pricing programs were received by shoppers, with an eye to doing better in the future. They say that this is only possible because, generally speaking, Whole Foods associates are superior to their competitors.

2.Store managers have autonomy.
Individual store managers have considerable autonomy to customize their stores to their neighborhoods. If they can justify special sections or planograms to senior management, they aren’t held back. Likewise, vendors say they can sometimes just walk into a store and get an item authorized at that location immediately.

3. It ‘plays well with others.’
“Overall WFM is a good partner and, for the most part, is welcoming of help and advice on how to remain a good partner,” says one vendor in the refrigerated/frozen foods arena. Observers praise the chain for not taking slotting or slapping on fees unnecessarily. They say communication is open, with smaller brands getting more of a chance at shelf space because of the volume done in organic and natural foods. Another opinion: “You want to do business with Whole Foods, they are a good business partner, they are selective. Being a brand in their stores is a reflection of your product and company.”

4. Efforts to impose more structure are working.
Vendors generally praise Whole Foods’ efforts at national coordination and the creation of more consistency within its stores around the country. The assimilation of the Wild Oats stores has gone smoother than most had expected. They credit strong corporate efforts at communication with associates at every level. Adds a frozen food vendor: “A critical issue for them is how to stay close to the local/regional consumer while leveraging what corporate has to offer. They recently started doing category reviews in Austin which winds up being more of a recommendation in frozen for now since they do not yet have the ability to do a force out in frozen. They hope to be able to do force outs soon in the larger (125ish) stores with expanded frozen space.” There’s a caveat here from one observer: “They may be maturing to a more ‘corporate’ culture which may turn off some of their long-time employees and shoppers.”

5. All kidding aside, pricing is decent.
Says one vendor, “Contrary to the name ‘Whole Paycheck,’ Whole Foods delivers natural and organic foods cheaper than most supermarkets. We do price surveys of each market area and WFM always has the lowest prices on the core (natural and organic) commodity items, such as milk, eggs, bread, rice etc. So if one is an organic consumer, WFM has the best values, and this is partly due to their extremely low-cost logistics channel — United Natural Foods.” (Note: this remark did NOT come from United Natural Foods.) Says another vendor: “Keep in mind most of the customers in WFM are less price conscious. While I realize price is a consideration, presentation and displays are perhaps more important. They can really help push a promotion beyond your expectations.”

6. It offers excellent variety.
Frozen and refrigerated cases get relatively as much space in Whole Foods as they do in traditional supermarkets, observers say, although the focus on organic and natural is immediately obvious — resulting in much more variety in these areas. “They offer the best variety of organic and natural products in the industry,” was the typical response from vendors. Observers agree there’s a sense of abundance, especially in fresh items. Says another, “They’re cutting-edge merchandisers who have brought fashion to food retailing. They combine unique products with a bold merchandising style that creates eye candy for the shopper.”

7. A quality image is maintained and protected.
“They do a very good job maintaining an image of quality and adhering to a promise of better-for-you foods,” says one observer. Others say Whole Foods’ robust website and multitude of in-store fliers/factsheets help it bond with shoppers and be seen as a shopper advocate. Another observer adds: “Sticking to their mission of a ‘whole life’ is a benefit for consumers and it allows them to shop without thinking.” Finally, one vendor notes that “Whole Foods seems to have set the natural and organic standard for any other retailer wanting to choose that positioning. Manufacturers will change their recipes to meet Whole Foods requirements because they believe the Whole Foods shopper is an important one.”
8. It delivers a great shopping experience.
“WFM delivers the most enjoyable shopping experience of any retailer I know, with perhaps only Wegmans coming close,” says one vendor. There is agreement that the stores are warmer and more inviting than conventional units, with more wood, warmer lighting, and handwritten signs. Observers singled out perimeter perishables for special praise, citing good visual merchandising, appealing meals and (ahem) terrific margins. “They do food theater well. The perimeter is vibrant and teeming with activity, and they use lighting to accentuate food colors as well as anybody,” says a consultant familiar with the chain. Our favorite quote from one vendor: “You almost feel healthier just because you are shopping there... even if you eat cheese curls normally!”

9. It knows how to brand itself.
“WFM has created a powerful corporate identity with their stores across the country,” says one observer. “Their in-store branding/artwork is contemporary, artsy, visually friendly. (vs. generic-looking in-store brands that are often unimaginative and visually stark). Other store chains are now copying the Whole Foods look,” according to another. Says a third, “The store’s name doesn’t sound as corporate or impersonal. I can relate to what Whole Foods means, but I don’t know anything about Mr. Albertson, or Mr. Ralph, or Mr. Kroger. Who doesn’t want their food to be whole?”

Here’s What Whole Foods Could Do Better...

No, not everybody loved everything about Whole Foods. Here are some observations that will, in some cases, contradict what’s been said above. But the different perspectives could help you compete better if you’re up against Whole Foods in your market.

1. The price image needs work.
Observers say the perception of high prices, justified or not, hurts Whole Foods, and it needs to take active steps to change this. They note that other supermarkets send out fliers to steer shoppers to their stores, while Whole Foods relies on word-of-mouth. It needs to do more to recruit mainstream shoppers who are not going to its stores, these people say. Having said that, nobody thinks Whole Foods should adopt price/item fliers. One observer points out that Trader Joe’s has a very effective radio campaign that might work for Whole Foods, so long as it was broadcast to a wide demographic group to give the chain more mass appeal.

The ‘Whole Paycheck’ joke rankles Mackey. In a recent conference call, he noted that “One of the myths out there about Whole Foods Market is that we’re some kind of luxury retailer and we get lumped in that category and whenever the economy gets weak everybody comes out and says Whole Foods sales are going to fall. However, that’s never been the case. We’ve been doing this for 29 years, and every time there is a recession, our sales don’t fall.”

