Tuesday, May 21, 2024

The problem with Whole Foods’ plans for a new grocery chain

A customer builds a salad at the new Whole Foods Market store in downtown Los Angeles.  The year ahead could be a pivotal one for Whole Foods Market. The grocery chain is facing steep competition, and its reputation for being a wallet-buster isn’t helping.

Which likely explains the motivation behind two major efforts the company has announced to better compete in the increasingly crowded organic grocery wars. In November, it outlined plans to gin up profitable growth at existing stores by boosting its prepared foods business and offering more discounts, among other measures. And, in its biggest gamble, it is launching a new chain this year called 365 by Whole Foods Market that it hopes will appeal particularly to millennials and budget-conscious shoppers.

The twin strategies raise questions about how Whole Foods will prevent one brand of stores from cannibalizing the business of the other. And on Wednesday, the company’s latest quarterly financial results underscored what a big challenge Whole Foods faces as it tries to hang onto the organics crown.

[The popularity of organics is both good and bad news for Whole Foods]

Whole Foods reported that total sales in the most recent quarter rose 3 percent. However, sales fell 1.8 percent at stores open more than a year, and the company said that was due to both a decline in the number of transactions and a decrease in “basket size,” or in how much money was spent per transaction.

Executives said on a conference call with investors that some of the decline was because the grocer has gotten more aggressive with promotions, offering deals such as a three-day sale on supplements. Those promotions are not going away anytime soon. Whole Foods announced Wednesday it was launching digital coupons within its mobile app, and executives said they were continuing to find places to slash prices outside of temporary promotions.

“There are certain very important categories that we know that we need to be competitive on an everyday basis on and so we are working to systemically identify those and move pricing on those to make sure we’re competitive,” said A.C. Gallo, the company’s president, on the investor call.

The boost in overall sales could be attributed largely to the fact that the grocer operates more stores than it once did. But that expansion appears to be slowing. Whole Foods added 38 stores in 2016, but has plans to add about 30 in 2016, including the new 365 outposts.  In other words, that means the pressure is really going to be on for the chain to figure out how to deliver more sales from its existing stores, and from digital avenues such as its partnership with Instacart.

The renewed emphasis on price-cutting comes as Walmart, Target, Kroger and others have undercut Whole Foods with their own organics offerings. But the discount strategy is somewhat perplexing when you consider what the new 365 chain is supposed to be: Executives have billed it as a smaller store that allows the company to offer a more convenient experience and reach less affluent shoppers. If both concepts are going to be pushing hard to communicate value, are they really going to appeal to different types of customers or different shopping occasions?

That’s not an idle concern. For the third straight quarter, Whole Foods said cannibalization among existing stores contributed to a decline in sales at stores open more than a year. If 365 isn’t differentiated enough, the risk for that could only grow.

[Why supermarkets are in trouble]

Co-chief executive John Mackey sought to draw distinctions between the two chains Wednesday, pledging that traditional Whole Foods stores would be more experiential, offer more prepared foods and be a destination for innovation. On the other hand, 365 would be more convenience-oriented and offer a tightly-edited assortment of goods.

And yet, go to the website for 365 by Whole Foods, and the lines seem less clear. The website says executives are looking for partner businesses whose services or products can be incorporated in the new chain, saying: “Record shops? Tattoo parlors? Maybe!”

If 365 were to include something as decidedly experiential as getting inked, it’s hard to see how that is much different than the vibe executives want to cultivate in Whole Foods.

Still, by Mackey’s description, the relationship between Whole Foods Market and 365 is starting to sound a lot like the relationship between Walmart and its recently-folded Walmart Express concept. Walmart launched Express to help it better compete for fill-in trips and to penetrate markets and shopping centers where it wouldn’t make sense to install one of its massive supercenters. But ultimately, the concept was axed because it didn’t gain traction.

Perhaps the Whole Foods story will be different: After all, there are surely major differences between Whole Foods and Walmart when it comes to the composition and size of their existing store fleets and in the kind of shopper they are trying to court.

Whole Foods can point to other signs for optimism. It is slashing operating costs successfully, thanks in part to new labor scheduling program. And it said Christmas and Thanksgiving week results were “outstanding,” with more than a quarter of their stores pulling down over $1 million in sales during the week of each of those holidays.

“We see customers do trade up and see that they trust us with their family meal,” said David Lannon, executive vice president of operations, on the investor call.

Still, investors appear to have some doubts. Shares of Whole Foods are down 45 percent over the last year.

Sarah Halzack is The Washington Post's national retail reporter. She has previously covered the local job market and the business of talent and hiring. She has also served as a Web producer for business and economic news.


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