Whole Foods beats analyst expectations, shares rise
Photo: Ralph Barrera
Photo: Ralph Barrera

Whole Foods to open smaller stores

Texas-based Whole Foods Market has some big expectations for 365 by Whole Foods Market, its new chain of smaller, value-driven stores.

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Company leaders hope the 365 stores — which are set to debut in late May — can help Whole Foods shake off its “Whole Paycheck” reputation. They hope the smaller, value-driven store experience can draws millennials and older shoppers alike. Plus, they hope the new chain can inject new life into earnings for the whole company.

“We can go radical on 365 stores and — assuming those are going to work as well as we think they do — they will serve to help accelerate transformation within the mother brand, Whole Foods Market,” co-founder and co-CEO John Mackey said in an earnings call this month. “In some ways we think (the 365 stores) represent the future for where Whole Foods Market will be evolving. People are going to take a very different perception of our company.”

Whole Foods is coming off a challenging 2015, when the organic foods giant saw its stock fall more than 40 percent during a series of disappointing earnings reports. This year, Mackey has said, will be different, thanks to a new game plan that includes 365, among other efforts.

After years as the organic foods leader, Whole Foods has seen traditional supermarkets, big-box stores and online retailers chip away at its market share. 

So far, Whole Foods says, it has signed 13 leases for sites for its 365 stores, with at least 10 of those expected to open by October of 2017. Most of the first stores are going into suburbs of larger cities such as Los Angeles. Six will be in California, the company said.

The retailer will open its first 365 store in the Los Angeles suburb of Silver Lake, California, followed by Lake Oswego, Oregon, near Portland in July and Seattle suburb Bellevue, Washington, in August. It also has a location planned to open in 2017 in Cedar Park, Texas.

The 365 stores average size will be 30,000 square feet, as opposed to the 40,000 to 50,000 for traditional Whole Foods stores.

“We have assembled an amazing team of people who have been working tirelessly to create an innovative shopping experience that will appeal to new and existing Whole Foods Market customers,” Jeff Turnas, president of 365 by Whole Foods Market, said this month.

Future store locations also include Houston, along with California cities San Francisco, Concord, Santa Monica, Claremont and Los Alamitos. Stores are also planned for Evergreen Park, Illinois; Cincinnati and Gainesville, Florida.

“What Whole Foods is doing here is going after that customer who wants organics but not necessarily the Whole Foods prices,” said Brian Yarbrough, an analyst for Edward Jones.

There will be plenty of interested observers keeping an eye on the 365 stores’ performance, from Wall Street investors to direct competitors such as Trader Joe’s, which has created its own popular following thanks, in large part, to its lower-pricing strategy.

“I very much see this as a natural progression with Whole Foods,” said Dwight Hill, a Dallas-based partner with retail consulting firm McMillan Doolittle. “They certainly have had to make adjustments with regards to their price-value relationship and are certainly working hard to instill more of a price image. We are pretty excited about seeing what these stores look like.”

In November, Whole Foods executives laid out a nine-point plan that included significant reductions in the chain’s expenses while also expanding efforts to evolve the brand.

Under that plan, Whole Foods has said it would cut $300 million in expenses by 2017. Other parts of its strategy include raising awareness and marketing of Whole Foods’ in-house 365 brand, its lower pricing initiatives, expanding their digital reach and moderating its store count growth.

The retailer also recently debuted a new customer loyalty program with digital coupons and a new division focused on culinary and hospitality efforts led by top chef Tien Ho.

“They are trying everything they can to drive customers back to the brand. They are trying a lot of different things,” Yarbrough said. “Give them credit for innovation and trying new things.”

This month, Whole Foods said its 365 stores could also have some traditional in-store partners such as beauty and food-related businesses, as well as the nontraditional, such as tattoo parlors.

It’s been working at recruiting these new partners through an effort called “Friends of 365,” which was launched late last year.

In October, the retailer encouraged “all types of entrepreneurs and businesses” that were “aligned with the mission and values and quality standards of our parent company” to compete for a space at a 365 store. Applicants were asked to submit a pitch, which was considered for voting at the retailer’s “Friends of 365” website. Finalists were invited to make their pitch to the company. The candidates who received the highest online votes included a Shea butter skincare business, a Japanese-style Ramen shop and a bone broth eatery.

The first wave of winning partners could be announced as early as next week, the retailer said.

“Friends of 365 will operate independently of the store,” the retailer said. “If selected for the program, your business will be responsible for making the space your own, staffing and all aspects of running the operations for your concept.”

Whole Foods could use a home run with its 365 plan.

The retailer has seen its once double-digit same-store sales fall into single digits in recent years, and into negative territory in the last several months. Same-store sales growth is a key metric in the grocery industry.

“The competition has increased greatly,” Yarbrough said. “You are seeing the Krogers of the world getting stronger in organics.”

Yarbrough says he remains concerned that the 365 stores could cannibalize, or eat up the business, once reserved for the retailer’s original brand.

“They are trying to launch in a few different places and different size markets to get an idea where (365) best fits,” he said. But “the big concern is the cannibalization.”

Still, Whole Foods executives say they are are convinced they have a winner and say they are still mapping out a plan to reach an eventual goal of 1,200 total stores.

“The 365 stores are going to leapfrog ahead on many of the practices that we will be evolving in Whole Foods Market,” Mackey said. “We think we’ve got lots of growth room for both concepts.”

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