WHOLE FOODS MINI BASE CASE

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WHOLE FOODS MINI BASE CASE
Whole Foods Market Inc. is a publicly-held American supermarket chain specializing in natural and organic food that opened on September 20, 1980, in Austin, Texas. As of September 2015, the company had 91,000 employees and over 400 supermarkets in
the United States, Canada, and the United Kingdom

Whole Foods founders John Mackey and Walter Robb are co-CEOs, with John Elstrott as chairman. Whole Foods Market became a Fortune 500 company in March 2005 and was the 30th largest retailer in the U.S. based on 2014 revenue

The company’s stores are supported by its Austin Texas headquarters and its main produce procurement office in Watsonville, California as well as regional offices, distribution centers, bake-house facilities, commissary kitchens, seafood-processing facilities, regional meat and
produce procurement centers, and a specialty coffee and tea procurement and roasting operation. The company’s product selection includes grocery, meat, seafood, bakery, prepared foods and catering, coffee, tea, beer, wine, cheese, nutritional supplements,
vitamins, body care, and lifestyle products including books, pet products, and household products. The company’s in-store brands, 365 and 365 Organic Everyday Day Value, account for approximately half of its inventory.

In the face of steep competition from major chains such as Walmart, Target and Kroger as well as specialty grocers like Trader Joes and Sprouts, WF suffered three successive quarters of disappointing earnings in 2015, and came under fire for overcharging customers
in some areas. The company’s stock price dropped 46% year over year, and in September WF announced that it would cut 1.6% of its workforce. Two months later, the CEOs detailed a nine-point plan to reduce expenses, promote lower prices, boost the prepared food
business, expand digital reach and slow store growth.

Earlier in 2015, Whole Foods had presented a strategy for launching a new chain, to be called 365 by Whole Foods Market (“365” stores) in 2016 that would appeal particularly to millennials and budget-conscious shoppers. The first “365” stores are set to be located in various metropolitan settings, including the Pacific Northwest, Southern California and southeast Texas. While the chosen locales will contain residents of varying education and income levels, they will have in common substantial concentrations of consumers who are, in
the words of John Mackey, Whole Foods’ co-founder and co-chief executive, “hip, cool and tech-oriented”. These so-called “hipsters” are typically younger consumers who want highquality, organic foods but can’t necessarily afford Whole Foods’ prices. In announcing the
creation of the “365” concept in 2015, Mackey stated that, along with lower prices, the new chain would feature a modern vibe and edgier aesthetic.

The company’s plans and strategies have raised questions about how Whole Foods will prevent one brand of stores from cannibalizing the business of the other. According to a recent (2/12/16) report in The Washington Post: WF’s latest quarterly financial results underscored what a big challenge Whole Foods faces as it tries to hang onto the organics crown. 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 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.

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.

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