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Overcharging scandal hurts Whole Foods sales

Retailer plans another marketing campaign to highlight unique offerings

Whole Foods is feeling pinched after New York City officials found it was overcharging customers.

The grocery chain known for its organic offerings said Wednesday that sales growth slowed sharply at established locations in the last two weeks of the quarter ending July 5.

That was after New York City's Department of Consumer Affairs said the chain's stores were overstating the weight of some pre-packaged products, like chicken tenders and a vegetable platter. The company said sales were showing improvement, but still weak this month.

"There's no magic bullet for restoring whatever trust was lost,'' co-CEO Walter Robb said during a call with analysts and investors.

Robb said that "nobody gets it 100 per cent right'' when it comes to weights and measurements in the grocery industry, but that Whole Foods was nevertheless taking steps to prevent overcharging going forward. That includes training for workers and a pledge to give away products if customers discover they were overcharged.

Over time, Robb said Whole Foods will get past the setback through its various efforts, including an ongoing push to make prices more affordable.

"We're not sure why Whole Foods was singled out for this attention, and we don't know why the media ran wild with this,'' co-CEO John Mackey also said, noting that he doesn't think the company's track record is any different from other supermarkets.

The negative attention comes at a time when Whole Foods Market Inc. is already facing intense competition, with organic foods becoming more widely available.

That has prompted it to try and draw a sharper distinction between itself and its rivals. This fall, for instance, it's planning another marketing campaign to underscore what makes it unique.

At the same time, Whole Foods is trying to appeal to a broader audience by shaking its "Whole Paycheck'' image.

To extend its reach, the company also plans to open a new chain of "365'' stores that focuses on lower prices in a smaller format. The first location is slated to open next year in Los Angeles, and leases have been signed for additional locations in Bellevue, Washington; Houston; Portland, Oregon; and Santa Monica, California.

The new chain would be in addition to the company's more than 420 Whole Foods locations.

After adjusting for the timing of Easter this year and discount day for workers, Whole Foods said sales rose 2.6 per cent at established locations in the first 10 weeks of the quarter. The figure fell to 0.4 per cent in the final two weeks of the period after the overcharging in New York became public.

In the first three weeks of the current quarter, the figure was up just 0.6 per cent.

For the full fiscal year, Whole Foods now expects sales at established locations to rise in the low single-digit percentages, down from the previous forecast of growth in the low- to mid-single digits.

For the third quarter ended July 5, the company earned $154 million, or 43 cents per share. That included an expense of a penny per share related to California's new paid sick leave law.

Analysts expected 45 cents per share, according to Zacks Investment Research.

Total revenue was $3.63 billion, short of the $3.7 billion analysts expected.

A year ago the company earned $151 million, or 41 cents per share, on revenue of $3.38 billion.

Shares in Whole Foods fell 11 per cent to $36.27 in after-hours trading following the release of the earnings report.

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