The risky business of trading down
Whole Foods Market recently announced that the company plans to launch a chain of stores that will feature lower-priced items. According to company statements this move is aimed at attracting millennial shoppers.
With a growing consumer interest in organic and fresh foods, Whole Foods faces competition not only from specialty grocers like Nugget Markets and Sprouts Farmers Market but from mainstream markets as well. Speculation has it that there is a place in the retailing world for a purveyor of value priced better-for-you foods. This may be Whole Foods’ attempt to fill that space before anyone else does.
Is this new banner a fighter brand designed to allow Whole Foods to thwart low-cost competitors? Probably. Will they be successful at protecting the Whole Foods’ premium price position? That remains to be seen. Launching a fighter brand comes with a fair amount of risk.
The primary danger with launching a fighter brand is the risk of cannibalizing the parent company. If consumers do not see a discernible difference between what they can get at Whole Foods Market and the items available at their new value-priced banner, then they may just end up stealing consumers from their higher-margin, premium-priced stores.
Another concern for Whole Foods is the fact that they may be ill equipped to compete in the value-priced arena. The company’s structure and operating model is built on being a premium retailer selling at a premium price. (The company did not earn the nickname “Whole Paycheck” for nothing.) They may have trouble battling retailers who already know how to compete on price.
Though sales growth for Whole Foods Market has slowed, the chain still has more than 400 locations with a net income for the quarter ending April 12 (2015) of $158 million. That is substantial. Still, the strategy of launching a new chain of stores – and growing it quickly – requires significant investment. If it goes south, Whole Foods Market will be significantly damaged: much like General Motors with the demise of Saturn.
However, if Whole Foods Market does manage to succeed in launching a brand that offers similar products to two entirely different consumer sets in a way that keeps them both separate and happy, they will control a significant portion of the retail segment of the estimated $62 billion natural/organic foods industry. Perhaps that’s worth the risk.