Whole Foods — sometimes mocked as Whole Paycheck for its traditional higher prices — appears to have found that, especially in inflationary times, there is a limit on how much people will pay. The Wall Street Journal recently reported that the Amazon-owned company, in a virtual summit, told its vendors that it wanted to reduce prices to consumers as suppliers’ own costs begin to come down.
Given that, as the Journal noted, last year Q4 foot traffic to Whole Foods stores was down 8% year over year, it could be that the company needs to build its customer base. Trepp did an analysis on the loan performance of properties with Whole Foods as a tenant. The firm found some interesting variations based on different overall tenant mixes.
Trepp counts a total of 42 loans across 43 properties with Whole Foods as a tenant at the moment for a total of $1.7 billion. The most frequent co-tenant was one of the brands (T.J. Maxx, Marshalls, or HomeGoods) of discounter T.J. Maxx.
For the comparison, there was a total of 23 properties, which given the footprint of both chains seems like a small sampling that might not be representative across all examples. Trepp calculated weighted averages of occupancy ratios, net cash flow debt service coverage ratios, and net cash flow debt yield.
“As seen in this table, properties with TJX as a Whole Foods co-tenant have stronger performance metrics, with a weighted average DSCR (NCF) of 2.75x, occupancy of 98%, and debt yield (NCF) of 14.2%,” the report said. “Properties without TJX as a Whole Foods co-tenant on the other hand show slightly weaker performance metrics, with a weighted average DSCR (NCF) of 1.63x, occupancy of 90%, and debt yield (NCF) of 9.17%.”
The firm’s take is that the overperformance of Whole Foods with a T.J. Maxx property as a co-tenant could “suggest the impact of consumers increasingly favoring cheaper options due to the impact of inflation on their budgets.”
Trepp dug into one example: Legacy Place in Dedham, Massachusetts. There’s been a 14% drop in foot traffic between 2019 and 2021 and a higher-end tenant mix, including Whole Foods, Anthropologie, lululemon, Urban Outfitters, L.L. Bean, Kings, Caffé Nero, and West Elm. There’s also been “high tenant turnover.”
A $109 million loan on Legacy Place comes due in four months. When the loan was interest-only, DSCR (NCF) was about 2.0x. It then dropped to 1.60x when the loan converted to amortizing. In Q3 of 2022, DSCR (NCF) was 1.41x. “A back-of-the-envelope refinance analysis shows that the DSCR could drop below 1.25x depending on the terms of the new loan and how the updated financials look,” Trepp noted.
All this should raise the question of pricing and foot traffic for other retailers. There is a theory in retail that a certain amount of luxury goods will sell to people who aren’t in the upper quartile of income because it offers a chance to psychologically partake of an aspirational lifestyle. Perhaps the traffic loss is people who fit into that category. Or it could be that even a more natural targeting is getting edgy over prices.