Whole Foods Market (WFM) first opened in 1980 as a large health food store in Austin, Texas. Over the years the grocer has grown and now has 490 stores in the United States and the United Kingdom. The company only sells natural products, is committed to sustainability and is often listed as a top company to work for.
However, Whole Foods Market is not without its critics. The company is nicknamed “Whole Paycheck” due to its high prices, and the company has been repeatedly accused of misleading customers. Whole Foods has allegedly lacked transparency when it comes to its definition of "natural" and has embellishing homeopathic claims. Most recently, it has been accused of over-charging customers.
In 2014, Whole Foods paid out almost $800,000 in fines to California cities after having been accused of over-charging customers. Claims ranged from employees not discounting the weight of a container when selling bulk items, to delis selling products by the piece instead of the pound and employees pre-labeling containers and then filling them with varying (sometimes lower) amounts of product.
In 2015, on the other side of the country, Whole Foods was accused of similar practices. In New York, the Department of Consumer Affairs (DCA) announced that in an ongoing investigation, 89% of tested Whole Foods products did not pass the federal weight deviation guidelines. The investigation looked at 80 different pre-packaged foods, and the results were similar to the findings in California – incorrectly weighed packaging and pre-printed labels that were filled in after having been weighed.
Whole Foods released a statement disagreeing and claimed that the DCA used the media to coerce the grocer into paying large fines. Fines for mislabeling start at $950 for the first offense and can reach up to $1,750 for further offenses. With the DCA claiming that thousands of products were mislabeled, Whole Foods could face fines of up to a few million dollars – relatively nothing compared to its record $4.7 billion in 2015 Q1 sales. (For more, see: Whole Foods: How Will Shares React To Price Probe?)
Was It Intentional?
Whole Foods has been facing increased competition. With Walmart Inc. (WMT) and other large grocery chains introducing organic and natural products at lower prices, Whole Foods is losing its health-food seeking, price-sensitive clientele. In an effort to increase profit, Whole Foods has been lowering prices for years and, in 2015, the company announced the opening of a new, lower-priced sister chain to attract younger shoppers. (For more, see: 5 Things Whole Foods Management Wants You to Know.)
Given the decreasing growth in sales and profit over the past few years, is it any wonder that the company would try to eke out a few more dollars from its clientele? There’s an argument to be made that regular shoppers at Whole Foods are price insensitive – the store is notorious for its high prices and is still packed with customers every day. As food prices rise throughout the country, how would consumers know if the recent increase in a package of chicken tenders is due to faulty weighing or because chicken is more expensive? How many consumers are paying enough attention to what they buy to even notice individual items’ price increases?
Complaints of over-worked Whole Foods employees can be found throughout the internet. With an average salary of around $11/hr, Whole Foods is definitely expecting a lot of their employees. A faulty scale, a rushed employee who prints labels out ahead of time, a worker who fails to take the time to subtract container weight – these are all possible human errors that could result in the over-charging claims from the DCA. (For more, see: Whole Foods Pricing: Mistake or Misdeed?)
The Bottom Line
Of course, Whole Foods over-charges its customers; its whole business model is based on providing exclusive products to a wealthy clientele. The company’s profit margins reflect that customers are more price-insensitive than most and that they are willing to spend more money on Whole Foods’ products than for the same products at other stores.
In September 2017, Whole Foods had a net profit margin of 1.5%, The Kroger Company (KR) had net margins of 1.43% and Walmart only had net margins of 1.42%, which includes its more profitable, non-grocery departments. In fact, according to the Food Marketing Institute, grocery stores have an average net margin of 1.3%.
Between increased pressure from competitors also offering natural and organic products, pressure from shareholders to increase sales, and pressure on its employees to be as efficient as possible, it’s no wonder that Whole Foods is looking for ways to keep margins high. With possible mislabeling fines that may pale in comparison to the potential extent of profits from these unfortunate practices, it’s perhaps unlikely that Whole Foods will devote a lot of attention and resources to fixing this problem.