There has been some interesting discussion about Whole Foods (WFMI) in the comments under my recent post. I'm reprinting one of my responses here so everyone can read why I think WFMI has a moat that won't easily be breached.
Thanks for your viewpoint [re: WFMI's high prices harming its ability to establish a moat against Trader Joe's, Wild Oats, and other organics grocers], and I have to say, points well taken -- but, in my humble opinion, mistaken. Here's why: WFMI is in the brand business, not the price business. So as long as the lines are long, they would be nuts to start dropping prices -- unless they can keep their margins high by using their growing buying power to lower their costs. Which is, of course, is what they are going to do as they get bigger.
Right now they are only 165 stores nation-wide. (Albertson's has 2400 by way of comparison.) When they get to 1000 stores, their buying leverage will be immense compared to anyone else they compete with. Then you will see the others who try to compete on price fall by the wayside. Competing on price just sucks as a business plan. So 'whole paycheck' [Whole Foods' nickname in some areas] with long lines? YEAH BABY!!! That just SCREAMS moat!
Trader Joe's, by the way, has really low prices -- which means they have really low margins, which means it's hard for them to grow quickly and easy for them to be attacked. At some point, they either decide to stay small (their current plan) and not go head up against WFMI, or, like Wild Oats, they will be crushed by a superior product at a superior price. Any pricing model that TJ can use, WFMI can use better because they are much bigger. In the grocery business, size is price. (WMT vs KMART would be an apt comparison should TJ decide to take WFMI on, and as you know, KMART is bye-bye.)
As to 'whole paycheck', that's what they said when Starbucks sold coffee for 20 times the going price -- and that didn't turn out so badly, did it? John Mackey, who runs WFMI, tells a story of his startup days to this point: He and his wife were working 80 hours a week and taking home $200 a month. He was roundly criticized by his hippie friends for being too high priced. He decided then and there to build a business based on solid core values that included making a solid return on invested capital. He's done so for the last ten years and if he keeps up the intelligent growth, WFMI can go on this way for my lifetime, no question.
So here's the point: when you are evaluating a business to own, since you are only going to own a few great businesses, it's important to learn how to spot a solid Moat that is durable. What I've done here is tell you why I think the WFMI Moat is durable. But that really sort of follows noticing that WFMI's numbers scream MOAT! The WFMI castle has been under attack for its entire lifetime, but the Big Five numbers tell us that the attackers aren't getting across the Moat.
From that point we can dig in and see if we can figure out what the Moat is and how durable it is. For my nickel, the moat is getting wider and deeper (and that's backed up with the Big Five getting bigger and better). **
So defining the Moat is two parts:**
Do the Big Five show a durable moat?
Can you figure out why?
Both are important to know before we buy.
WFMI has a brand moat that is far superior to trying to compete on price. Their brand includes the best staff, the best natural fast food, the best fresh food and the best shopping environment in the grocery buisness. Obviously people are willing to pay for the whole experience. You should see the lines in the Columbus Circle, NYC store on Saturday night!
Competing with this Brand on the basis of price is suicidal. The dying old school grocery stores are trying to get into this business and will try to compete on price, killing WFMI's competitors from below while they in turn are being eaten by WalMart from even farther below. WFMI competes with a branded quality experience that simply is not matched in their industry. That plus the best pricing model in the business is their moat and, as I said, it's getting wider by the day.
So now that you see how I think about it, instead of debating this one, how about finding one that you feel this way about. Write me and defend your wonderful business that is available at an attractive price, and I'll post it here for the world to see how you go about it. And, believe me, since WFMI is pushing up against its Sticker price (the time when a Rule # 1 investor gets out -- temporarily), I'm looking for the next wonderful thing to put on my Watch List.
Now go play (but before you do, go find me a great Rule #1 business to buy!)
Phil
