Why Whole Foods is launching a cheaper spin off

by Nigel Hollis | June 17, 2015

Whole Foods, the leading organic grocery store in the U.S., has announced that it will launch a new store offering value prices to snake people aka millennials. ‘Branding down’ is a tried and tested strategy in packaged goods and luxury cars, but why is Whole Foods launching a new store and will the venture be successful?

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The news was announced as Whole Foods share price took a 10% hit when the store reported a 10% growth in sales to $3.6 billion. Investors were disappointed, however, because this represents the slowest growth since the recession, and same store sales only grew 3.6%, falling short of expectations.  Jeremy Bowman commenting on the announcement for The Motley Fool suggests that the new store is the best idea that Whole Foods has had for years, and suggests that expanded selections of cheaper organic foods at Kroger, Wal-Mart, and others has undermined Whole Foods growth.

As I have noted elsewhere, when a brand demonstrates that there is sufficient demand for a product – be it smartphones or organic produce – it does not take long for the competition to try to get a share of the action. However, there is more going on here than just copycat marketing. Brands like Costco, Aldi and Sam’s Club are perceived to offer a cheaper shopping basked without undermining quality.

A quick look at our BrandZ data supports hints at a far greater challenge for Whole Foods. Last year, 44% of U.S. grocery shoppers interviewed agreed that Whole Foods was worth less than it costs. That is the highest percentage of all the brands measured and 46% higher than the average. However, Whole Foods also has a higher than average proportion of people who said it was worth more than it costs. The latter, who would appear to be loyal fans that value the brand’s purpose and experience, believe that its difference is worth paying for and think it will gain importance in future. However, these people only represent less than one in five shoppers.

I doubt there is any way that Whole Foods can easily extend the appeal of its brand beyond the minority of people that truly believe in what it stands for. The minority has bought into the brand and the majority have not. So one option is to extend the footprint of the existing brand and stay focused on the existing target (Bowen reports that Whole Foods has just over 400 locations currently, and it believes the domestic market can support as many as 1,200 of its supermarkets). The other option is to follow through on their plan to launch a different value proposition focused on people who might appreciate what the brand has to offer if the price was right. The challenge will be to keep the new offering distinct enough that the existing fans will not be attracted to try it out.

Walter Robb, co-CEO of Whole Foods, says the new store will be a "uniquely branded store concept unlike anything that currently exists in the marketplace" with "value prices ... a modern, streamlined design, innovative technology and a curated selection." Presumably the new stores will be focused on urban rather than suburban locations in order to reach those elusive millennials.

So what do you think? What should Whole Foods be doing? Do you think the new venture will be successful? Please share your thoughts.

2 comments

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  1. DEGerenser, June 17, 2015

    The idea that a "discount store" for a premium food store brand can work is flawed. Savvy consumers know that 50%-75% of the merchandise in Retail Outlet Stores, like Polo, Brooks Brothers, etc. is made especially for the discount market.  How do you do that with organic produce???

    DEGerenser

    Manchester, Vermont

  2. Bryan Jensen, June 17, 2015
    My thought is that Whole Foods should consider how "Millennial Mindset" is affecting broader market mix and brand relationship opportunity besides considering as narrowly as the Millennial generation. While Millennials have statistically high debt to lower income, Gen Xers have been most strongly impacted through income, savings and investment reduction in recent downturn. Furthermore Boomers also have been impacted and they have strongly driven the "quality foods" demand around which Whole Foods has built reputation. Therefore my thinking that there are bigger issues at play like economic inequity than merely generational demo/psycho-graphics.

    I considered this in a recent Periscope interview ( bit.ly/1JY6Dds ) and LinkedIn Pulse follow up ( http://linkd.in/1GfljPJ ).

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