2015 has been an ugly year for Whole Foods Market (NASDAQ:WFM). Between the scandal over mislabeled weights on packaged foods, flatlining same-store sales, and a stock price that's fallen 40% since Jan. 1, investors may be better off looking forward to next year for a comeback.
Of all the reasons to hope for Whole Foods to return to its former glory, the biggest may be the upcoming debut of its new downscale chain, 365. Whole Foods plans to open five of these smaller-footprint stores next year, offering a selection of value-priced products to target millennials.
But the plan hit a surprising snag recently when the company's plans for one of the new 365 stores in Silver Lake, a gentrifying neighborhood of Los Angeles, was greeted with outrage by local residents. The reason, however, was not because Whole Foods was displacing independent businesses, snarling traffic patterns, or making a giant real estate grab -- which are often the reasons locals protest a national chain -- but because the company had promised to open a full-line store in the neighborhood and was instead substituting one of its smaller, cheaper, unproven models.
So far, 196 people have signed a petition stating, "We want the powers-that-be at Whole Foods Corporate to know that the residents in this area do not want a budget 365 store. We believe the corporation has largely mis-identified the demographic of the surrounding neighborhood as a fiscally concerned youth base. This is wholly wrong. The neighborhood is actually comprised almost exclusively of financially secure people in their mid 30s and above and many accomplished professionals with young families."
Part of the problem stems from the fact that the contents of the 365 store are not yet known. Will it carry the butchers, bakers, and fishmongers that help differentiate Whole Foods from the average grocery store? The other reason is that Whole Foods had promised one of its gleaming full-line stores back in 2013, taking over a Ralph's that occupied more than 50,000 square feet, but went back on its word.
Losing the battle but winning the war
We don't know for sure why Whole Foods is opting to install a 365 in Silver Lake instead of one of its regular stores. Presumably, the company's market data told it that the new format might do well in that neighborhood despite the community backlash.
But the reaction underscores a huge tailwind for Whole Foods. There are gentrifying neighborhoods like Silver Lake across the country, and these markets are generally underserved by high-end organic groceries like Whole Foods. In Brooklyn, for example, the gentrifying hipster capital with a population of 2.6 million, there is only one Whole Foods. Nationwide, the company has about one store for every 750,000 Americans, underscoring the opportunity in parts of cities with rapidly increasing property values.
There are many other communities like Silver Lake that are clamoring for a Whole Foods. In Washington D.C., a neighborhood organization told the company, "Between the families, the young professionals, longtime residents and university students in the neighborhood, we have more than enough demand to satisfy Whole Foods."
Among the other communities that have petitioned Whole Foods to open are Staten Island, N.Y., southern Utah, and Geneva, Ill. The demand and excitement over potential Whole Foods stores is harder to imagine for rivals like , say, Kroger, a sign of Whole Foods' uniqueness and brand strength.
Despite Kroger making inroads on Whole Foods' dominance of organics, it's important for investors to remember that demand for new stores remains high. Even as overall same-store sales have fallen to low single digits, comps at stores open less than five years are close to 10%, indicating that new stores are doing well.
Whatever happens with the Silver Lake battle, the uproar shows that Whole Foods is the rare brand that upwardly mobile Americans consider a must-have. Real estate agents had even begun using the upcoming opening to promote the neighborhood. That's a huge asset for Whole Foods, and it's unlikely to change despite rising competition and the best efforts of Kroger and others.
The demand for new stores remains strong, and same-store sales growth should eventually normalize as the weights and measures scandal fades away. With the improving economy and upcoming rollout of the 365 brand, 2016 should present greener pastures for the company.