Whole Foods: Youth will be served

The millennial generation is so coddled. Now it's getting its very own Whole Foods. The organic and healthy foods grocer is to introduce a new store format specifically tailored to American youngsters. Details will be filled in by late summer but expect a smaller store format with cheaper foods (and fewer types of kale salad). An executive on the company's conference call said the cryptic disclosure was intended to "tantalise" investors and analysts. Whole Foods shares dipped a tenth, however, so a more appropriate verb may have been "horrify".

In fairness, the share price reaction was partly driven by disappointing comparable stores sales growth in the first quarter. That clocked in at a modest 3.2 per cent (a few years ago the figure was nearer 10 per cent.) That kind of growth, along with a rapid store-expansion programme and juicy gross margins of around 35 per cent gave Whole Foods a PE ratio of more than 30.

However, since reaching $65 in 2013, Whole Foods shares have fallen to $43 (and a PE of 25). It is not that fresh and healthy food has fallen out of favour. Precisely the opposite has happened. But now consumers have much more choice.

So Whole Foods has had to pursue initiatives it might have preferred to eschew - including hosting its first investor day in February. It has decided to cut some produce prices. This will hurt profitability but should bring customers through the doors. It is also introducing a loyalty card and has bought more national advertising. And the company still believes there is plenty of firepower left from building new stores, even as existing stores are become less productive. Whole Foods has just over 400 outlets but is aiming for 1,200.

Despite the fall in comparable store sales, Whole Foods says its return on capital is 15 per cent, up from 9 per cent in 2010. For it to keep that up, the kids will have to be all right.

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