Near the end of next month, the iconic organic-food grocer Whole Foods Market, Inc. (WFM) will officially tiptoe into uncharted waters by opening its first venue that targets a more value-oriented consumer.
The initial Whole Foods stores were a hit right off the bat when the first one opened in 1980, and the rise of healthier eating and healthier lifestyles propelled the company — and WFM stock — forward between the 1990s and the 2010s.
With the growth of its success, though, came the outsized growth of its prices. And, once the shoppers who had been jokingly calling the company “Whole Paycheck” (in reference to what it cost to shop there) started to realize mainstream grocers like The Kroger Co (KR) also sold plenty of organic food at better prices, Whole Foods hit a wall.
The solution? Fight fire with fire, by creating a venue that sells more affordable food.
Thus, Whole Foods 365 was conceptualized last year as a means of bringing lower-cost goods to the masses. The company’s own “365 Everyday Value” brand will be prominently featured in the new store concept, and sold at prices more akin to what a shopper might find at a Kroger or Wal-Mart Stores, Inc. (WMT) that offer groceries.
There’s just one issue with the idea that should concern current or would-be owners of WFM stock:
It won’t work.
Whole Foods Is Missing the Point
Kudos to Whole Foods co-CEOs John Mackey and Walter Robb for doing something different when an old business model starts to fail; some CEOs would have tried harder to do more of the same that wasn’t working.
Of all the ways to address the paradigm shift, however, this new concept is apt to be the least meaningful one.
To be fair, nobody knows exactly what the yet-to-be-unveiled Whole Foods 365 will look and feel like. We do know, however, that more affordable 365 Everyday Value-labeled goods will be featured, and we also know these smaller-footprint stores will almost have to carry a smaller number of items; the one opening in Silver Lake (Los Angeles) will only be a 28,000-square-foot site.
We also know that each store will parcel out some square footage to local food entrepreneurs to market their particular foods, or even non-food items. Or, these vendors may end up opening mini-restaurants within the confines of the grocery store.
As Whole Foods 365 President Jeff Turnas explains, the point of the new look and feel isn’t just to get customers in the door, but to encourage them to stay a while. The longer they stay, the more they buy.
It all sounds brilliant … on the surface. Ultimately though, it’s a recipe for disaster.
In simplest terms, KR and the grocery arm of WMT are successful (profitable) because they do an enormous amount of volume at their stores, and each of their stores has a massive footprint. The typical grocery-only Kroger takes up 61,000 square feet of space, while the so-called super-Krogers (which sell a lot of non-food items) typically occupy more than twice that space. The average Walmart store takes up 180,000 square feet, and generally speaking, locales that offer groceries allocate about a third of that square footage to food items.
The big “so what?” is, Kroger and Walmart’s grocery efforts are viable because they offer nearly everything, and have a lot of it because they have the room for to store it. The new Whole Foods 365 still won’t be able to compete with the bigger players on selection, which may be just as important as price to many consumers.
At the same time, it remains to be seen how much price-driven “value” Whole Foods 365 can actually offer that the existing Whole Foods stores can’t.
Even lower-cost organic food can cost more than its non-organic alternatives, and on a pound-for-pound basis, Kroger can still afford to offer better prices on organics due to its sheer scale.
Indeed, Whole Foods may find that its biggest concern right now isn’t even competing with the likes of Kroger, but rather, the rise of organic food delivery services such as Door to Door Organics and Farmbox Direct. Outfits like that negate the need for any retail middleman.
Bottom Line for WFM Stock
It’s admittedly a creative and ambitious idea. But one thing that the market and consumers have made clear is companies that strive to be all things to all people tend to be attractive to none. It’s going to be difficult for Whole Foods Markets to command premium prices for its goods when just down the street a Whole Foods 365 store is preaching a value-oriented sermon.
Likewise, it’s going to be tough for Whole Foods 365 to compete with Kroger and its large-scale peers on price when those other players also have a much larger selection of goods at similar prices.
If WFM stock is every going to be a truly compelling investment again, it’s going to have to decide to be one thing, and go all-in with that effort … even if that means shrinking itself to match the current demand from organic die-hards who would never even step foot in a Kroger.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.