Whole Foods Tries Small Format Stores... Again

Source: https://media.wholefoodsmarket.com/

Roshan Fernandez reports in today's Wall Street Journal about Whole Food's renewed attempt at operating small format stores. Fernandez writes that "The 9,100 square-foot Daily Shop location is about a quarter the size of a regular Whole Foods, and sells items at comparable prices. 'We’re serving a previously unmet need in the neighborhood,' said Nicole Davia, a Whole Foods senior vice president."  Whole Foods has opened several of these Daily Shops in New York, with plans to expand to Washington, D.C. soon. 

As it turns out, Whole Foods has tried small format stores previously, and that effort failed. In 2016, the company launched an experiment with a series of small format stores labeled "365 By Whole Foods Market."  Those stores sold primarily private-label items under the 365 label that Whole Foods sells in its larger locations.  The notion was to offer a lower-priced selection in these small format stores, with the target being millennial customers who were resistant to the high prices at Whole Foods.  The company was reacting to the "Whole Paycheck" image that turned away some shoppers.  At the time, Fortune's Beth Kowitt reported on the launch of the 365 stores:

“Our goal is to compete in the marketplace without lowering the Whole Foods standards,” Turnas (head of the 365 stores) told Reuters during a recent store tour. He said 365 stores will complement Whole Foods’ premium, full-service sister brand – often dubbed ‘Whole Paycheck’ in popular culture in reference to its perceived higher prices. But the new chain will have to work hard to avoid being labeled “a cheaper Whole Foods”, said Kevin Kelley, a principal at strategy and design firm Shook Kelley, which has worked with Whole Foods and other grocers.

When I teach strategy, I often invoke this story as a classic example of straddling two quite different business models... and failing as a result.  365 was quite distinct from the Whole Foods' premium grocer model, but not as lean as Aldi or as much of a fun treasure hunt experience as Trader Joe's.  It was hopelessly floating in the middle, unclear about who it truly wanted to be.  The result was confusion, both internally and for the customers.  

This time, Whole Foods is sticking with its premium, upscale positioning with the new small format stores.  Thus, it seems that they have addressed one major mistake from the attempt a decade ago.  Now, the question becomes whether they can operate small stores efficiently.  Fernandez quotes former Wal-Mart executive Bill Simon, who says, “If they’re going to operate a bunch of small-fresh stores, the degree of difficulty is as high as you’ll see in retail."  Simon and others point out that many larger grocers fail at small format stores because of the logistical challenges, as well as the difficulty stocking a sufficient number of higher margin items in the limited shelf space.  Aldi and Trader Joe's have perfected the small format model, but many large format grocers don't fully understand the difficulty shifting from their supercenters to these much smaller footprints, often in congested, urban areas.   If Whole Foods can figure it out, there is clearly opportunity here, as many customers do like the concept of "fill-in" trips to smaller stores that are located near their homes and workplaces.