Whole Foods’ Ham Handed Moves

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\"WholeIn an unusual turn of events, the sands are shifting under Whole Foods Markets—and now it’s in trouble.

In short order, Whole Foods, the quintessential upmarket food retailer, has gone from being a Wall Street darling to a Wall Street pariah. In rough terms, Whole Foods’ equity value has dropped by nearly half since winter. Even more disturbing, its comps in the first quarter were a meager 1.3 percent, or less than half of what they generally are. The last weeks of the second quarter saw comps at 0.4 percent. This indicates very serious sales slippage and suggests comps are headed for negative territory.

What’s Going On Here?

Whole Foods is now facing three major challenges, two of which have to do with price and one of which concerns its core product offer.

  1. The newest challenge to Whole Foods is one of its own making. In New York City, the Department of Consumer Affairs found a “systematic” problem with short weights, meaning consumers were paying more for product than they should. News stories about that situation spread far and wide, and are what account for most of the near-term drop in comps.
  2. The longer-term drop in comps has to do with the persistent consumer perception that Whole Foods product simply costs too much, even if it’s high quality, natural and organic. This remains the case even though Whole Foods has made some real progress in lowering many price points, a fact that remains invisible to many consumers.
  3. In another pricing challenge, natural and organic product has gone almost entirely mainstream and is widely available at many supermarkets for far less. As I predicted earlier in The Robin Report, Whole Foods is relinquishing the product exclusivity it has long used to convince consumers to shop its stores and pay its prices. Whole Foods has since acknowledged that it was slow to recognize changing competitive dynamics.

Curious Reactions

Some of Whole Foods’ reactions to these challenges have been strangely ham handed. Whole Foods has had a longstanding problem with short weights—In 2012, the company paid a $800,000 fine in California because of short weights. It has paid fines in other jurisdictions too.

In New York, inspectors said Whole Foods’ pricing errors were the most serious they had ever encountered. In response, John Mackey, co-CEO, said Whole Foods was a “victim” of overzealous enforcement because all food stores have pricing inaccuracies and they often fall in customers’ favor. He also pointed out that Whole Foods has a high percentage of random-weight items wrapped and weighed in store, which are more prone to error.

From the consumer point of view, this is cold comfort. Pricing integrity is one of the most important tasks retailers have. It simply must be done right.

Nonetheless, Whole Foods offered to give customers product for free if they noticed they were overcharged. For packaged food, that’s a step in the right direction. For random-weight product, it’s an empty offer. How many consumers have scales accurate enough to measure product weight and tare weight to determine what the price should be?

Even as the offer applies to packaged goods, it’s a strange one because it doesn’t include product that is mis-charged in customers’ favor. That means Whole Foods stores will tend to be full of underpriced product.

As for Whole Foods core product offer —natural and organic—it seems clear that it is losing its footing. Many other supermarkets sell more product in that category than Whole Foods does. Costco is now the nation’s largest purveyor of organic product. Kroger’s private label line of organic product is doing quite well. And so it goes with nearly every other major food retailer.

Of course, the fact that many players now offer natural and organic product at lower prices hammers home the idea that Whole Foods is overpriced. But there’s more: One bizarre price-related episode in California made Whole Foods an Instagram laughingstock. Whole Foods offered “asparagus water,” which consisted of a bottle of water containing three asparagus stalks. It was priced at $5.99. Whole Foods withdrew that absurd product. When customers laugh at you, it’s not good news.

The High-Price Solution?

So what is Whole Foods doing about that high-price image? In a move that looks very much like capitulation, Whole Foods intends to open something of an off-price store called “365 by Whole Foods.” The idea behind the “365” store is to offer its existing line of lower-priced product along with a few other products in a smaller-than-usual space. That move has more than a few strange aspects to it, starting with the name. The name might make a lot of sense to company insiders since “365” is the name of its private label. Maybe some consumers know that, too.

But to many other consumers, it will seem meaningless and unrelated to the iconic Whole Foods brand. It’s also unusual because it’s nearly without precedent to name a store after an existing private brand.

Typically, private brands are intended to further the aims of the core banner. Possibly Whole Foods was inspired by Canadian Superstore Loblaw’s “Joe Fresh” stores. Joe Fresh is Loblaw’s private label affordable-fashion apparel line. The “Joe Fresh” stores gave Loblaw the means to expand the label into new territory. In contrast, 365 product is available in all Whole Foods stores, so why invite customers to go elsewhere in the same market to get it? All planned “365” stores will be in existing market.

Finally, Let’s face it: The “365” concept is no more than a knockoff of Trader Joe’s. Unfortunately for Whole Foods, Trader Joe’s has quite a running start and has captured the high-quality, low price territory.

However, when it comes to targeting the Trader Joe’s customer, Whole Foods isn’t alone. Hard discounter Aldi intends to introduce a range of organic and specialty products that are positioned against Trader Joe’s. Aldi’s “Simply Nature” is already its fastest growing brand. Incidentally, if Aldi creeps too far upscale in terms of product and price, it too will enter the danger zone. Up to now, Aldi has been able to keep its core low-price discipline and image.

The Better Way

Whole Foods’ “365” project brings to mind the dilemma posed by other outlet stores. At what point do the lower prices available in an alternate venue start to erode the equity of the main store?

We’ll see what happens as Whole Foods starts to roll out its first five “365” stores next year. Maybe the store will a big winner, but it seems more likely that Whole Foods would have done better to stick to its core strategy. Considering the cost and energy that will be expended on the new store, Whole Foods could have instead made more price investments and undertaken a stepped-up marketing campaign intended to convince consumers that its prices really are more reasonable than they might think.

To be sure, changing a retailer’s image is slow work, but sometimes it can be ultimately unsuccessful, as many retailers have already found out. Supermarket operator Food Lion has been working for quite a while to recapture its low-price image, and there’s still work to be done.

Supermarket operator Haggen is now closing more than two dozen of the stores it just acquired because it couldn’t find the right price to offer its consumers.

This is true across other retail channels, as apparel retailers such as Abercrombie & Fitch have discovered when they lost their core niche and value image. There are many avenues to success, but sticking to one core strategy and doing it well is very often the better way to success, regardless of the retail channel.



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