Whole Foods Market (NASDAQ: WFM) is considered as bougie a company as any out there. The organic grocery chain is often derided as "Whole Paycheck," an elitist business catering only to the wealthy.
So it surprised many when the company opened up a store in Detroit, a city that's fallen on hard times over the last decade and where about 40% of the population lives below the poverty line. Even the company's Founder and co-CEO, John Mackey, was initially skeptical of the idea proposed by co-CEO Walter Robb.
However, since opening in 2013 the store has become an overwhelming success. It received a warm and enthusiastic welcome from the community, and turned profitable in less than a year.
The Detroit store was a sort of experiment to see how the company would fare in a lower-income community and if it could attract a different kind of customer. To prevent sticker shock and keep prices competitive with other stores, it limited wine prices to $20 and did the same for meat per pound, among other steps.
On review sites, the Detroit Whole Foods receives four out of five stars, with commenters noting that the "prices are reasonable" and "the parking lot is very busy," with one former skeptic saying, "Love the vibe. Love the people."
With the surprising success of the Detroit store now a notch on the company's belt, management has decided to expand further with the concept, opening stores in inner-cities with a smaller footprint, lower prices, and smaller selection like the Detroit iteration. In early 2014, Whole Foods opened a store in the New Orleans Mid-City area, which has helped boost investment in the neighborhood.
The company is following with planned openings on Chicago's South Side and in Newark, New Jersey next year. More importantly, the Detroit store serves as a template for its new 365 chain, which will offer a limited selection of lower-priced goods in smaller stores, targeting millennial consumers who seek high-quality food but do not have the income to shop regularly at Whole Foods . Considering the company's success in Detroit and New Orleans, as well as the growth that other retailers have found with smaller footprints in areas outside of their primary demographics, there seems good reason to believe in 365's potential.
Co-CEO Robb calls 365 "an evolutionary strategy," alluding to the fact that the company is being forced to adapt to a changing market, where the big supermarket chains have muscled in on organics and smaller players like Trader Joe's have exploded. He also says that the experience in Detroit "gave us some confidence that we could go in this direction."
The key to the turnaround
Whole Foods shares have hit a four-year low following a weak second-quarter earnings report and the market's sell-off last week. Comparable sales fell to just 1.3% last quarter, a far cry from the heady days of the mid-2000s when the company was regularly ringing up double-digit comps. That's a sign that the the brand is reaching maturity with its core customer base, especially as competition has crept in, and in order to reach its goal of opening 1,200 stores nationwide, nearly triple its current count, it will need to evolve. That means opening more stores like the one in Detroit, and renders the success of the 365 chain crucial.
There's one other factor in the company's favor as well. While same-store sales have flattened at older locations, at stores open less than five years comps were up nearly 9% last quarter, and average weekly sales companywide continue to grow, indicating that younger stores are still experiencing significant growth and demand for new stores remains high.
If the lessons of the Detroit store can be applied to the 365 chain, Whole Foods' comeback should find traction. What the Detroit store has shown is that healthy, organic groceries, which set Whole Foods' brand apart from mainstream grocers, have a market outside wealthy liberals and are in demand in a much wider cross-section of the country. Whole Foods has shown it can adjust its model to meet the needs of lower-income customers. By targeting the huge opportunity in millenials, the 365 stores should find an even richer bounty for the company to harvest.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns and recommends Whole Foods Market. 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.