Whole Foods Market (NASDAQ: WFM) is down but not out.
The company that pioneered the organic food movement has become a victim of its own success as the high growth and fat margins it enjoyed for years attracted heavy competition from larger players like Kroger and Wal-Mart, and alternative chains like Trader Joe's.
As the Whole Foods stock tumbles and comparable-store sales turn negative, the company has announced a number of changes to its business over the past year that management hopes will return the company to growth. Let's review the steps the company is taking to turn around the business.
Probably no recent Whole Foods announcement has attracted more attention than its decision last May to launch 365 by Whole Foods, a new chain of smaller-footprint, budget-priced stores targeting younger shoppers. As the name implies, the 365 house brand will be a central component of the new locations.
In many ways, 365 seems to borrow from Trader Joe's, which is known for its small-format, affordably priced grocery stores that feature its own house brand. Whole Foods expects to open three 365 stores this year and another 10 in 2017. The first 365 location is set to open in the Silver Lake neighborhood of Los Angeles in May and will include a popular vegan restaurant, By Chloe.
Partnering with outside businesses is another way Whole Foods hopes to drive traffic to its new stores. The company also announced a program called Friends of 365, which it defines as "an opportunity for creative entrepreneurs to operate within our stores and connect with our community." Based on the selections Whole Foods has revealed so far, most of the businesses will be food-based, but there are also other examples, including beauty products, body care, and clothing and accessories.
The "Friends" program offers Whole Foods a way to differentiate itself from competitors, and as the By Chloe partnership shows, Whole Foods has the kind of brand that can attract trendy small businesses in a way that bigger competitors cannot.
Hiring a big-name chef
Last December, Whole Foods named Tien Ho as its new global vice president of culinary and hospitality, a new role within the company. Ho brings his pedigree as a chef at well-respected restaurants such as Momofuku and Ma Peche. The decision signals Whole Foods' desire to strengthen its leadership in prepared foods, a $3 billion high-margin business that rivals have taken notice of.
Ho has only been on the job for two months, but he has just announced a food truck test kitchen at its flagship Austin store to experiment with new ideas for store eateries. The truck's first incarnation will be Tartinette, and it's set to debut March 10, serving creative salads and sandwiches.
Like its partnerships with Friends of 365, Whole Foods also seems bent on making its prepared foods lineup more creative and exciting -- expect some of Ho's ideas to begin trickling into stores nationwide.
Doubling down on delivery
Last month, Re/Code revealed that Whole Foods had formed a strategic partnership with grocery delivery start-up Instacart, making an undisclosed investment in the $2 billion company and agreeing to a five-year delivery partnership.
Whole Foods became Instacart's first national partner in August 2014, and the supermarket chain has touted the relationship several times since then, noting that its customers saved 970,000 hours in the first year of its Instacart partnership, which is now available in 16 cities. On Whole Foods' most recent earnings call, Co-CEO Walter Robb said some locations see the share of sales through Instacart in the mid to high single digits.
As e-commerce proliferates, grocery delivery should grow along with it, and Whole Foods appears to have the ideal customer base to warrant such a service as its shoppers tend to be high-income, urban, and willing to spend a few extra dollars to save time. While Kroger and other competitors also offer delivery through Instacart, Whole Foods is more likely to tap into the partnership as an important service offering. Though management has not yet announced the investment, the news shows that Whole Foods sees the relationship as a success and delivery as an important growth opportunity for the company.
Becoming more price competitive
After an embarrassing scandal last summer that involved mislabeled weights and prices on packaged goods, Whole Foods has taken further steps like lowering its prices and improving its value perception. The company said it would lay off 1,500 workers in September in order to control costs, and it has become increasingly promotional in giving back to customers. It has offered discounts during "customer appreciation" periods of up to a month, which included 50% off on some items and $0.25 cups of coffee. The company has also taken steps to cut prices on a more lasting basis where applicable.
The most successful new promotion may be its digital coupons, a program that was launched on Jan. 28. Daily downloads of the Whole Foods app jumped from 1,000 to 5,000 in the period after the coupons were introduced. Unlike in-store savings, the digital coupon also helps drive traffic to the store since customers may be enticed by a particular offer.
Based on the recent earnings report, the lower prices and promotions do not seem to have immediately stemmed the sales slide, but repairing its value perception will take time, as will the rest of the turnaround.
Meanwhile, Whole Foods continues to commit its Conscious Capitalism motto with recent decisions such as partnering with SolarCity to install solar panels at 100 stores and testing sales of ugly fruits and vegetables that normally get thrown away.
The stock price may not reflect it, but Whole Foods' turnaround is well under way. While it may take time to bear results, the brand is powerful, and management has proven itself in the past. With several promising ideas for restoring growth, the company should return to more bullish pastures over time.
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 shares of and recommends SolarCity and 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.