Is Whole Foods Unable To Compete In The Organic Grocery Space?

Goldman Sachs’ Stephen Tanal believes Whole Foods Market, Inc. WFM is experiencing a “competitive barrage,” losing market share in its core organic and natural business.

Tanal downgraded the rating on the company from Neutral to Sell, with a price target of $31.

Intensifying Competition

While Trader Joe’s and The Fresh Market Inc (previously traded TFM) have been taking share from Whole Foods, the analyst mentioned that the largest challengers were Costco Wholesale Corporation COST and The Kroger Co KR, which are focused on delivering value through price and quality.

Related Link: Goldman Upgrades Kroger To Buy, Unconcerned About Competition From Wal-Mart

“COST dominates price, while KR boasts convenience as an added edge. Taken together, the group has raised the competitive bar in natural and organic: a differentiated product offering is no longer sufficient,” Tanal stated.

How It Impacts Whole Foods

Competition had led to consistent deceleration in Whole Foods’ same-store sales, with the company’s first negative comps since 2009 being reported for 4Q15–2Q16.

“Wellness has gone mass, and it is not coming back, never again to be relegated to niche specialty retailers serving price-insensitive, early adopters. We expect tough results from WFM’s existing stores to more than offset profits from new store openings,” the analyst pointed out.

However, Tanal also expects Whole Foods to see opportunity for store growth. Goldman Sachs’ capacity analysis suggests that the chain could grow to 1,047 stores in the United States, which represents 2.4X the current footprint.

Tanal also expressed concern that growth in stores might not translate into growth in earnings.

Full ratings data available on Benzinga Pro.