Whole Foods seeks boost from budget-conscious 365 chain

The Whole Foods Market in Union Square, New York City. The company's latest quarterly financial results underscore what a big challenge Whole Foods faces as it tries to hang onto the organic foods crown in the face of stiff competition from Walmart, Target and Kroger.

The year ahead could be a pivotal one for Whole Foods Market. The grocery chain is facing steep competition, and its reputation for being a wallet-buster isn't helping.

That likely explains the reason for two major undertakings the company has announced to better compete in the increasingly crowded organic grocery wars. In November it outlined plans to gin up profitable growth at existing stores by boosting its prepared foods business and offering more discounts, among other measures. And in its biggest gamble, it is launching a new chain this year called 365 by Whole Foods Market that it hopes will appeal particularly to millennials and budget-conscious shoppers.

The twin strategies raise questions about how Whole Foods will prevent one brand of stores from cannibalizing the business of the other. And last week, the company's latest quarterly financial results underscored what a big challenge Whole Foods faces as it tries to hang onto the organics crown.

Whole Foods reported that total sales in the most recent quarter rose 3 percent. However, sales fell 1.8 percent at stores open more than a year. The company said that was due to both a decline in the number of transactions and a decrease in how much money was spent per transaction.

Executives said in a conference call with investors that some of the decline was because the grocer has gotten more aggressive with promotions, offering deals such as a three-day sale on supplements. Those promotions are not going away. Whole Foods said it was launching digital coupons within its mobile app, and executives said they would continue to slash prices outside of promotions.

The boost in overall sales could be attributed largely to the fact that the grocer operates more stores than it once did. But that expansion appears to be slowing. Whole Foods added 38 stores in 2016, but has plans to add about 30 in 2016, including the new 365 outposts. In other words, that means the pressure is really going to be on for the chain to figure out how to deliver more sales from its existing stores, and from digital avenues such as its partnership with Instacart.

The renewed emphasis on price-cutting comes as Walmart, Target, Kroger and others have undercut Whole Foods with their own organics offerings. But the discount strategy is somewhat perplexing when you consider what the new 365 chain is supposed to be: Executives have billed it as a smaller store that allows the company to offer a more convenient experience and reach less-affluent shoppers.

If both concepts are going to be pushing hard to communicate value, are they really going to appeal to different types of customers or different shopping occasions?

That's not an idle concern. For the third straight quarter, Whole Foods said cannibalization among existing stores contributed to a decline in sales at stores open more than a year. If 365 isn't differentiated enough, the risk for that could only grow.

Co-Chief Executive John Mackey sought to draw distinctions between the two chains, pledging that traditional Whole Foods stores would be more experiential, offer more prepared foods and be a destination for innovation; 365 would be more convenience-oriented and offer a tightly edited assortment of goods.

By Mackey's description, the relationship between Whole Foods Market and 365 is starting to sound a lot like the relationship between Walmart and its recently-folded Walmart Express concept. Walmart launched Express to help it better compete for fill-in trips and to penetrate markets and shopping centers where it wouldn't make sense to install one of its massive supercenters. But, ultimately, the concept was axed because it didn't gain traction.

Perhaps the Whole Foods story will be different: After all, there are surely major differences between Whole Foods and Walmart when it comes to the composition and size of their existing store fleets and in the kind of shopper they are trying to court.

Whole Foods can point to other signs for optimism. It is slashing operating costs successfully, thanks in part to new labor scheduling program. And it said Christmas and Thanksgiving week results were "outstanding," with more than a quarter of their stores pulling down more than $1 million in sales during the week of each of those holidays.

"We see customers do trade up and see that they trust us with their family meal," David Lannon, executive vice president of operations, said on the investor call.

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