WHOLE FOODS MINI BASE CASE

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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