Whole Foods Goes Discount, Takes on Trader Joe’s with New ‘365’ Stores

As Whole Foods (NASDAQ:WFM) forges ahead with plans to open lower-cost versions of its stores, consumers and investors alike may be wondering will it pay off? “Designed to complement the Whole Foods Market brand by bringing the highest quality healthy foods to a broader audience, 365 by Whole Foods Market stores will allow us to serve more customers with a fresh, value-driven shopping experience,” said Jeff Turnas, president of 365 by Whole Foods Market to FOXBusiness.com The name of the stores stems from the in-house “365 Everyday Value” brand. The first 365 store will be located in Silver Lake, Los Angeles. Others are planned for Bellevue, Washington; Houston, Texas; Portland; Oregon, and Santa Monica, California in the second half of 2016. The company says it will then open twice that amount of stores in 2017. The new stores will stand at around 30,000-square-feet, smaller than the current stores which average about 50,000-square-feet.

Turnas, who took the helm in June, has held various leadership positions at the company for 20 years. He is likely hoping to tap the growing appetite for quality.

“Consumers continue to prioritize health and wellness, with 83% reporting they are concerned about the nutritional content of the foods they eat,” according to a U.S. Grocery Shopper Trends 2015 Report conducted by the Food Marketing Institute (FMI). While the chain’s products arguably meet the needs of the modern consumer to a T, the prices do not. The phrase “Whole Paycheck” was coined by some shoppers who feel the store is an unaffordable luxury. “The organic space has become more competitive,” said Joe Agnese, an analyst at S&P Capital IQ.

In addition to the success of direct competitors like Trader Joe’s, Whole Foods has also been taking hits as “non-traditional players are expanding their offerings,” said Agnese. Namely, big box grocery chains including Costco (NASDAQ:COST), Walmart (NYSE:WMT) and Target (NYSE:TGT), all of which are expanding their organic offerings. In fact, The Seattle Times reported Costco has surpassed Whole Foods as the largest organic grocer in the U.S. Costco CFO Richard Galanti noted in a May earnings call that Costco sells $4 billion worth of organic food products annually, eclipsing Whole Foods’ estimated $3.6 billion in organic sales. Along with mounting competition, Whole Foods is also suffering from a New York City Department of Consumer Affairs (DCA) investigation that uncovered Whole Foods routinely overcharged for pre-packaged foods at New York City stores. A similar investigation in California also found pricing irregularities.

While Whole Foods may not be able to regain sales traction against the big box stores, it can perhaps target the Millennial consumer with these new stores. Millennials are getting married later, meaning they will obtain more shopping and cooking experience than previous generations during the young adult years when they are solely responsible for themselves.

“As single-person households continue to increase, it will become more important for retailers and manufacturers to cater to the evolving needs of the single-person household,” the FMI report stated.

Agnese anticipates Whole Foods will market the 365 stores as a different kind of shopping trip than a typical grocery store as a means to draw in the Millennial customer.  They will be “more like a farmers’ market,” he said, where presumably these younger consumers can shop in a way that fits their single-person household needs. Agnese notes it is difficult to tell how the 365 initiative will impact the company’s next fiscal year or its stock. And, while many are still reeling over the overcharging accusation, “consumers can be forgetful,” he said.   Shares of Whole Foods have declined 35% this year.