Re: Whole Foods Market in 2008

Jackie Huba, a fanatical Whole Foods Market customer evangelist, asked What Should Whole Foods Do? in response to its dismal third-quarter financials and its under-performing stock.

I was going to comment on her post but my comments were lengthy enough for a blog post. (So here it goes …)

As someone who has spent time inside Whole Foods Market (WFM), I have a few thoughts.

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FIRST, comp sales for WFM are the lowest they have ever been at 2.6%. Next quarter, comp sales will get a boost because the acquired Wild Oats locations will enter the WFM comp store base. From the conference call with analysts (transcript here), I learned the acquired Wild Oats stores are comping at 7.0%.

Even with the addition of Wild Oats locations to its comp base, sales comps will still be below the upper single-digit territory WFM is accustomed to earning.

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SECOND, since Starbucks and WFM appeal to consumers with discretionary income, they merit comparison. Starbucks is implementing discounting programs like a Treat Receipt happy hour ($2 iced coffee drinks) and doing far-from-coffee brand extensions like smoothies to drive sales. WFM, instead, is continuing to be guided by its “quality compass.”

When asked by a Wall Street analyst if WFM was considering loosening its quality standards (i.e. selling products with artificial ingredients) to help improve sales and margins, the company emphatically said … NO!

In particular, co-coo Walter Robb said, “Quality is our compass and we’re going to continue to steer by it because that’s who we are and that’s who we are in the marketplace and I think customers know that and appreciate it.”

Robb continued, “We’re not going to just start selling price items that’s not who we are but we are clearly offering the value items if that’s the choice that you want to make.”

Starbucks, on the other hand, is abandoning its quality compass and kowtowing to the drug of low price gimmicks and far-out brand extensions to drive sales. Kudos to WFM for staying true to its purpose. Mucho kudos.

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THIRD, my advice to WFM is to keep following its “quality compass” and not engage in unhealthy discounting tactics. The economy will rebound and when it does, so will WFM.

However, this financial hit should cause WFM to rebalance how much autonomy it gives regions and individual stores to make business-impacting decisions ranging from procurement, distribution, merchandising, marketing, and training.

Because regions and stores are given the freedom to make so many business-impacting decisions, redundancies galore exist. And those redundancies result in WFM spending excess monies to recreate the proverbial wheel to serve its regions and stores. This excess was never an issue when sales were strong. With sales slowing, these expensive redundancies become exposed.

The answer for WFM to better compete in rough economic times might be to centralize more business-impacting decisions in order to reduce costs and improve profits. Problem is, the WFM corporate culture isn’t about centralization … it is all about decentralization.

Comments

[gregorylent]

the bigness, and the near flaunting ego of the stores, in size, and the sheer assault in number of products, will be the intangibles that will continue to work in the background to lower the brand. times change. less is more is growing.

starbucks shot their own foot with greed and ambition, wfm has some of that vibe in them as well. it is in the package, not the quality.

[Steven Hoober]

> because the acquired Wild Oats locations will enter the WFM comp store base

That, or they'll close the Wild Oats nearby, immediately adjacent to the big development area, so everyone in the area needs to drive an extra five milee. Oh, and be sure to abandon it with lots of debris in the store, and let it look like crap and get all weed covered.

Either one.

As far as the core stores go, they are becoming too variable. Not store to store, but hour to hour. I have to believe this is some sort of core management issue. If it's a weekend afternoon full of demos, they whole place hums; it's almost like a good club before the band starts and it gets too loud. Other times... enh. Not everyone cares. It's just a middling level-of-service grocery store, with high prices.

So, #3 is spot on. I suspect something will shift at the regional-to-store management level, and hopefully they can do it without mussing the local-feeling culture.

[john moore (from Brand Autopsy)]

gregorylent ... yep, bigger, more opulent stores have changed the customer perception of WFM. And it has damaged the company's bottom line. (Love your "ego flaunting" line.)

A “Vegas Effect” applies to Whole Foods. When shoppers experience the pristine and bountiful WFM stores, they know something is up. It’s the same feeling people get when they go to Las Vegas. People see/experience the opulence ... the decadence ... the over-the-top-glam when in Vegas. They also know their tourist dollars in the form of gambling losses pay for the the opulence ... the decadence ... the over-the-top-glam.

To an extent, WFM shoppers feel something similar. They can tell the shopping experience at WFM is much more pristine and “over-the-top” than the same shopping experience at a Safeway, Kroger, or Giant. Immediately, customers know that the higher prices they pay at WFM fuel the pristine and “over-the-top” customer experience. Dig?

WFM now realizes the drag on profits these mega-huge stores are super spendy to build-out and costly to operate. Thus, we learned from the analyst conference call, WFM is altering its new store plans.

First, they are reducing the number of new stores to be opened in the coming months.

Second, WFM has downsized new location sq. footage for eight signed leases by 9,000 sq. ft. each.

Third, and most important, WFM will start building smaller footprint stores going forward. According to the analyst conference call, the sweet spot to maximize company profit and customer experience at WFM is building locations between 35k to 50k sq. ft.

[john moore (from Brand Autopsy)]

Steve ... WFM has shuttered some OATS locations since the merger. My thinking is WFM has closed almost all of the OATS locations they find necessary to close.

[gregorylent]

amazing even the big boys don't get it right .. at least they try

after eight years in india, back in america, i could not walk into whole foods, not more than a couple of meters. took a few weeks to get used to it. and i had been a lover of organic, co-ops, etc.

i could literally feel the energy of being marketed too, thousands of demographic study groups designing the packaging for a hundred different teas, waters, corn chips.

it made me sad for america, in ways that may prove to be right if sustainability is a problem. excess on all fronts.

and i knew i was buying an identity, as well as good food.

after awhile, i enjoyed it, hanging with the wealthy and prosperous.

i wish them well, quality is important

[Patrick]

Quality compass is veering from true north.
They're selling Borden milk at Whole Foods now (albeit w/o RBGH but Borden Milk ain't no friend to cows--can you think of a bigger dairy factory) and I just picked up some cocktail sauce in their prepared food section and what is it sweetened with--high fructose corn syrup. No, HFCS isn't on their banned list but I doubt I would have seen this a year ago.

It's the little things . . .

[OurPlaybook]

Whole Foods, IMO, appears to being in the correct direction and seems to be expanding their product in the right markets. Sometimes I look at a store and say, thats not going to work here, however I think Whole Foods does choice research.