Los Angeles, CA—In the face of dwindling sales growth, Whole Foods Market has announced plans for a new store concept that could affect the entire natural products industry.

This yet-to-be-named sister chain was announced during Whole Foods Market’s Q2 earnings call, led by co-CEO John Mackey, with several Whole Foods executives on call, including co-CEO Walter Robb, president A.C. Gallo, EVP Glenda Flanagan and more.

Mackey began the call by noting that even though Whole Foods experienced its sixth consecutive year of record new store openings and a 10% increase in sales in Q2, some issues have arisen. As he explained, “We do know that we are not immune to the larger macro environment, and the exploding demand for natural and organic products has resulted in increased competition from many different channels. In addition, severe weather and cannibalization had a larger impact in Q2 than in Q1.” Part of this cannibalization issue was due to the fact that some of the most accelerated Q2 growth took place in existing markets, which drives market share gains but can hurt individual stores. Chicago and Florida were two specific areas that he mentioned where this was taking place.

Overall, same-store sales rose 3.4% in Q2, a slower growth than the 4.5% in Q1. The company’s digital presence had shown a strong increase, though. Average weekly Instacart sales increased to $1.5 million, over 3.3 million transactions were made through Apple Pay, and Whole Foods Market surpassed four million followers on Twitter.

On the heels of this data came the new store concept announcement: a new format combining Whole Foods Market’s industry standards with value prices, a streamlined design and more standardized product assortment, and an emphasis on technology. The aim of this new sister chain is to “offer convenient, transparent, and values-oriented experience geared toward millennial shoppers, while appealing to anyone looking for high quality, fresh food at great prices.”

According to Jay Jacobowitz, president and founder of Retail Insights, Brattleboro, VT, “The jury’s still out,” on the potential success of this venture, but real estate is key. “The question is,” he asks, “do millennials live in a specific place? For the moment, the answer is yes; in densely populated areas such as the inner cities.” While this may seem to present an ideal target for store locations, there are some potential issues. One such hitch that Jacobowitz sees is what may happen to these same millennials as they form households and start families. If they migrate out of these metropolitan areas, the consumer base Whole Foods Market is trying to target may no longer be present in the numbers expected as time goes on. In addition, if the new stores are located primarily in these urban areas, “they can potentially cannibalize their existing stores in those trade areas that have been an anchor for the store’s revenues.” Considering the cannibalization concerns expressed in the earnings call this appears to be a valid point. There may be an opportunity for stores that are less costly to build with a smaller footprint and smaller selection in areas with less population density, such as the Midwest, but there is “a dearth” of millennials in some of these regions, he continues.

Another question Jacobowitz poses regards Baby Boomers and the wealthier customer base that may already be frequenting Whole Foods stores. Since Whole Foods has promised to maintain its ingredient standards for both stores, some of the existing customer base may “trade down” in pursuit of cheaper price points. “Hypothetically, why should I pay $22.95 for salmon at the mainline store when I can pay $13.95 at the millennial store for the same piece of fish?” he queries. Looking to the independents, he explains that stores like Sprouts Farmers Market and Natural Grocers by Vitamin Cottage are already causing competition in this space, as well as reaching out to the millennial market that Whole Foods is now trying to court.

Mackey also explained that the intention is for this concept to be complementary to current stores, “an ‘and’ to our Whole Foods Market brand, not an ‘or.’” The current plan is to begin opening stores next year, then expand fairly rapidly. More details on the new venture should be shared some time before Labor Day.  It is these announcements, Jacobowitz muses, especially the real estate, “that will reveal all,” largely because it will allow for further empirical analysis of the populations the stores will be serving. 

Call transcript courtesy of Seekingalpha.com

Posted 5/7/2015