How the notoriously pricey Whole Foods is surviving the recession.

If you're looking for green shoots, stop by the Whole Foods (WFMI) in Paramus, N.J. Wander in past the multihued display of locally grown flowers into the oasis of produce for which the upscale grocer is known: twenty-some 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 and on. Measuring 63,000 square feet, it's one of the biggest Whole Foods ever, and it opened up at a terrible time—when the downturn was still in full swing in March. Naysayers at the time predicted that the lavish store would elicit an underwhelming response from consumers, but thus far they've been proved wrong. The store has exceeded sales expectations and, in the words of CEO John Mackey, its customer volume has been "phenomenal."

If Whole Foods were perishable, it probably would have expired this past year. But instead, it has done surprisingly well, holding its own as a high-end food spot in what's now been a yearlong assault on any store considered expensive. While its most recent earnings report wasn't dazzling—revenue compared with last year's was flat—it wasn't dismal, either. And many analysts are predicting increased sales to be announced in the earnings report next week. "We haven't been hearing that anywhere else in the luxury retail space," says Jefferies & Co. supermarket analyst Scott Mushkin. Such optimism has fueled the grocer's soaring stock price, which is up 156 percent so far this year. In the same period, Safeway (SWY) and Kroger (KR) have each fallen more than 20 percent.

So 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 in May. The ever-expanding grocer has markedly scaled back and is opening only half the stores it had planned for 2009. "We are moving a little more slowly," says Whole Foods spokeswoman Libba Letton. "We put the brakes on some of our expansion plans and we're opening smaller stores," she says. The Paramus store was one of only three new Whole Foods opened in the second quarter. And, as the staff there will tell you, the sprawling store may be one of the last of its kind. Whole Foods is shifting away from the mega-mart model and focusing instead on opening smaller, less labor-intensive stores, like the new store that recently opened in Capitola, Calif.—at 23,000 square feet, it's half the size of most new Whole Foods.

Yet, from the very onset of the recession, Whole Foods had to do more than just trim expenses; it needed to prevent an exodus. As of last July, one-fifth of shoppers surveyed by research firm Retail Forward said that they had already switched grocery stores to save money. Whole Foods' reputation as an expensive place to shop—it's been nicknamed "Whole Paycheck"—made it especially vulnerable to losing its customers. Instead of hunkering down and holding out for the economy to recover, Whole Foods began to experiment with ways of convincing America that it was, in fact, an affordable place to shop, without actually slashing prices storewide.

"Of course, we realized that everyone was trying to save money," Letton says. To make sure those budget-conscious customers didn't write off Whole Foods, the retailer ramped up the marketing of its promotions through newsletters, coupons, and the Whole Foods Web site. "About a year ago, we launched a campaign to make our customers aware of the value that there was in the stores," she says. The "values" Whole Foods has been hawking—unlike the "everyday low prices" of a discount retailer like Wal-Mart (WMT)—are mostly sales on items that vary from week to week. "We would rather invest in a strong promotion where people are clearly getting a value than, say, just trying to drop prices, everyday price here or there," Gallo said in the May conference call.

In the same call, Co-President Walter Robb pointed out that, according to tracking done by research firm Nielsen, the negative perception about Whole Foods pricing, had dropped from 20 percent to 10 percent over the past few months. "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," he said. Though analysts doubted Whole Foods' ability to flip its image at first, many, like Mushkin, are impressed with the results. "It was actually a  smart move to emphasize value in the store," he says. "It kept their customers coming in, even if those customers were trading down once inside the store."