Please ensure Javascript is enabled for purposes of website accessibility

2 Reasons Why Whole Foods 365 Will Be a Hit

By Jeremy Bowman - Apr 14, 2016 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The organic grocer has learned from changing market dynamics. Soon, investors will see the fruits of its new project.

Whole Foods Market (WFM) has set the date.

The company that pioneered the organic grocery space will open its first budget-priced 365 store next month. The new supermarket concept will be unveiled on May 25th in Los Angeles's Silver Lake neighborhood. Whole Foods describes the store as bringing "fresh, healthy food to a broader audience with a streamlined quality-meets-value shopping experience."   

Image source: Whole Foods.

Investors initially dismissed the idea when it was introduced a year ago, sending the stock tumbling as analysts saw the move as capitulation to new competition in the organic space. Whole Foods can't keep growing through its traditional format, they argued, so it's developing a cheaper option, but fragmentation is a typical strategy for targeting different demographics and income levels. Rivals like Kroger (KR -0.36%), which has several brands ranging from high-end chains like Harris Teeter to more mainstream banners like King Sooper's, have long employed such a strategy.

Beyond the need to reach out to a new demographic, there are several other reasons the new 365 concept should be a hit. Let's take a look at a couple of the big ones:

1. Following a successful footprint
More than any other supermarket chain, the new 365 seems to resemble Trader Joe's, the alternative grocer that has grown to nearly 500 stores nationwide. The company is privately held so hard numbers on its financial performance are unavailable but its annual revenue is estimated at about $10 billion. Over the years, Trader Joe's has developed a cult-like following and its sales per square foot, the best indicator of how efficiently a company uses its real estate, are the tops in the industry at around $1,750. That's nearly double Whole Foods at $930 and close to triple Kroger at $672. Wal-Mart, the country's No. 1 grocer is even further back at just over $400 per square foot.

Clearly, Trader Joe's is doing something right. Customers seem to like its combination of low prices, convenient packaging, and wide variety and selection of organic and natural foods. In many ways, 365 seems like a combination of Whole Foods' full-line stores and Trader Joe's. The new stores will take up less space than a typical Whole Foods, mirroring Trader Joe's smaller footprint, and carry a more limited selection of items. It will also rely more heavily on its private-label brand 365, much in the way Trader Joe's products are almost entirely private label. Finally, 365 will reduce labor costs by nixing butchers and cheesemongers and having such items prepackaged, much like Trader Joe's. Mixing the Whole Foods brand with the Trader Joe's operational model should be a winning combination. 

2. Attracting trendy partners
When Whole Foods first announced its Friends of 365 program, it was mocked for suggesting the idea of tattoo parlors in its stores, but its plans for the first store make it clear that the company will include mostly food and beverage concepts in the new stores, which seems to be the most logical addition.

Whole Foods named the popular vegan restaurant By Chloe as its first Friend of 365. By Chloe will have its own dedicated space inside the Silver Lake store, where it will serve core items from its menu such as pesto meatballs and burgers. Other Friends of 365 at the new location include Allegro Coffee Company and TeaBot. Allegro already has a fancy outpost in Whole Foods' Brooklyn store , and the Silver Lake location will include a craft brew bar as well as cold beer. TeaBot, Whole Foods says, is a Toronto-based start-up that provides self-serve custom tea kiosks that prepare tea in under 30 seconds.

Whole Foods has yet to name any Friends of 365 at other upcoming stores, but based on submissions, potential partners could be a shea butter skincare line, a Mexican restaurant, small-batch jewelry, and bone-broth beverages. 

Despite its recent struggles, Whole Foods is still an excellent business. With a profit margin of 3.4%, it outperforms virtually all of its major rivals, including Kroger at just 1.8%. The company has also maintained its goal of opening 1,200 stores nationwide, a number that will only increase with the addition of 365.

The new chain won't have an immediate effect on the bottom line as only three 365 stores are expected to open this year with 10 more slated for next year. However, a successful launch last month should provide a much-needed boost for the stock as investor optimism returns.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
The Kroger Co. Stock Quote
The Kroger Co.
$53.20 (-0.36%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.