Whole Foods Market, Inc. is launching a new store concept geared toward millennial shoppers. The format will feature a modern, streamlined design, innovative technology and a curated selection to deliver a convenient, transparent and values-oriented shopping experience.
The move comes at a time when Whole Foods’ track record of robust growth has been showing signs of spoilage. Competition from emerging players in the natural and organic segment, including conventional grocery stores, has been squeezing share from the Austin-based retailer in recent years. A deceleration in comparable-store sales during the company’s second quarter sent Whole Foods’ share price tumbling 11% during mid-morning trading on May 7, more than $5 from the previous close of $47.72.
For the three months ended April 12, Whole Foods had net income of $158 million, or 44c per share on the common stock, up 11% from $142 million, or 38c per share, in the prior-year period. Results include a non-routine supplier credit of $7 million.
Sales advanced 10% to a record $3,647 million from $3,322 million, benefiting from a shift in Easter to the second quarter from the third quarter of the previous year. Comparable-store sales increased 3.6% for the quarter, which was lower than expected.
“There are many moving pieces so we can’t say definitively what caused the moderation in comps during the quarter,” said John Mackey, co-chief executive officer, during a May 7 earnings call with financial analysts. “We do know that we are not immune to the larger macro environment and the exploding demand for natural and organic products has resulted in increased competition for many different channels. In addition, severe weather and cannibalization had a larger impact in Q2 than in Q1.”
As for the new store concept, Whole Foods said it is building a team to focus on the venture and is negotiating leases, with plans to begin opening stores next year.
“We want to underscore we see this as an ‘and’ to our Whole Foods Market brand and not an ‘or,’” Mr. Mackey said. “We believe the growth potential for this new and complementary brand to be as great as it is for our highly successful Whole Foods Market brand.”
Executives declined to provide many details on the new venture, promising more information will be announced by Labor Day, but they emphasized the new concept will be notably different from Whole Foods.
“I think the biggest rationale is this marketplace continues to grow and explode, and I think we think by creating a second growth vehicle for our company, we can broaden the accessibility to fresh healthy foods,” said Walter Robb, co-c.e.o. “And we continue to be leaders in that sense.”
Added Mr. Mackey: “There’s things we can do with the Whole Foods Market brand. We can continue to do a better job on our expense discipline. We can continue to be aggressive and gradually lowering some of our prices. But the Whole Foods Market brand stands for the highest quality, the best selection, the highest degree of service. So that brand can bend a little bit, but we can’t break it, we’re not willing to break it. But we think we can create a complementary brand that can go places the Whole Foods Market brand cannot effectively go.”
Mr. Mackey added the new concept is not expected to cannibalize the flagship brand because it will have a smaller product mix and a different target customer.
“The Whole Foods Market brand is very targeted to a certain type of customer, certain type of shopper,” Mr. Mackey said. “We think the opportunity is a lot larger than that, and we think there are certain customers that the Whole Foods Market brand is attractive too, but there are other customers that it’s less attractive to.
“And we see a whole generation of young people coming up who are quite interested in natural and organic foods. The millennial generation, they’re idealistic, they’re values-oriented, they’re mission-driven. These all play to Whole Foods Market strength. They’re also very value conscious.
“So we think a streamlined, hip, cool, technology-oriented store unlike any store anybody has ever seen before, but has lower capital, lower cost, perhaps lower labor cost and lower prices is going to be very, very attractive to that particular generation.”
Net income for the first half of the year was $326 million, or 90c per share, up 9% from $300 million, or 81c per share, the year before. Sales for the six-month period were $8,319 million, up 10% from $7,561 million. Comparable store-sales for the period increased 4.2%.
The company had 417 stores at the end of the quarter and expects to open its 500th store in fiscal 2017 with a long-term goal of 1,200 Whole Foods Market stores in the United States.
For 2015, the company expects to deliver sales growth of more than 9%, comparable-store sales growth in the low- to middle-single digits, and 38 to 42 new store openings. For the third quarter, management expects comparable-store sales growth to be negatively affected by the shift of the Easter holiday and cycling over a special promotion in the prior year.