So are we adding a luxury food brand to the “designer derby” of racers seeking more growth (for its own sake) by reaching down to consumers who are reaching up? Or is the CEO of Whole Foods, John Mackey, spreading his high-end food among the masses at prices they can afford, simply out of the goodness of his democratic heart? I’m speaking of the Whole Foods launch of pilot stores in more down-tier areas of Detroit, New Orleans and Chicago’s South Side. And about this strategy, Mackey made this rather magnanimous and altruistic statement: “For every penny we cut off the price, we reach more people who can afford to shop with us.”
What a wonderful thing to say. And, what a wonderful thing to do for the less well-heeled people living where the stores are being launched. And I suppose it will be a wonderful thing for new growth, at least for the foreseeable future.
Other upscale brands, designers, and retailers have expressed similar and lofty intentions. For example, fashion designers like Karl Lagerfeld, Vera Wang, and others declared themselves “democratic” to the fashion press as they created diffusion brands for mainstream retailers like Kohl’s, H&M and the list goes on. The spin is to trumpet their benevolence, affordably providing their wonderful high brow brands to low brow folks. It’s a nice trick and happily accepted by those mainstream consumers who buy the stuff. But the reality of it is far less noble. The business survival reality for these designers is growth, growth, and more growth. So there’s nothing benevolent about serving aspiring consumers who are reaching up. These brands are reaching down for more business — because they must.
And so it goes with luxury retailers like Saks, Nordstrom, Neiman-Marcus, Bloomingdale’s, and others as they accelerate their outlet store expansion.
They need the business. They need the growth.
Is This One Different?
Mackey calls his vision and this sharing of higher and healthier value, “Conscious Capitalism,” which is, in fact, the title of his co-authored book. Furthermore, he co-founded an organization that has taken on the same name. Without going into greater detail, its abiding principles are: “While making money is essential for the vitality and sustainability of a business, it is not the only, or even the most important reason, a business exists. Conscious businesses focus on their purpose beyond profit.”
This is certainly an admirable philosophy and one that has been the driving force of America’s Healthiest Grocery Store (Whole Food’s slogan), with sales of about $13 billion across some 388 stores. And third quarter registered a respectable 10 percent sales growth with same store sales growing 3.9 percent. However, in the analysts call, co-CEO Walter Robb explained that the comp sales growth as being less than the prior year’s growth of between 6 and 7 percent, as due to “continued headwinds from our value efforts, cannibalization, competition and the economy.”
Growth is one thing, profitability another. Over the past three years, Whole Foods reported gross margins of 34 to 36 percent, “luxuriously” higher than Walmart’s and Target’s at about 24 to 29 percent. So while they intend to cut staff and sell more frozen and pre-wrapped food in these lower income areas and offer lower prices, it will be a challenge to maintain their current level of profitability.
However, back to the brand, how will this move ultimately affect its most competitive advantages including its “higher purpose,” its position and strength in the marketplace, its image, and its emotional neurological connection with its current core consumers?
The danger for all brands reaching down for new markets and growth lurks in the very real possibility that lowering prices on anything associated with the brand, or a variation of it, may ultimately lower consumers’ perception of the value of the brand. When that happens, it’s “curtains.”
Mackey says, “Everybody is copying last year’s model of Whole Foods, but we’re building the next one.”
John, even though I’m totally into your “Conscious Capitalism” and higher purpose, beware of what you wish for.