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Whole Foods © Erik Freeland/Corbis // Whole Foods © Erik Freeland/Corbis

Extra7/31/2009 2:46 PM ET

How Whole Foods profits in lean times

The purveyor of gourmet foods has retained customers without slashing prices through an effective promotional campaign stressing the 'values' to be found in its aisles. 

[Related content: food prices, Safeway, groceries, economy, retail]
By The Big Money

If green shoots are what you seek, stop by the Whole Foods store in Paramus, N.J. Wander past the multihued display of locally grown flowers and into the oasis of produce for which the upscale grocer is known -- more than 20 types of leafy greens and pristine arrangements of flawless fruit, from rolling mounds of kiwis to deep bins of shiny crimson cherries.

Beyond that, the store stretches on and on. At 63,000 square feet, it's one of the biggest Whole Foods ever.

It opened in March as the recession was in full swing. Skeptics predicted it would elicit an underwhelming consumer response, but thus far the store has exceeded the company's expectations; in the words of CEO John Mackey, customer volume has been "phenomenal."

If Whole Foods Markets (WFMI, news, msgs) were perishable, it probably would have expired this past year. But instead, it’s holding its own in what's now been a yearlong assault on any store considered expensive.

While Whole Foods' most-recent earnings report wasn't dazzling -– year-on-year revenue was flat -– it wasn't dismal, either. And many analysts foresee increased sales when the Austin, Texas, company posts third-quarter financial results on Aug. 4. "We haven't been hearing that anywhere else in the luxury retail space," says supermarket analyst Scott Mushkin at investment bank Jefferies.

Such optimism has fueled the grocer's soaring stock price, up 159% this year. In the same period, shares of traditional grocers Safeway (SWY, news, msgs) and Kroger (KR, news, msgs) have each lost 19% of their value.

What's kept Whole Foods healthy? "We have shown that we can adjust if we have to," co-president and COO A.C. Gallo said.

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Weathering the recession © Photographers Choice/SuperStock
Weathering the recession
Business is down at Whole Foods stores, but the company has responded by lowering its costs and stressing value to its customers, says analyst Simeon Gutman of Canaccord Adams (May 14)
One adjustment was to slow the pace of expansion. The company now expects to open half the stores it had planned for 2009. "We are moving a little more slowly," says Whole Foods spokeswoman Libba Letton. "We're (also) opening smaller stores."

The Paramus store was one of just three Whole Foods outlets opened in the second quarter. And the sprawling store may be one of the last of its kind as Whole Foods shifts from the megamart model and focuses on less labor-intensive stores, like one recently opened in Capitola, Calif., which, at 23,000 square feet, is half the size of most new Whole Foods outlets and about one-third the size of the Paramus store.

Continued: 'Everyone was trying to save money'

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