By Annie Gasparro And Jesse Newman
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 nonfood 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."
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 Food's 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.
Write to Annie Gasparro at annie.gasparro@wsj.com and Jesse
Newman at jesse.newman@wsj.com
Access Investor Kit for Nordstrom, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6556641008
Access Investor Kit for Southwest Airlines Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8447411088
Access Investor Kit for Whole Foods Market, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9668371068
Subscribe to WSJ: http://online.wsj.com?mod=djnwires