Whole Foods Is Ready to Convince You That It Can Do Cheaperby
Smaller stores will offer cheaper private-label groceries
Retailer seeks to ignite growth by drawing younger shoppers
Whole Foods Market Inc., stung for years by snarky comments about its prices, is about to find out if it can dispel the notion that its name should really be “Whole Paycheck.”
Next week, the company will open the first of several smaller stores that will specialize in cheaper private-label groceries. It’s seeking to demonstrate that Whole Foods isn’t just for foodies willing to pay a premium for grass-fed beef and organic kale.
Called 365 by Whole Foods Market, the new concept is designed to help the retailer compete in an era when the organic food it first brought to the masses is now widely available at convenience stores and supermarkets. Company officials are trying to ignite growth after same-store sales fell 3 percent in the three months through April 10, the third straight quarterly decline and the worst performance since 2009.
“They have to do this,” said Allen Adamson, the former North American chairman of the branding firm Landor Associates. “They’ve played out their hand in trying to grow the Whole Foods concept.”
The first 365 store will open in the hip Silver Lake section of Los Angeles on May 25. The company has signed 19 leases for the new stores, with locations in the Portland and Seattle areas slated to open in the next few months. The 365 units will be about half the size of a typical Whole Foods market and offer more prepared food and fewer items -- about a third of what’s found in a standard store.
“We want it to appeal to a wider audience,” said Jeff Turnas, a company veteran who is running 365. “This model allows us to compete with everybody in the market.”
Expanding from its original store in Austin, Texas, Whole Foods rose to prominence over the past 20 years by popularizing organic food, prepared meals and craft beer. The company helped cultivate the rising foodie culture in the U.S. while benefiting from the increased interest in healthy eating. Its sales and share price rose in tandem for the better part of a decade.
But with that success came stiff competition. Conventional retailers like Kroger and Wal-Mart have expanded their organic and natural offerings, undercutting Whole Foods on price. Same-store sales growth slowed to 2.5 percent in 2015 and the shares slid 34 percent, the second-straight annual decline after a five-year stretch when Whole Foods stock gained an average of 74 percent a year.
Analysts aren’t convinced the new concept will stabilize the company. For one, they warn that the cheaper 365 concept may cannibalize sales from existing Whole Foods markets. Scott Mushkin, an analyst at Wolfe Research, recently called the 365 rollout a “sign of the company’s search for answers.”
“The company has lowered prices, remodeled stores and launched a national advertising campaign all to no avail as sales continue to slip,” Mushkin wrote.
Of course, this isn’t the first time a high-end retailer has rolled out a lower-priced sister chain to draw in more budget-minded consumers. Nordstrom, the premium department store, had success when it started Nordstrom Rack, as did Gap Inc. with Old Navy. The Nordstrom model appears to be what Whole Foods is following, according to Michelle Grant, a grocery analyst at Euromonitor International.
The new venture will provide the company with a chance to showcase its 365 private label while also taking advantage of the fact that grocery shoppers are increasingly agnostic about where they buy food. More and more, consumers will visit two or three grocery stores on a regular basis, a departure from the days when loading up at the local supermarket once a week was the norm, Grant said. And the lower prices at 365 should appeal to millennials who respect the Whole Foods brand but can’t afford to shop there.
“For a consumer who wants to eat healthy, on a budget, this will have a really strong appeal,” Grant said.
Whole Foods may never be able to fully shed its reputation. Stories about hefty prices for water infused with asparagus or prepeeled oranges will enforce the notion that the store is for wealthier shoppers, and advertising touting lower prices may not easily erase that image. With 365, though, the company is taking a step in the right direction, said Jim Hertel, a grocery industry analyst at Willard Bishop.
“No question, they’re trying to change that ‘Whole Paycheck’ buzz,” he said. “They glamorized organic food and succeeded in tapping into an upscale market, but they have a reputation for being expensive, and that’s been a challenge.”
If nothing else, the 365 launch has generated renewed interest in the Whole Foods brand. News stories and social-media postings have speculated about how the stores will look and where they’ll be located.
At a recent party to celebrate 365 in New York, guests included Whole Foods co-founder John Mackey, who is also co-chief executive officer, and New York Times publisher Arthur Sulzberger Jr. They chatted with celebrity chef David Chang over Fuku sliders and noshed on vegan chocolate cookies from By Chloe with Samantha Wasser, one of the founders of the trendy vegan eatery in the West Village.
Wasser and her partner, chef Chloe Coscarelli, are opening an outpost at the 365 store in Los Angeles as part of the “Friends of 365” program. Each of the new stores will have at least one outside business operating within, giving the company a way to customize each location, Turnas said.
“We’re all foodies, and 365 is about food,” he said. “Yes, it’s our value format, and we’re going to compete on price. But we’re going to compete while keeping Whole Foods quality.”