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.
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