Why Whole Foods is in a Pickle…
Whole Foods finds itself in a situation common to businesses across wide ranging categories. The dilemma or pickle for Whole Foods in grocery speak isn’t unusual for large companies.
Category leaders as they mature often lose the perception and status of being the innovative leaders attracting new cadres of customers they once enjoyed. New becomes old…; the demographics change. New consumers enter the market, the business becomes complacent, they fail to update their brand and execute on their mission; worse they fail to recognize market changes. The original insights they developed into a great business abandon them. Their instincts are off.
The business is now huge, slow to move. Competitors have mimicked their original marketing positioning and now consumers new and old no longer see the business relevance. It becomes a price game. Let’s lower the price to reverse sales declines. This doesn’t work, and the opposite occurs accelerating brand and sales erosion.
Recent public announcements by Whole Foods indicate the company is hurt by all and more of these headwinds. Highlights:
• Expanded new stores into current WF markets- creating saturation and cannibalization of established stores. Same store sales are decelerating. In the most recent quarter ending 7/5/15 same store sales growth were 1.3%, slower than the previous 2 quarters of 3.6 Q2, and 4.5% Q1. Source NYT 7/29/15. The sales growth decline is worsening a trend since 2014 when sales growth then declined from 8% to 4%.
• Customer complaints about how some stores look shabby, quality, service, and pricing indicate poor execution;
• Large scale organic food distribution, with an accepted price premium, is what WF created to lead the grocery industry but is NOW mimicked by smaller regional and local players delivering same. Among others this includes Sprouts Farmers Marker, Trader Joe’s. Organic is no longer unique but mainstream. Wal Mart with its expertise in logistics and distribution is delivering organic items; Safe Way, and Krogers are rushing in products. According to the Wall Street Journal sales of organic and natural foods combined reached $48 billion in 2012, up 8 times over 1998 sales of $6B. Yet organic food in 2012 accounted for just 4% of total U.S. food sales.
• Brand dilution- WF store count growth combined with an imminent launch of smaller store formats of a 365 retail brand risk bifurcating the brand image and resources. The point of 365 as stated by WF is to introduce young urban consumers setting up new households to a less expensive offering than WF regular.
• Efforts at price promotions predictably have done nothing to stem the sales weakness. Price promotions that sell the same proposition of value at a discount tend to erode the brand promise.
If a business doesn’t take care of execution to deliver on the promise of a consumer benefit, it serves only to offer the public something mediocre for less.
In the long run no one will buy mediocrity.
So that’s the situation Whole Foods finds itself in…There’s a bright spot. If management takes on the challenge of transforming the business and reasserting category leadership, it’s quite possible it can grow again.
Rather than trying to reduce prices to attract customers, and diluting their brand by opening a second line of stores they may consider the opposite. That is re-energizing the chain by refocusing their efforts on their mission and executing on what they do best i.e. presentation of quality organic and natural foods of the highest standards. With the category of natural/organic still only at 4% of total U.S food sales, and total sales growing at 8x since the ’90s it appears the category is getting only bigger. Whole Foods doesn’t have the category to itself any longer but the overall pie is much larger and the growth prospects are never better.
There’s good precedent for revitalizing a brand and its business.
A few years ago, Starbucks found itself in a similar position. Premium retail brand, category leader. Opened too many stores; merchandised too many products beyond the core of coffee related beverages and accompaniments. They too invited competitors of all sorts; small, regional and even McDonald’s McCafe through their massive store counts. Starbucks innovated and led the coffee retail business, but made missteps in the early 2000s.
Starbuck’s management took its eye off execution of a consistent experience, and service quality. The founder stepped back into the run the company, simplified the store offerings, apologized publicly to consumers, instituted a re-training of all store personnel, and got back to the basics of providing a great experience around coffee and inventive combinations, that are delivered by well trained knowledgeable baristas in a comfortable café. AND they established benefits programs such as education and healthcare to take care of the of most important stakeholder and face to the customer– Starbucks employees.
John Mackey, co- CEO and a founder of Whole Foods, may delight consumers and investors again. According to an extensive article in Fortune 9/1/15 Mackey is giving deep thought to Conscious Capitalism. The notion is that enterprises with passion and purpose outperform. An outgrowth of this thinking is the idea of blending Nonprofit with Profit through foundation work that tie Whole Foods to its communities: Whole Cities, Whole Kids, and Whole Planet. This thinking extends to compensation and the relationship of executive pay to average wages/salaries of employees.
These efforts enhance Whole Foods brand credibility for innovation and advances its evolution in presenting new ideas about food and community that resonates with its core consumer base. This is consistent with Whole Foods founding heritage and helps the company find new pathways for product and service ideas to build growth.
Successful revenue growth is about value and NOT price. Whole Foods various stakeholders need to appreciate this as core to Whole Foods’ existence. The company’s ability to communicate and demonstrate tangible examples in practice will determine its success in executing upon Mackey’s vision. It will also require Mackey to do a good job positioning a long view of Whole Foods to shareholders so as not to be distracted by quarterly revenue/profit pressures. This tempts management to try too hard to reverse financial performance with price discounts, and ill advised brand diversification strategies a la 365.
It will be interesting to follow Whole Foods news as it goes forward to address its current challenges.
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