Can Whole Foods’ New Small-Store Strategy Turn the Company Around?

Love it or hate it, Whole Foods Market Inc. (WFM) played a big role in ushering in the organic movement by making organically-grown food more accessible to the masses. But it’s no big secret that Whole Foods products come with a high price tag.

Now, the health-food chain is looking to shed its “Whole Paycheck” nickname and appeal to larger crowd by offering lower prices. But is that enough to turn the company around?

Whole Food

PASADENA, CA/USA – NOVEMBER 15, 2014: Whole Food Market exterior. Whole Foods is an American foods supermarket chain specializing in natural and organic foods.

Whole Foods will be opening the first of several smaller stores next week. These smaller stores will be focused on offering lower-cost, private-label groceries to draw in a wider range of customers.

Known as 365 by Whole Foods Market, the new stores are designed to help the company regain its competitive advantage at a time when organic food can now be purchased in most large-chain supermarkets.

The company is attempting to reignite growth after a 3% decline in same-store sales last quarter. This was the third straight quarterly decline for Whole Foods, and marked its worst performance since 2009.

The first 365 store will open its doors on May 25 in the Silver Lake area of Los Angeles. Whole Foods has already signed 19 leases to open new stores, including locations in the Seattle and Portland areas. The 365 stores will be half the size of a typical Whole Foods store, with fewer items and more prepared foods.

“This model allows us to compete with everybody in the market,” said Jeff Turnas, head of the 365 unit. Turnas says the 365 stores will allow the company to appeal to a much wider audience.

Over the last two decades, Whole Foods grew from a small store in Austin, Texas to one of the largest organic-food supermarket chains. The company gave rise to the foodie movement in the U.S., and reaped the benefit of an increased interest in healthy eating.

But after seeing tremendous growth over the last decade, Whole Foods is facing stiff competition from Wal-Mart (WMT) and Kroger (KR), which have both expanded their natural and organic food offerings and offer lower prices. In 2015, same-store sales slowed to 2.5% and shares dropped 34%.

Whole Foods appears to be following the same playbook as Nordstrom, which found success with the opening of its Nordstrom Rack stores. The new stores will appeal to Millennials who have respect for the brand, but simply cannot afford to shop there.

In theory, the 365 store concept is a smart idea. But many analysts worry that the move will take away sales from existing Whole Foods stores. If the company plays its cards right, it may be able to turn around its sluggish sales and drive new growth by appealing to budget-conscious shoppers who want to eat healthy.

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Daniel Simmons