After much anticipation, Whole Foods Market, Inc. (NASDAQ: WFM) finally debuted its new 365 by Whole Foods chain last week in Los Angeles' Silver Lake neighborhood.
With Whole Foods' comparable sales sliding, management hopes the new budget-priced, millennial-focused banner will win back customers it has lost to Kroger (NYSE:KR), Trader Joe's, and others that have moved in on Whole Foods' organic niche and undercut it on price.
The early results seem positive. The store was mobbed at opening, with many complaining of a lack of parking, and most customer reviews have been positive. One woman told The Los Angeles Times, "It's really a fun, exciting vibe, and the prices seem great," while another said it had "Trader Joe's prices" but "better quality."
Whole Foods plans to ramp up the new format quickly with two more store openings set for this year and as many as 10 next year. Meanwhile, management is busy scouting spaces for future stores to expand the new concept, having signed 19 leases to date.
With the grand opening now behind us, let's take a look at what shoppers and investors can expect from the new chain.
Tech, tech, and more tech
Targeting a generation that's glued to their smartphones, Whole Foods has harnessed technology to sell groceries in new and innovative ways. iPads are positioned throughout the store to allow shoppers to make custom prepared-foods orders or scan a wine bottle for reviews. At checkout, there are self-service express lanes that take only Apple Pay or credit cards. The produce section features a digital scale, and the whole store has digital price tags to allow for easy adjustments.
One of the Friends of 365 (a program that allows partner businesses to set up shop inside the store), TeaBOT, offers customizable brewed tea using a special machine.
Tapping technology like this makes sense not only for cutting costs, but also for boosting efficiency and meeting millennials' needs. Most folks in the younger generation, for example, would probably rather consult an iPad than a sommelier for wine recommendations.
A low-slung floor plan
One of the most underrated features of the new chain may be its in-store design. Management wanted the 365 stores to be "designed with ease in mind," so it lowered fixtures and shelves, making the whole store visible from any point inside.
This contradicts the traditional theory of grocery store design. Supermarkets generally position staple items like milk, eggs, and bread in the back corners of the stores, forcing customers to walk past the rest of their merchandise in order to get what they need. Like some other retailers, supermarkets tend to make finding the things you want somewhat difficult in the hopes that you'll stumble upon a different item and make an impulse purchase.
But with the rise of e-commerce and the increasing importance of convenience, this approach is getting tired. Whole Foods seems to understand this, and designing the store in a navigable way shows respect for the customers' time and energy.
"Whole Paycheck" this is not. Through cost-saving efforts in its store design and labor expenses, among others, 365 essentially matches Trader Joe's and Ralph's, the local Kroger brand, in prices. According to the Los Angeles Times' price comparison on five staple store-brand items (milk, bread, paper towels, peanut butter, and eggs), 365 matched Ralph's and Trader Joe's in two categories, was cheaper in one, more expensive in one, and in the middle in the last. Perhaps more importantly, the prices of eggs, milk, and bread were between 21% and 33% cheaper at 365 than at a standard Whole Foods.
Lower prices figure to be 365's biggest asset as it seeks to develop a customer base separate from Whole Foods'. Distinguishing itself from its familiar parent may also be the new chain's biggest challenge, however, as it moves forward. One Yelp reviewer, for instance, expressed disappointment that 365 lacked so many of her favorite aspects about Whole Foods, like wild fish or a cheesemonger.
But that's the point of 365. It's not a store for the typical Whole Foods shopper. It's a store for those who prefer to buy organic products at the lower price points found in Kroger and Trader Joe's.
In just its first week since opening, it's far too early to say whether 365 would be a hit, but naysayers should remember that Whole Foods is still a top-notch business. After all, it pioneered the organic space that has since gone mainstream, and despite its recent swoon, it still trounces Kroger and other rivals in key metrics like profit margin and sales per square foot.
The management team is smart, and it knows a thing or two about selling groceries. Indeed, 365 is the logical response to the changing market dynamics and the increasing demand for affordably priced organics. Those factors, along with the initial response to the new chain, are enough of a reason to believe in its future success.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Whole Foods Market. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.