Bigger-than-expected baskets at first 365 by Whole Foods Market: ‘I never saw so many Trader Joe’s bags in a Whole Foods store before’

Speaking at the Oppenheimer 16th Annual Consumer Conference in Boston on June 22, Mackey said it was too early to provide numbers, but added: “Assuming that the first few stores give us anything close to what Silver Lake [the L.A. store] does, then we’re probably going to roll that out very rapidly.  ​

“How many 365s are they going to be? Well we don’t know; we have one open, we have 20 in development and a bunch more we’re negotiating on. ​

“[But] I do think that 365 is such an exciting growth opportunity, I do think we’re going to have a lot of those stores, they have such superior economics because you’re taking your capital down 50% to two thirds where​ [a standard] Whole Foods Market is…​ [so] if you get anything close to Whole Foods Markets’ sales per square foot, the economics are astounding.​

“We didn’t have conveyer belts ​[at the cash registers at the first 365 store] because we were expecting with a smaller store and curated mix that we’d get a lot more… smaller baskets, but it’s been the opposite, we’ve been getting bigger baskets than we traditionally get at Whole Foods. So that’s been a surprise, and we’re very happy.”​

“Amazon Fresh and Blue Apron Plated get a lot of media attention … but at the end of the day by far the biggest competitors to Whole Foods are the legacy supermarket companies Kroger, HEB in Texas, Publix in Florida, Wegmans on the East Coast, those are all very, very good competitors and they’re all copying Whole Foods.” ​

John Mackey, co-CEO, Whole Foods Market​

‘I’m watching start-ups being snapped up for multiples of sales but barely any profits’​

Asked about how Whole Foods could regain the initiative as more competitors moved into its territory (natural and organic foods) – coupled with more competitive pricing - he said: “One of the reasons there’s so much new competition sprouting up is because the world is changing. Well Whole Foods kind of won, our basic philosophy has been adopted. ​

“And everybody wants to be selling natural and organic foods, everybody wants to be selling healthier foods. I’m watching these little mom-and-pop things, startups that Whole Foods nurtures being snapped up for multiples of sales, but barely any profits, because the packaged food industry is so ​[competitive] they ​[big legacy food brands and retailers] are losing share, the markets are turning away from them and they’re trying to stay relevant by making expensive acquisitions.​

“When you have too much competition the weak players get shifted out. I’d like to think and I believe, Whole Foods market is not one of those weak players.”​

“If you go there ​[the new 365 by Whole Foods Market store in L.A.] in the morning, you get older people and if you come there at night you get younger people and most of the business is being done at night.” ​

John Mackey, co-CEO, Whole Foods Market ​

Is the pricing strategy of Blue Apron, Thrive Market and Plated sustainable? ​

Asked about pricing at Whole Foods, which has worked hard to address the ‘Whole paycheck’ moniker, he said price gaps with rivals were “definitely narrowing,” ​although the chain “has more work to do,” ​on this front.

That said, some of the prices being offered for natural and organic foods via online platforms were probably not sustainable, he claimed. “If you’ve got competitors that are being held up by venture capital money that are subsidizing their pricing in order to give sales, like Thrive Market is doing or Plated and Blue Apron are doing, eventually, you can't do that indefinitely. Well Amazon can, but no one else can.”​

So Whole Foods would continue to invest in price, but over a period of years, he said: “We have to be more price relevant… we're lowering the price gap. It's a multi-year journey because we're not willing to sacrifice our culture in some sort of insane attempt to change everything at once.”​

The first 365 by Whole Foods Market​​ store opened in Los Angeles on May 25, with a second to follow in July in Lake Oswego, Oregon, a third in September in Bellevue Square in Washington State, and up to 10 more nationwide in 2017.

The 365 stores – which are around 25-30,000sqft with 7,000 skus vs around 40-50,000sqft and 25,000 skus for a regular Whole Foods store - will “open up a whole new set of customers who, so far, have for various reasons, have not liked Whole Foods Market,​’ according to co-CEO John Mackey.

The Silver Lake (L.A.) store includes a vegan fast-casual restaurant called by CHLOE, a craft coffee and beer bar from Allegro Coffee Company and a kiosk called teaBOT allowing shoppers to create customized tea blends – as part of a new ‘friends of 365’ initiative involving partnerships with local businesses.

We know we’re getting a different customer in [the] 365 [stores]​

As for the price differential between the new 365 stores and Whole Foods’ regular stores, meanwhile, chief information officer Jason Buechel added: “We haven’t exactly figured out how Whole Foods best responds to ​[the 365 stores]. Does it match prices in certain categories, or does it just differentiate away from it? How does it treat 365 as a competitor?​

“We know we’re getting a different customer in​ [the] 365​ [stores]. I never saw so many Trader Joe’s bags in a Whole Foods Market store before.”​

Digital initiatives​

Over time, transformational changes Whole Foods is making to its supply chain, IT systems and buying structures will enable it to drive efficiencies such that more money can be invested in pricing, he said.

“We put together a plan that's essentially replacing 80% to 90% of our systems over a period of time.”​

The new team member platform is the most advanced of these systems, he said: “It has really allowed us to automate a lot of our HR processes and create one common system for all team member information and attributes. That allowed us to do things like labor scheduling which is one of the strategic plug ins that sits on top of it, it also allowed us to do things like digital learning, new solutions for account management and recruiting.”​

On the customer side, Whole Foods is replacing four legacy systems with one new point of sale (POS) system, he said, while on the product platform side, it is partnering with Infor to replace in-house ERP (enterprise resource planning) systems that are different for every buying region with one centralized platform that will host all product information, and handle replenishment, product allocation, and forecasting.

He added: This is something we're really, really excited about. What's great is we just kicked this project off last October and we're already putting pieces of this into production and some of those pieces actually have shown up in our first 365 store including our ability to have a perpetual inventory there and team member assisted replenishment.”​

Category management currently done in ‘12 different ways with Excel spreadsheets’​

Mackey added: “On the POS side of things… as we want to make price changes,​ [the new system] does allow us to be more dynamic and responsive so we can do things closer to real time and put together promotions that allow us to do things more at a personalized level."​

As for category management, he said: “Most of the things that we do today for assortment planning, space planning, pricing and promotions, we're doing in 12 different ways and in Excel spreadsheets; we don't have very sophisticated solutions there. So this is giving us one cohesive system."​

Analyst: Management is making the right moves to turn things around​

So are these changes enough to transform the fortunes of Whole Foods, where sales have fallen continuously over the last six quarters, as have its same-store sales (which were -3% in Q2, owing to a 0.9% fall in average basket size and a 2.1% fall in the number of transactions of Whole Foods customers)?

Only time will tell. However, Rupesh Parikh, senior food, grocery and consumer products analyst at Oppenheimer, told delegates he was impressed by what he had heard from the senior management team, adding: “We continue to look very favorably upon Whole Foods' longer-term prospects. ​

“The management team has demonstrated a consistent track record over time of innovating and gaining share. We believe the key elements are starting to come in place to eventually support a sustained turn in the business and return the chain to its historical outperformance.”​

Quotes courtesy of SeekingAlpha's transcripts service.