Whole Foods Market will enter value ring with new price sensitive chain in 2016

The still unnamed stores will be “unlike any store anybody has ever seen before,”​ co-CEO John Mackey said May 6 during the retailers second-quarter earnings call when the new chain was announced.

“Offering our industry leading standards at value prices, this new format will feature a modern, streamlined design, innovative technology and curated selection. It will offer convenient, transparent and values-oriented experience geared toward millennial shoppers, while appealing to anyone looking for high quality, fresh food at great prices,”​ Mackey said.

While he provided scant details about the new format, he assured investment analysts that the stores would not compromise on the high quality that Whole Foods is known for, but rather suggested the price difference would come from “lower capital, lower cost, perhaps lower labor costs.”​

He emphasized that the new stores will appeal to millennials who are “quite interested in natural organic foods”​ but are “also very value cautious.”​

Whole Foods has explored opening such stores for a while, but waited until now so that it could focus on expanding the number of stores under its flagship brand and test the viability of smaller format stores – both of which have been successful, Mackey said.

He also underscored that the new stores will be “an ‘and’ to our Whole Foods Market brand, and not an ‘or,’”​ meaning he sees “growth potential for this new and complementary brand to be as great as it is for our highly successful Whole Foods Market brand.”​

Despite his reassurance, several investment analysts expressed skepticism about executives' claims the new stores will not cannibalize sales from Whole Foods Market. Investors apparently shared similar concerns as the share price for Whole Foods fell notably after the announcement.

Attempts to recast image fall short​

The announcement about the new stores comes after Whole Foods Market, mockingly referred to by some as “Whole Paycheck Market,”​ tried to recast its image as a more affordable and accessible retailer​.

Among its efforts to redefine itself was a decision to lower prices on produce in some stores to drive more foot traffic. It also is expanding its rewards program nationwide to help consumers better see their savings, while at the same time communicating in ads that its “values”​ make it worth the price increase compared to competitors.

Executives said the Value Matters campaign is succeeding so far and will continue to expand in the next week to include online video, digital display, mobile and social ads. It also is expanding the regions and stores in which produce prices are lower.

Even as the retailer continues down these paths, it is unwilling to stray too far and risk diluting the Whole Foods brand, executives said.

“There are things we can do with the Whole Foods Market brand. We can continue to do a better job on our expense discipline. We can continue to be aggressive in gradually lowering some of our prices, but the Whole Foods Market brand stands for the highest quality, the best selection, the highest degree of service,”​ said co-CEO Walter Robb.

“So there it is – that brand can bend a little bit, but we can't break it. We're not willing to break it, but we think we can create a complementary brand that can go places, the Whole Foods Market brand cannot effectively go,”​ he added.

Sales miss mark​

The announcement also comes at a time when store traffic at Whole Foods Markets is slowing, causing its sales to fall short of expectations during the second quarter.

Even though the company’s overall sales increased 10% to $3.6 billion during the quarter, the retailer reported only a disappointing 3.6% increase in same store sales during the period, which fell short of industry expectations of a 5.3% increase, noted analysts with Cowen and Company.

They also point out that transactions rose only 0.8% during the quarter compared to 2.3% in the previous quarter and 2.4% in the same quarter last year.

The retailer attributed the drop in same-store sales in part to its continued expansion, which included opening 11 new stores during the quarter. The cannibalization of the older stores by the new ones was expected, and should level out after the first year the new stores are open, executives said.

The smaller basket size is a different story and likely due to increased competition from other retailers now selling organic, Mackey said.

“We do know that we are not immune to the larger macro environment and the exploding demand for natural and organic products has resulted in increased competition from many different channels,” ​he said.

To an extent, the new value-oriented chain should help address this.