Whole Foods Is Getting Killed by Aldi. Is a Millennial Grocery Chain the Fix?

Come to 365 for the cage-free eggs, stay for the TeaBot.

When the first 365 by Whole Foods Market opened near me in Los Angeles, I went immediately, curious to see how millennials shop for food. Do they just take photos of it? Do they look for items with their own names on them? Do they even buy groceries? Don’t they just smash buttons on their iPhones until a cooked meal appears at their door? Market researcher Mintel reported last year that 40 percent of them don’t even eat cereal because it requires cleaning up afterward.

The 365 concept is Whole Foods’ response to three quarters of sales declines at stores open at least a year. The parent store’s focus on organic and local has been copied elsewhere, cheaper. It’s getting killed by Trader Joe’s and Aldi, because they offer lower prices; smaller, easy-to-navigate stores; and an ever-rotating selection of inventive items covered in chocolate or Sriracha. Whole Foods is a victim of its own success: It got shoppers to buy fresh groceries instead of stuffing their freezers. But that meant they were going to the store more often, so they wanted to get out faster, without having to choose among 100 olive oils. And if you’re going to get them to drive somewhere, the destination has to feel like an “experience” they can’t get online. Instacart and AmazonFresh have the competitive advantage there, among folks who want to stay on the couch, snacking on something other than cereal.

Whole Foods 360 exterior
Photographer: Julian Berman for Bloomberg Businessweek

Whole Foods has signed 19 leases for 365 stores across the country. It planted the first in the hipster-est section of L.A., Silver Lake, known for having a coffee shop/dog adoption agency and a stop sign on which someone’s added “Hammer Time” in graffiti. To get the perspective of someone in 365’s target audience, I brought along my 27-year-old friend Igor Hiller; his millennial bona fides include doing improv at Upright Citizens Brigade and having car insurance paid by his mother.

Whole Foods 360 TeaBot
Photographer: Julian Berman for Bloomberg Businessweek

We were greeted outside with a sign that said “Free Air Guitars.” Walking in, we found a clean, well-lit, and colorful store, with exposed beams and ducts. There were no employees in sight, as if to say, “Shop, don’t shop, totally up to you, dude.” (What they’re actually saying is: fewer employees, less overhead, smaller costs to pass on.) Igor liked it immediately. He liked that it was a third smaller than the Whole Foods he spent hours roaming as a screenwriter’s assistant; that items were cheaper, closer to what he paid at Trader Joe’s; that there were only a few choices per product; and that the salad bar was priced by the container, not the pound, making him reconsider his entire belief system about avoiding items with a lot of water weight. He got way too excited that prices were listed on digital tablets instead of on chalkboards with photos of farmers—he gets it, farmers grow food, whatever. He didn’t mind the absence of a butcher or a cheesemonger, or that the wine expert was replaced by a screen where he could search reviews of pinot noirs.

We stopped at the TeaBot, where we chose personalized blends, caffeine levels, and temperatures. Mine was based on a mixture called Chai These Nuts. Then we went over to a mural that said “Silver Kale.” Igor made me pose with him in front of it while another shopper took our photo. “It’s very Instagrammable,” Igor said. “That’s why they put that in.” He didn’t like the anagram, though. (Get it? Silver Lake, Silver Kale?) “I hate any advertisement that pretends to know me. You’re not my friend. You’re a company. Don’t try to have an inside joke with me.”

There seemed to be fewer shoppers at 365 who were Igor’s age than there were fortysomethings like me. Five minutes after we got there, we ran into my Generation X friend Bruce Gilbert, a music supervisor for shows such as Transparent and Orange Is the New Black, wearing a Joy Division T-shirt with lead singer Ian Curtis replaced by Joey Tribbiani from Friends. Sipping a cortado from the Allegro cafe—it also serves beer and wine—he told us he’d been there four times in the previous three days, partly to check out the MILF scene. “I was here at 10 o’clock last night,” he said, which was apparently peak time. He hadn’t shopped for groceries yet.

Whole Foods 360 interior
Photographer: Julian Berman for Bloomberg Businessweek

That’s cool with 365’s president, the very chill Gen Xer Jeff Turnas, who’s been with Whole Foods for 21 years. “We didn’t set out to say we just want millennials in our store,” he says. “We set out to create a fun, new, fresh way to shop with amazing prices.” Turnas spent the past few years in Europe and, with 365, is trying to copy the vibe that makes supermarkets there more experiential. He obsessed about the store’s music; the playlist, which you can subscribe to on Spotify (current followers: 34), includes such songs as Odessa by Caribou and How Did I Get Here by Odesza. (The website 365 team members use for job information is called Backstage Pass; a “You Rocked It” program lets them award points to co-workers that can be redeemed for gift cards.) And Igor was right: Turnas added the mural after the stylish company that provides 365’s employee uniforms told him the store needed an Instagram attraction. “I liked ‘Silver Save’ more than ‘Silver Kale,’ ” he says, preferring a message that riffed on prices. “But we let the artist do his thing.”

