Wal-Mart vs. Whole Foods

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Wal-Mart President and Chief Executive Mike Duke specifically addressed the issue in a statement on May 14: "When economic conditions improve, we believe customers who shop at Wal-Mart today will stay with us because of the business improvements we're making and continue to make."

Leaving Behind "Whole Paycheck"

Morgan Keegan's Lawrence says Wal-Mart has improved store conditions that used to irk customers—for example, by managing inventory better and keeping stores cleaner. Plus, "people have experienced they can save money there," he says. Such savings can be "habit-forming."

At Whole Foods, executives are trying to convince customers that the chain's nickname shouldn't be "Whole Paycheck." "While it hasn't been an overnight shift, we believe we are starting to change the dialogue about our prices and hopefully the perception as well," Chairman and Chief Executive John Mackey told analysts.

Stores are putting more emphasis on sale items. "People are willing to buy provided they feel like they are getting really good value," said Co-President A.C. Gallo.

More Cost-Cutting Expected

The strategy is getting a few positive reviews. "Customers are responding to lower prices while service and experience are not suffering," said Canaccord Adams analyst Simeon Gutman in a May 14 note.

Whole Foods shares have more than doubled in 2009, as investors dismissed earlier fears about the future of the company. But, Gutman warned, future gains for the stock will need a real improvement in the economy. Investors are already expecting further cost-cutting. While improvements in Whole Foods' "price perception" could help, the company needs a strong revival in sales driven by an economic recovery.

It's a tale of two grocers, one high-end and one down-market. Whole Foods would probably benefit most from a strong economic recovery, while Wal-Mart holds a comparative advantage in tough times. But, with the economic situation highly uncertain, both companies—and their investors—are bracing themselves for either possibility.

Steverman is a reporter for BusinessWeek's Investing channel.

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