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.  

JetBlue Acquires Spirit Airlines: Will Straddling Work?

Source: Getty Images

The bidding war for Spirit Airlines has ended.  JetBlue and Frontier both sought to acquire Spirit.  Today, we learn that JetBlue has completed the deal at a price of $3.8 billion.  Alison Sider of the Wall Street Journal reported on the deal, quoting JetBlue CEO Robin Hayes: 

Buying Spirit would supercharge JetBlue’s growth, accelerating its plans by years, Mr. Hayes has said. The combined airline will have 458 planes—up from JetBlue’s fleet of just over 280 jets now—and will have over 300 more on order. Spirit’s pilots are a big part of the allure as well, at a time when airlines are struggling to replace the thousands who retired during the pandemic and are facing a growing shortfall.

Will the deal create value in the long term for JetBlue?  It's a fascinating question.  Historically, firms in the airline industry has struggled to be consistently profitable.  Richard Branson once joked that the easiest way to become a millionaire is to start as a billionaire and then open an airline.  Airlines have had even more trouble being profitable when they have tried to straddle two contrasting business models.  For instance, when Delta launched Song to compete with the likes of Southwest, they struggled mightily.  The same goes for United with Ted, and British Airways with its Go! subsidiary - which aimed to compete with EasyJet and Ryanair in Europe.  In each case, the full-service legacy carrier tried to also run a low-cost subsidiary, and the two business models did not co-exist successfully in the same corporation.  

Joanna Bailey wrote about this deal several months ago for the Simple Flying website. She noted,

 

"The offer of $3.6 billion, or $33 per share, represented a premium of around 30% over the price Frontier had agreed. Clearly, JetBlue sees a value in the carrier, but why?  On the surface, they aren’t exactly a match made in heaven. Spirit is a true ULCC (ultra low cost carrier), lightweight, efficient and no-frills; JetBlue is very much a hybrid airline, offering better services at affordable price points, but not truly low-cost. At first glance, Frontier looks to be the better option, but how does that pan out when we consider routes, fleet, and what’s best for the passengers?"  

Bailey concludes that Frontier seemed a better fit as you consider competitive positioning, fleet configuration, and route network.  She explained, "The Frontier-Spirit tie-up would have created the largest ULCC in the country, with a fleet of almost 500 aircraft targeted by 2026."  

Perhaps, though, JetBlue doesn't plan on operating two contrasting business models moving forward.  A quote from CEO Robin Hayes in the Wall Street Journal today seems to suggest a shift away from the ULCC strategy at Spirit:

“This is about creating a larger JetBlue,” Mr. Hayes said Thursday. JetBlue has said it plans to retrofit Spirit’s distinctive bright yellow planes to match its own fleet, including tearing seats out of Spirit’s more crowded cabins. The combined airline would be based in New York, with Mr. Hayes at the helm, the airlines said Thursday.

Ok, so perhaps we won't see an attempt to straddle.  This quote though suggests a different question: If JetBlue plans on transforming Spirit to match the existing JetBlue strategic positioning, then what's the rationale for the merger?  Why acquire the airline rather than just contining to add planes and routes to the existing JetBlue network?  It will be interesting to hear and see why acquisition might create more value than organic growth in this case.  Many people have their doubts about this deal... understandably.  

Straddling: Whole Foods Discontinues 365 Store Format

Source: Wikimedia Commons

Supermarket News reported yesterday that Whole Foods will not be opening additional 365 format stores. The company had launched the small-format 365 stores two years ago in an attempt to provide a less expensive option targeted at millennial shoopers.   CEO John Mackey explained the move in a memo to his staff: "However, as we have been consistently lowering prices in our core Whole Foods Market stores over the past year, the price distinction between the two brands has become less relevant. As the company continues to focus on lowering prices over time, we believe that the price gap will further diminish."  Count me as someone who was skeptical of this strategy even before Amazon acquired Whole Foods and began to lower prices in the traditional stores.  Let's take a look back at the original rationale for the 365 stores.  Annie Gasparro of the Wall Street Journal reported on the strategy in 2016:

Announcing the plan last month, executives said these new stores would have a trendier atmosphere, with high-tech ways of interacting with shoppers that help keep its costs down.  Some retail analysts said the value-focused chain, which is expected to largely carry private-label foods, could help Whole Foods compete with Trader Joe’s, which tends to attract younger shoppers who want affordable, natural foods.

A Reuters article by Lisa Baertlein, published in 2016, revealed some skepticism about the 365 strategy by industry analysts:

“Our goal is to compete in the marketplace without lowering the Whole Foods standards,” Turnas 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.

Why did the 365 format struggle to gain traction?   I would argue that it's a classic example of a straddling strategy.   The 365 format was caught somewhere in between the traditional business model of Whole Foods and the very successful contrasting business model at places such as Trader Joe's.  For more on Trader Joe's, you might check out a recent Freakonomics episode in which I participated.   Straddling often occurs when incumbent players try to react to successful entrants.  Consider how the legacy airlines tried to cope with entrants such as Southwest and Ryanair.   Among the failed responses were straddling strategies such as United's Ted, Delta's Song, and British Airways' Go brands.  For more on straddling, check out this short video clip from one of my Great Courses lecture series. 

Brief Clip from The Great Courses lecture series on Competitive Strategy