Whole Foods 360 Mural
Photographer: Julian Berman for Bloomberg Businessweek

Turnas is also cool with the store’s fake Instagram account. Created by 27-year-old music video director Jack Wagner, it gained attention for fabricating a story that singer Kim Gordon had been bitten by a coyote in the parking lot. It also posted a fake apology from a barista for inserting indie rock cassette tapes into boxes of organic cereal. Wagner started the account after walking to 365 every morning to get a breakfast burrito and iced coffee. He, too, hasn’t yet purchased any groceries. “We drank beers,” Wagner says. “We treated it like a bar and pregamed there before a Memorial Day party.” Turnas says Wagner’s account might have bothered the executives who run Whole Foods, but not the folks at 365. “I’m not sure it’s negative,” Turnas says. He figures it’s an honor that someone cared enough to mock the place. Still, supermarket analyst Phil Lempert, the food trends editor for NBC’s Today show, says 365 is “trying way too hard to be hip.”

It’s difficult enough to succeed even when you’re not. Tesco, the hugely successful British grocer, started a U.S. chain called Fresh & Easy in 2007 and wound up loaning Ron Burkle $234 million in 2013 to assume its liabilities; Burkle closed all 150 stores last October. Fresh & Easy was intentionally unhip. Vegetables and fruits were wrapped in cellophane—it was supposed to make them look convenient and safe, but they were seen instead as gross. The self-checkout lines were confusing. The lack of Sriracha-and-chocolate-influenced products bored customers.

Aldi, however, has had great success as a no-frills supermarket. (In a not-very-millennial move, Aldi, a private company, declined to share its financials.) It’s all about speed and price, not Spotify playlists. Aldi is as cheap as a grocery can be, and when I visited one alone in Arcadia, about 20 minutes outside L.A., I could see why. You put a quarter in the shopping cart dispenser to rent one, getting your money back when you return it, so no worker has to play fetch. There are no paper or plastic bags—it’s BYOB—and no one to put what you buy into them. Items are displayed Costco-style, in the cases they arrived in, and about 90 percent are house brands. Instead of 30 aisles, there are only five, but there’s room for constantly changing “Aldi Finds” such as chocolate-covered pistachios and Sriracha kettle chips. “The customer doesn’t have to walk in the store and have so many options and take time to decide. We’ve done that work for them,” says Liz Ruggles, Aldi’s marketing director. There are 1,500 Aldi stores in the U.S., and the company says it plans to open 500 more by the end of 2017.

More competition is coming. Kroger, the largest supermarket chain in the country, is working on its own cooler version of itself: In February it opened a Main & Vine in Gig Harbor, Wash., exactly the kind of city you want to audition in. Produce, which makes up half the store’s inventory, is in the interior aisles, not on the perimeter, an acknowledgment that people are putting fresh ingredients center stage in their meal planning. A chef cooks at a table in the front of the store, and you can buy the ingredients to re-create his dishes, such as Mexican-style corn; bacon, Brie, and apple baguette sandwiches; and spiced cherry grilled chicken thighs. There are regular wine, beer, and cheese tastings, as well as a bar and cafe. Millennials “want to hang out in a cool environment” and feel like foodies, says Mike Donnelly, Kroger’s executive vice president for merchandising, who’s in charge of Main & Vine. Up to a point. They don’t want bento boxes, Donnelly learned. People thought they were too weird.

Whole Foods 360
Photographer: Julian Berman for Bloomberg Businessweek

In its first week, at least, 365 had this crucial hangout thing down. When we went, Igor suggested we go to a tablet and order bowls of quinoa, Brussels sprouts, and barbacoa. After our names appeared on a giant screen and we picked up our meals (no human interaction necessary), we ate at an indoor picnic table next to my cart, which was filled with two chimichurri-marinated chicken breasts ($5), two prepacked Dover sole filets ($5), Beast burgers ($4.39), and Justin’s honey peanut butter ($5). I’ll be back. The figs were really cheap. For the record, Igor didn’t buy any groceries.

(Removes incorrect ownership information in the second paragraph.)

Subscribe to Businessweek