Whole Foods Market: nine steps to a turnaround

Date : 05 November 2015

As Whole Foods Market reports challenging fourth quarter and full year results, we review how it plans to deliver an improved performance going forward.

Challenging results but leadership remains optimistic

Whole Foods Market has reported a challenging set of quarterly results, with sales and profits under pressure. While some of the factors driving this performance are self-inflicted, including self-cannibalisation from a record number of store openings, and deflation as a result of value investments, the retailer is facing a significantly higher level of competition in its core US market. However, Whole Foods Market’s leadership remains optimistic about its long term prospects, although it acknowledges that it needs to move much quicker in a number of areas.

As the business continues to grow, processes and systems need to evolve, and while it will also be focusing on highlighting its points of difference, its competitors are able to deliver strong results without making the same level of investment in product quality and sourcing. Whole Foods Market is banking that customers will vote with their feet when it delivers this message in a more consistent, and obvious way.

First negative comp since 2009, and it’s getting worse

Fourth quarter sales increased by 5.6% to $3.4bn, however, comp store sales fell by 0.2% its first negative comp since 2009. Profits were also lower in the quarter at $56m, down 56.2% year-on-year. Since the end of the quarter, trends have deteriorated, with the retailer reporting that comp store sales in first quarter to date are down 2.1%. Any turnaround in business performance is going to take some time, but the retailer has a number of initiatives underway to drive this.

1. Reducing costs and improving productivity.

Whole Foods Market plans to reduce costs by a $300m run rate by the end of 2017, with a focus on eliminating inefficiencies from the business. This includes transforming its buying processes to better leverage its size and scale, particularly for centre store products. Fresh foods purchasing will remain at the regional level. The challenge will be as it evolves its model is that it does not create any negative impacts, particularly as it centralises more of its operations.

2. Accelerate growth of private brands and prepared foods

With private brands and prepared foods accounting for almost $5bn in sales, the retailer will accelerate innovation in these areas to further differentiate its offer. Food-to-go will be a particular area of focus and is recruiting for a new VP of Culinary and Hospitality to drive progress in this area. Having developed a leadership position in this area, Whole Foods Market is keen to protect this and make a further step-change over its competitors. Restaurant partnerships are likely to be a key element of the model.

3. Improve its value perception

Building on the work it has already undertaken in this area, the retailer will increase promotional activity and strategic price reductions. As part of this it will place greater focus on tracking how its promotions and investments resonate with shoppers and how they impact its results. One of the key challenges will be the deflationary impact on certain categories, but the retailer is determined to close the pricing gap with its competitors when the price difference cannot be justified.

4. Enhance external marketing efforts

With a significantly increased level of competition in the sector, marketing spend will be increased to support and communicate its points of differentiation, in addition to its price investments. This value with values approach builds on last year’s launch of its first national marketing campaign and will aim to demonstrate to shoppers how it is different, particularly in terms of quality standards and product sourcing.

5. Invest in digital and grocery ecommerce

Given a strong level of online traffic, Whole Foods Market will focus on converting that into sales. To support this it has recently integrated Instacart into its app, and will look to build on the strong results which it is seeing from grocery ecommerce. Its best stores are currently running at 15% of store sales, with average online baskets of up to $100. The retailer will also launch a national digital sales flyer, while the test of its affinity, or loyalty, program will be extended to additional markets in order to refine the model before rolling it out nationally.

6. Develop new technology platforms

The retailer plans to replace a number of legacy technology solutions in a number of areas including checkouts, labour productivity and data management. The new platforms will enable Whole Foods Market to provide improved personalised offers at the checkout via its mobile app. Recently it announced plans to co-create a next-generation cloud-based retail, merchandising and supply chain management platform which will bring it a number of new capabilities in areas such as perpetual inventory, replenishment, space planning and price optimisation.

7. Launch ‘365 by Whole Foods Market’

Next year will see the launch of its first smaller format, value-focused concept, ‘365 by Whole Foods Market’. Three stores are planned for 2016, and up to 10 in 2017. This store format will enable the retailer to extend its presence into new catchment areas, and if successful, could be a major growth vehicle for the future.

8. Slow the pace of new store growth

While the retailer remains confident of being able to open up to 1,200 stores in the US, it will be moderating its new space growth in the current year. Having accelerated its openings over the last two to three years, self-cannibalisation has been a major issue. Remodels and relocations will also be important as it is the older stores in the portfolio which are dragging back its overall performance.

9. Protect the culture

With a number of significant changes underway in the business, the leadership is focused on ensuring that the culture of Whole Foods Market is not impacted. With its people being an integral element of the customer experience at its stores, the retailer will continue to invest in them, particularly as new technologies have the potential to change the level of interaction with its customers.

Planning on 3%-5% sales growth in fiscal 2016

With these programs in place, Whole Foods Market is anticipating sales growth of 3-5% in the current financial year. This is dependent on its comp sales performance, and while the higher end of its outlook reflects a 2.8% two-year comp, in line with the current run rate, the lower end of its sales outlook reflects that comps could get worse. Year to date they are running at -2.1%, significantly lower than the 5.4% which was achieved in the first quarter last year.

Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on Whole Foods Market. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region.