The 4 Initiatives Whole Foods Must Articulate

For just a moment, let's forget a wilted stock, concerns about competition, and a sense that Whole Foods Market's  (NASDAQ: WFM  ) idyllic days of rampant growth may have come to an end. What would shareholders need to know to be reassured about the company's path forward?

Management laid out a fairly specific vision within its last quarterly release of earnings in May. Dubbed a "strategic plan," it was more of an operational blueprint, which essentially projected future growth that will rely more heavily on square-footage increases (new stores) versus its prior benchmark of comparable-store sales (increases in sales at existing stores).

The operational plan is fairly convincing, and I've provided some analysis here. But a table of numbers alone won't address shareholders' current anxiety. Let's take a brief look at four major initiatives under way at Whole Foods, and examine why it's important for management to more clearly articulate progress in each area to quell investor anxiety over Whole Foods' long-term prospects.

Loyalty program
In November of last year, Whole Foods launched a test market of a loyalty, or affinity, program, in a small group of cities in Illinois, Indiana, and Florida. The test allows members to buy Whole Foods' private-label "365" brand products at a 10% discount. An affinity program combined with promotional activities could be of enormous long-term value to the company. The gold standard in executing such a program is Starbucks, which essentially owns its own digital currency through its loyalty program powered by prepaid cards and mobile apps.

A properly run affinity program increases a retailer's connection with its customers, and more important, provides enormous data about customers' buying habits and trends. But as natural products expert Jay Jacobowitz pointed out a few years ago in Whole Foods magazine (a trade publication not related to Whole Foods Market), an affinity program without proper technology and teams in place to analyze the data is at risk of becoming merely an expensive discount program. 

In the company's next earnings call, investors will listen for an update on this program, to see how the test has progressed and whether Whole Foods will roll it out nationwide soon. But it will also benefit the company to preview how it will utilize gathered data to increase customer loyalty and generate repeat visits -- two ways to neutralize threats from competitors' discounting of organic foods.

Technology

We have several pilot projects in process including click and collect, direct delivery, payment at food venues using Square, a mobile app, affinity program and expanded access to our e-store from just the holidays to year round. We aim to create seamless and unique experiences that add choices, convenience and flexibility to support our customers' busy lifestyles.

--Whole Foods Co-CEO John Mackey from a Whole Foods Q2 earnings call transcript

As you can see from this quote, Whole Foods appears to be "piloting" several technology-driven programs (including the affinity program discussed above). While the company's operational plan to build more stores is its weapon of choice for revenue growth, technology represents an important opportunity for the company to incrementally increase revenue.

Image courtesy Todd Barnard under Creative Commons license.

So far, investors have been provided with scant information on upcoming technology enhancements, other than the introduction of Square card readers, which allow customers to pay for, say, a half-pound of roast beef while still in the meat department of their local stores.

More specificity regarding technology spends and timelines will reassure those shareholders who worry that the grocer isn't moving fast enough to execute on initiatives such as its mobile app. With a substantial social media presence, including a Twitter following well over 3.7 million, Whole Foods is one of the few consumer-facing brands that has a chance to leverage its loyal and digitally connected customer base in the manner in which Starbucks has. Yet Whole Foods should consider making public its timelines for release of its mobile app, as well as providing more detail on how the app will benefit customers while increasing average transaction size for the company. Naming a quarter for projected release, a practice used by tech companies and consumer companies releasing mobile apps alike, would be a credible way for management to commit to executing in a timely fashion.   

Scale of secondary markets
During the first quarter of 2014, Whole Foods prepared the scene for its shift in strategy by announcing that the company was raising its long-held expansion goal from 1,000 to 1,200 stores in North America. At the same time, in fact throughout this year so far, the company has discussed a greater diversity of stores located outside of traditional bustling metropolitan areas. 

Two intriguing locations recently mentioned in the earnings call are Jackson, Mississippi, and San Luis Obispo, California. The population of Jackson is 174,000, and the population of San Luis Obispo is just 45,000. Unlike some of the more spectacular recent Whole Foods openings, such as the first Brooklyn location, with its 56,000 square feet of store space and 20,000-square-foot rooftop garden, these locations are more modest and quite smaller. The Jackson store measures 35,000 feet, and the San Luis Obispo store, part of a group of four locations purchased from New Frontiers Natural Marketplace, is 33,000 square feet. Both are smaller than the current 38,000-square-foot average of all Whole Food stores, and still smaller than the future projected 40,000-square-foot average found in the company's operational blueprint.

Communicating the role that diminutive stores in smaller markets will play in Whole Foods' future should be a priority for the company. How many of a future projected 1,200 stores will be located in secondary markets like Jackson? In addition, it's important to know if smaller stores will enrich or detract from the company's return on invested capital, or ROIC. The company has increased its ROIC over the last several years to 15%, and is shooting for 16% in the next four years. With lower opening costs and a smaller capital investment, one would presume that smaller-footprint stores will support this important metric. Yet lower neighborhood density might just as easily denote a more marginal return for each store. Either way, this is a topic that investors should hear more dialogue around in the coming months.

Quality ratings/differentiation

Whole Foods produce image by Elvert Barnes under Creative Commons license.

One of the secrets to Whole Foods' success is that it has positioned itself as a destination for those who want to be informed about the food they are buying. The company has a history of working with nonprofit organizations to develop food standards, such as its alliance with the Global Animal Partnership to develop the 5-Step Animal Welfare Standards. It's also collaborated with the Marine Stewardship Council (MSC) for the purchase of seafood certified by the council, and with nonprofits Safina Center and Monterey Bay Aquarium, which resulted in the color-coded sustainability ratings for wild-caught fish not certified by MSC.

We will soon see Whole Foods introduce a similar rating system for produce, which will cover the third major area of nonpantry items. Whole Foods' rating systems, and the trust customers place in the provenance of its products, is the company's true value proposition. Whole Foods can only benefit from promoting its various rating systems more visibly. But similar to the initiatives above, shareholders would welcome more detail from the company. Of primary interest is how Whole Foods' extensive focus on local, sustainable, and socially conscious food choices can be developed as a more effective weapon to fend off the looming shadow of organic food price competition. 

Drawing all themes together
While the company offered up its operational plan as strategy in May, we won't really have deep insight on Whole Foods' strategy until management begins to articulate its progress on the four initiatives above in greater -- and more convincing -- detail. For those who are curious about these themes, you won't have to wait long: Whole Foods' next earnings release is scheduled for the end of this month, on July 30. 

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