Whole Foods kicks off its new fiscal year with a somewhat disappointing set of numbers.

While total sales grew, the 3 per cent increase is fairly anemic – especially when measured against the context of continued store expansion.

On an underlying basis, comparable sales fell by 1.8 per cent. This is a sequentially worse performance than the prior quarter and one that flags up the fact that Whole Foods continues to lose market share across many of its established locations.

Within the quarter, performance over the holidays appear to have been somewhat stronger with underlying sales since the start of November shrinking by a slightly more modest 1.6 per cent, versus the 2.1 per cent decline recorded in the first five weeks of the period. However, this respite appears to have been temporary with comparable sales in the first three weeks of the second quarter dropping by a rather unsatisfactory 2.8 per cent.

Whole Food’s inability to generate growth from existing outlets is, in part, a function of the increased competition in its space. The days when Whole Foods was unique in the type of products it sold are long since gone. Competition from rivals like Sprouts and from mainstream players like Kroger, which have pushed more into fresh and organic, have partly undermined one of Whole Foods USPs. Certainly, Whole Foods still has an advantage in terms of perceptions of the quality of its produce and in the breadth of its assortment of ethical products, but it needs to balance this with a superior overall customer experience if it is to compete more effectively.

Unfortunately, within some of Whole Foods older markets, including key stores in urban centers like New York City, stores simply do not deliver on the experience front. Indeed, some outlets are fairly shabby with customer service best described as mediocre. As a high-end operator in the grocery space such underinvestment reflects badly on the Whole Foods brand and inevitably makes customers question why they are paying a premium. In financial terms, this translates to a drag on the speed of sales growth of these outlets.

The expansion of other players onto its turf has also exacerbated the perennial issue of price – or more specifically the fact that Whole Food is seen as being high priced. This is something the company has worked hard to counter: absorbing some of the increased supply costs to keep prices down, and creating a stronger opening price offering across many categories. However, this has been to the detriment of margins which, in the latest quarter declined by 83 basis points to 34 per cent on a gross basis.

The launch of digital coupons via its mobile app may help to generate slightly better value perceptions among consumers, but unless they can generate a sustained uplift in volume they will simply end up eroding profitability still further.

The combination of falling margins and slowing sales growth presents a long term danger to profitability. The whole purpose of reducing prices should be to attract and keep more customers, with a consequent uplift to the sales line. However, at present this dynamic is not working as effectively as it should.

This is one of the reasons why Whole Foods is rolling out its new 365 concept: to provide a more price focused offering which is especially attractive to younger millennial shoppers who buy into Whole Foods’ values but are less than enthusiastic about its prices. This format has potential but it does not lessen the necessity to improve productivity at existing stores. Doing this is key to the company’s long term health.

• Neil Saunders is CEO of retail analyst Conlumino.