Whole Foods Aims for Younger Shoppers With New Stores
Grocery chain gears up chain of small-scale stores offering lower prices than its namesake outlets
By Annie Gasparro and Jesse Newman in the Wall Street Journal
Consumers looking for natural-and-organic groceries will soon have a choice: whether to shop at Whole Foods...or the other Whole Foods.
Austin, Texas-based Whole Foods Market Inc. is gearing up to start a sister chain of small-scale stores that offer organic and natural foods at lower prices than its namesake outlets, a bold gambit to juice the grocery chain’s sales growth.
In announcing the new format, to be unveiled this summer, executives said it would be “hip,” “cool,” and “high-tech,” with stores that are smaller and less costly to operate than its traditional outlets, which average 38,000 square feet, the equivalent of about 13.5 tennis courts.
If it succeeds, Whole Foods could win over younger, cost-conscious consumers now put off by its array of pricey items, analysts said on Thursday. Its new—and as yet unnamed—chain would have to draw in those customers, they said, but ensure that it doesn’t do so at the expense of its more than 400 namesake stores.
“We’ve never seen a food retailer operate an entirely new format successfully, especially one that is so different,” said Barclays analyst Meredith Adler.
The sister-chain plan comes after years of efforts by the pioneering retailer to combat intensifying competition, from smaller imitators and big chains including Wal-Mart Stores Inc. and Kroger Co. that have added natural-and-organic offerings. Whole Foods reported sales of $14.19 billion in its last fiscal year, up 9.8% from its fiscal 2013 revenue.
Recent Whole Foods filings with the U.S. Patent and Trademark Office offer possible clues about the new chain’s name, said Charles Grom, analyst at brokerage Sterne Agee. Among the names Whole Foods has filed to trademark since last week: Dailyshop, Clever Egg, Small Batch, and Greenlife.
While Whole Foods wields clout among foodies with time and money for grocery shopping, many shoppers—especially younger and slightly less wealthy consumers—still think of the brand by its unofficial nickname, “Whole Paycheck.” The company has tried for over two years to shed that through price reductions and increased private-label assortment, but executives acknowledged that it will never be able to offer the kind of value this other type of customer wants.
“That brand can bend a little bit, but we can’t break it,” Whole Foods’ co-Chief Executive Walter Robb said on a conference call with investors on Wednesday.
“They realized they were stuck with what the Whole Foods brand stands for: premium prices and premium products. They could only go so far with that,” said S&P Capital IQ equity analyst Joseph Agnese. “They needed a new image to attract a new kind of consumer.”
However, Mr. Agnese said, “usually you leverage the existing brand name when you come out with a new one. Instead, they are trying to get away from it.”
Other non-food retailers that have created spin offs have typically leveraged their existing brands, analysts say, pointing to Nordstrom Inc. ’s Nordstrom Rack stores and Saks Fifth Avenue’s Saks Off 5th.
In the 1990s and 2000s, the U.S. airline industry spawned smaller offshoots to battle new competition from low-cost, low-fare carriers such as Southwest Airlines Co. United Airlines had Shuttle by United, dismantled that, and then formed Ted, while Delta Air Lines started Song. None of these low-fare units worked out, because they had similar costs for things like labor and airport fees to their bigger, regular-fare parents.
Analysts say Whole Foods’ newer format could be about a third the size of its traditional stores, which will help keep costs down. That would put it more in line with rival specialty grocers like Sprouts Farmers Market Inc. and Trader Joe’s, which offer less product assortment and can be half Whole Foods’s typical square footage.
“Consumers are looking for something more intimate and curated where they can shop quickly but that still has the right assortment” of products, said Bruce Cohen, senior partner at Kurt Salmon, a management consulting firm. “Consumers are saying I don’t need marshmallows next to my organic pumpkin seed granola.”
‘Managing two banners for two sets of consumers…is a hard thing to do.’
—Jim Hertel, retail consultant
Whole Foods said additional technology will lower labor costs and attract tech-savvy millennial shoppers. The chain has been quietly testing an electronic shelf scale that alerts employees when a product is low or out of stock. It also is trying out “smart” grocery carts that help customers navigate the store and scan purchases along the way.
Analysts said Whole Foods has ample opportunities to acquire leases at abandoned sites that grocery chains or other retailers have left. Promising locations include Phoenix and northeastern cities in Pennsylvania, New York and New Jersey, said Burt Flickinger, managing director with Strategic Resource Group, a retail and consumer goods consulting firm.
“Whole Foods needs to put up a three front war,” he said, with a main focus in the northeast, a concerted effort to take market share from Trader Joe’s in California and other western states, and another in the central U.S. to cut off expansion of rival grocers like Sprouts.
Some analysts see Whole Foods’ decision to create a separate team to run its stores as a promising sign. Often, when retailers pull executives from original stores, they struggle to be committed to the new endeavor.
If Whole Foods’ new outlets hit millennials’ sweet spot, it could pave the way for growth beyond its current target of 1,200 traditional stores in the U.S. and could boost same-store sales from its recent 2% to 4% growth toward historical levels of between 7% and 8%.
Still, the risk is that the new stores could be a distraction that undermines a brand Whole Foods has worked for decades to build—or a stepchild that doesn’t get the necessary attention to succeed.
Willard Bishop retail consultant Jim Hertel says mainstream grocers traditionally have failed when they created a separate discount store banner., usually opting to acquire them instead
“The cautionary tale is, managing two banners for two sets of consumers within one organization is a hard thing to do,” he said.