Whole Foods doesn't have a pricing problem -- it has an identity crisis.
Shares in the natural and organic grocery chain have fallen 40 percent in the past year, as Wall Street has tried to persuade it to lower prices in hopes of jump-starting flagging sales. While that kind of strategy might have a place at Walmart, where people shop on fixed budgets and can quite literally only buy more when prices are lowered, it doesn't have the same effect on the shelves at Whole Foods.
Yes, Whole Foods is getting squeezed from all sides: Sprouts, Fresh Market, and other smaller natural foods companies that have long nipped at its heels now have real muscle. And big guys like Walmart and Kroger are stocking more aisles with fresh and organic food, giving shoppers fewer reasons to make a second trip to Whole Foods and more reference points for what organic items should cost. Recent allegations that Whole Foods overcharged its customers in New York certainly don't help.
But no one walks into a Whole Foods to hunt for the lowest prices. Artisanal cheeses and locally-sourced beefsteak tomatoes are just not price-elastic goods -- lower prices don't lead shoppers to buy more. You can see it in the company's latest sales results: Despite well-publicized efforts to cut prices and offer promotions like 25-cent cups of coffee, sales at established Whole Foods dropped by 0.2 percent in the quarter ended September 27, compared to an average 8 percent annual growth in those stores over the past 15 years. It's the first time sales at those stores dropped since 2009. And shopper's baskets haven't been growing.
On Wednesday, Whole Foods said it expected comparable sales to decline by 2 percent in the first quarter, adding that the outlook "reflects the possibility that comps could get marginally worse before they get better."
Anyone who watched J.C. Penney's spectacularly failed attempt to reinvent itself by getting rid of big discounts knows that Whole Foods isn't going to shrug off the 'Whole Paycheck' moniker anytime soon. And trying to do so is futile.
Whole Foods certainly shouldn't gouge its customers and needs to be competitive on pricing. To some extent, it already is: Whole Foods prices were about 5 percent higher than Fairway's prices on 204 similar, non-sale products, according to an August 2014 pricing study by Bloomberg Intelligence analyst Jennifer Bartashus.When comparing cornflakes, peanut butter and other private label products from Whole Foods to similar items at Trader Joe's in a July 2015 Bloomberg Intelligence pricing study, the basket of goods at Whole Foods was pricier by only 2.4 percent.
Instead of joining the organic-food price race to the bottom, Whole Foods is better off creating more value for its core, high-income customers with better products and store experiences. Cutting costs can help, but laying off customer-facing staff won't.
And it should leave the downmarket strategy to its new, lower-end line of "365" stores it plans to build in the coming years. Just as Nordstrom and other retailers have attracted new customers with off-price offshoots like Nordstrom Rack, Whole Foods can use "365" to tap the growing number of lower-income shoppers looking for healthier food. Given its cash stockpile, it could even snap up some of its pesky competitors.
What Whole Foods shouldn't do is pretend to be something it's not.
Update: An earlier version of this story incorrectly said that Whole Foods plans to build 1,200 "365" stores by 2021. The company has an eventual target of 1,200 Whole Foods Market stores, in addition to an unspecified number of future "365" stores.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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