2. Some buyers need to chill.
“Whole Foods needs to educate its team more about category management and pricing strategies. Because they have a chip on their shoulder about their price image, the buyers are tough on suppliers and often themselves, depressing margins within a core commodity which hurts everyone from the farmer to the manufacturer to the retailer themselves.” We’ll cut the buyers some slack here for two reasons: They’re overworked at every chain we know, and Whole Foods buyers are going through plenty integrating Wild Oats into operations. But in some cases, if the shoe fits...

3. It could speed up a little.
Says a manufacturer trying to gain distribution: “I have found the process of getting our items to the right place and point of approval to be very slow. The information seems to flow very, very slowly and, in my retail experience, that appears to be a sign of overwhelmed buyers. Even when you have something innovative to offer that can provide them with relevant variety, they appear to struggle with closing the communication loop. My guess is that once you are in, it is a different story.” Unfortunately, this isn’t an isolated complaint. Other vendors now selling the chain say decision-making can be very slow.

4. It relies too much on distributors.
“If you are a local niche producer with high costs, further marked up by the distributor and yet again by WFM, often your products end up with wildly high retail prices and aren’t successful in the store,” complains one vendor. Says another: “Major brands are over-represented at the expense of smaller companies that have a good product and if given a chance would outperform the slower-selling items of these major companies.”

5. It must focus on hiring quality people.
Okay, so this isn’t really seen as a problem now, but potentially a serious one as the chain expands. “They need to stay focused on hiring quality and qualified staff at all levels. For the stores this means approachable, knowledgeable, and helpful servants. Check the attitude at the door! In the main office it means finding people who are fiercely connected to the cause of innovativeness and convention-busting thinking,” is how one observer put it.

6. More structure, but not too much!
“They need structure, and maybe a hint of standardization, but not at the expense of becoming homogenous. They need to maintain their commitment to being a ‘neighborhood’ market. This flies in the face of buying power but serves to keep them special and sensitive to each store’s community.” Says another observer: “The largest area I believe they could improve upon is their distribution network. Once this is secure I believe they can further that by implementing some national programs while not pulling too much decision-making away from the store personnel. A fine balance between those two areas will help secure their business and profitability in the long term.” And finally, another adds that “Continuing to concentrate on cutting costs through distribution and national programs will help them to maintain margins while competing on costs with those chains now trying to duplicate their selections.”

7. It needs to pre-order more product for promos.
“If WFM chooses to support your items, they do sell lots of product and their stores do support the national display programs. However, about half of the stores do not pre-order enough product to manage their needs.” Another vendor says Whole Foods needs to reduce its margins on promoted items, and to work with manufacturers better to help them hit target feature price points.

8. Private label is gaining too much at the expense of branded items.
We’d be astonished if we didn’t hear this criticism from branded vendors. For the record, Whole Foods’ private label SKU count rose 13% over the past year, and private label makes up 19% of grocery and whole body sales. Some branded vendors say they are used to getting their products knocked off, and consider this in their planning. Smaller vendors complain that private label is squeezing out opportunities for them.

9. It must maintain differentiation.
According to one vendor, “Other retailers are quickly catching up in terms of adequate assortment that also delivers healthy, all-natural or organic alternatives. Whole Foods needs to make sure that shoppers do not become ‘equally pleased’ with the alternative. When traditional retailers are able to deliver on a wider range of family needs (healthy, value, convenient, short commute, children, gifts, etc.), the burden is on Whole Foods to reassert the value they offer.”

At a Glance

Headquarters:

Website: www.wholefoodsmarket.com

Chairman, CEO, Co-Founder:

John Mackey

Annual Sales: Tracking at $7.7 billion

Compound annual growth rate since 1991: 30%

Founded: Roots go back to 1972, but first actual Whole Foods Market opened Sept. 20, 1980, in Austen, TX.

Private Label: SKU count grew 13% last year, and PL now is 19% of food and whole body sales.

Recent Honors: No. 16 on Fortune magazine’s 2008 list of the “100 Best Companies to Work For.” It’s one of only 14 companies to be named every year since the list’s inception 11 years ago.

Perishables Sales: 67% of volume in fiscal 2007.

Its Long Shadow: If you Google “Whole Foods Market,” you get 1,440,000 hits, vs. 3,450,000 for “Wal-Mart” but only 443,000 for “Kroger.”

Whole Foods Now 36% Of United Natural’s $$

United Natural Foods, Dayville, Conn., has a contract to serve as Whole Foods’ primary wholesale natural grocery distributor through September of 2013, having entered a seven-year contract in September 2006.

When the Whole Foods’ acquisition of Wild Oats started making headlines the next summer, United’s stock took a hit over fears that the deal might cause it harm. First, the merger would likely result in the closure by Whole Foods of some competing Wild Oats stores. Second, Whole Foods’ relatively favorable pricing terms would no doubt be extended to Wild Oats.

At the time, Whole Foods was said to account for 26% of United’s revenues, with Wild Oats making up another 10%. Analysts have said that over the long haul, Whole Foods could increase the sales productivity of the Wild Oats stores sufficiently for it to produce benefits for United.

In a conference call with analysts in November, Michael Funk, United’s president and CEO, reported first quarter sales ahead by 13.9%, with net earnings up as well. He said Whole Foods and Wild Oats made up 35.5% of United’s volume, and grew by a combined total of 22.5% during the quarter. Most terms of the Whole Foods contract had by then been extended to the Wild Oats stores.

United has not been sitting idly by. In addition to growing business at Whole Foods and Wild Oats, it is capitalizing on opportunities in other channels, most notably traditional supermarkets and foodservice.