The Whole Foods Strategy…Isn’t (Whole)

There’s an interesting strategic play being made by Whole Foods Markets, in the midst of the company’s nearly $2 billion one-day drop in market value a few weeks ago, on the announcement of a shareholder lawsuit. Whole Foods had already come under legal pressure concerning claims of overcharging, but this new lawsuit claims securities fraud.

Now, when shareholders file a lawsuit like that, it’s not a good thing. Especially not when Millennial buyers, a segment Whole Foods has failed miserably in attracting, snicker at the chain’s exorbitant prices and call the chain “Whole Paycheck.”

In the midst of all this, Whole Foods has decided to take a market segmentation strategy to reverse its downward trend, a strategy aimed squarely at Trader Joe’s, a solid Millennial brand: launch a chain of smaller, lower-priced stores that focus entirely on stock with the Whole Foods private label, 365.

Whole Foods is going to try to out-Trader Joe’s Trader Joe’s,

This should be fun to watch, strategically speaking.

Now if you’ve never shopped at either Whole Foods or Trader Joe’s, know this: Trader Joe’s is a loved brand by nearly every segment, not simply the Millennials, and not simply because of their low prices, but because of their unique product and shopping experience based on simply being human.

Trader Joe’s has a strangle hold on the Millennial demographic. It’s considered by most brand strategists to be one of the authentic Gen Y brands. Trader Joe’s is quirky, does not claim to be all things to all people, and Millennials identify with that.The rather limited array of items, the mix of generic and exotic foods, the self-deprecating house brand private labeling with hilarious names that poke fun at the Trader Joe’s name, lower than average grocery store prices, and “real people” employees offering the food equivalent of an Apple Genius-like expertise on what’s in your basket, make for exactly the kind of value equation the younger customers are looking for.

The chain has done a phenomenal job at creating a truly unique culture, one obviously embraced by every employee at Trader Joe’s. When you can make being a cashier in a small specialty food market a highly sought-after position for a Gen Yer, you’re on to something.

Industry experts suffering from the curse of knowledge would disagree with me when I say that Whole Foods and Trader Joe’s play in essentially the same general space — grocers offering fresh, healthy, organic food. As a consumer I view them as shopping alternatives, and thus competitors. And I make my shopping decisions on the very different strategic choices each has made: as a result, I avoid Whole Foods like the plague and visit Trader Joe’s often as many as three times per week.

And I’m far from being a Millennial.

In fact, while I have only personal experience to support this assertion, it feels like Trader Joe’s has a strangle hold on every shopper segment. I love it. I don’t know anyone who doesn’t love it (and I know a lot of people). Like most Trader Joe’s patrons, I’m fiercely loyal. I can’t get everything I need there, but the net result of that is this: because I’m forced to go to a cold and unfriendly Vons to grab something I need but that I can’t find at Trader Joe’s, it actually underscores what I detest about Vons while reinforcing my love for Trader Joe’s. In other words, my lousy experience at Vons makes me long for Trader Joe’s.

Weird, I know. But it is what it is.

The Trader Joe’s strategy is rock solid, and the proliferation of the brand (not to mention top and bottom line growth) is proof positive. They buy direct from suppliers, sell few brands other than their own, and pass that savings on to the consumer. They have far smaller store footprints than does Whole Foods, but sell twice what Whole Foods does per square foot.

So, Whole Foods is taking a Trader Joe’s strategy in launching its 365-brand stores. Let’s stop and think about that for just a minute, and ask: what must be true for this to be a good strategy?

The heads of state and strategy at Whole Foods must’ve actually said something like this to themselves: “If we build a store called 365 that effectively offers the exact same Whole Foods products at lower prices, people will stop shopping at Trader Joe’s and shop at 365.”

I can tell you that if I were in that strategy session, I’d blurt out, in my best Jerry Seinfeld voice, “WHO ARE THESE PEOPLE?!”

I’ll tell you where people will stop shopping: Whole Foods. And they will continue to shop at Trader Joe’s, because 365, at least from what I can gather, offers no other value proposition than lower prices. And my bet is that they won’t be lower than Trader Joe’s anyway.

To be a profitable business that offers the lowest prices almost mandates you taking a low-cost provider position, which in turn requires you to rethink everything about your business. You need to be relentlessly vigilant on systems, standards, and costs. You need a deep understanding of your cost structure. You need to be willing to say, “we’re not for everyone, you either love us or hate us.”

And here’s the catch: prices aside (because price and cost are two different animals) there can only be one low-cost provider in any space. Think Southwest Airlines. Think Walmart.

So what the Whole Foods strategy will probably do is anger if not alienate completely their current customer base, who will feel like Whole Foods is even more of a ripoff than it is now. 365 will cannibalize Whole Foods in the short-term, and I would not be surprised if the whole chain implodes in the long term.

The Whole Food strategy isn’t a whole strategy. It’s a fragmented one that pits itself against not another player, but against itself. In other words, the real competition won’t be Whole Foods vs. Trader Joe’s, it will be Whole Foods vs. 365.

A half dozen 30,000 square foot 365 stores are opening on the West Coast in 2016, with a doubling of that the following year.

What Whole Foods has going for it is that the projected growth for organic food is roughly 11% annually. Which is to say, the tide is rising for all concerned. Still, Fresh ‘n Easy tried coming into this market, with dismal results. They just closed 30 southern California stores. Haggen Food Grocery Stores is trying, and is cutting hours and heads as I write this.

On the 365 announcement, Whole Foods shares fell 10%. That on the heels of missing earnings projections for three quarters in a row. Followed by a double-digit drop on the shareholder lawsuit announcement.

It would seem that Whole Paycheck has some payback coming.