If you work in or follow the US natural foods sector, or if you have an Internet connection, it is highly likely that you’ve run across the headline touting the downslide of the industry leading retailer, Whole Foods. Accordingly to Barclays, WF has lost over 14 million customers to other food retailers. Barclays espouses that retail giant Kroger is the largest recipient of Whole Food defectors but there is little doubt to those who shop organics and natural that other retailers ranging from club chains like Costco to discounters like Aldi have stepped up their organic game and have also taken a bite out of Whole Foods market share.
In my opinion there are several factors in play here that have led Whole Foods to this vulnerable place.
In response to a number of economic and environmental factors, food-at-home prices in many categories (eggs, beef, pork, and dairy) have fallen significantly resulting in the first annual decline (deflation) in prices since 1967. Many retailers passed on these savings to consumers as they battled for their dollar using heavy promotions. As in any price war, this often resulted in a plunge to lower margins just to stay competitive. Whole Foods is not adept at the bottomless discounting game especially considering they are starting from a prices that are roughly 20-30% higher than mainstream grocers. They aren’t nicknamed called Whole Paycheck for nothing.
INCREASED ADOPTION OF BETTER-FOR-YOU PRODUCTS
Organic is the fastest growing segment of the food industry. Sales have grown 209% over the past 10 years and show little signs of slowing. Moreover parents (ages 18-34 years old) are the biggest group of organic consumers. No surprise that these attractive stats have encouraged more and more retailers to add and expand organics in their mix. This once was a niche dominated by Whole Foods and other small specialty natural foods stores. Now 3 out of 4 grocery stores offer organic products. Believe it or not, Costco is now the biggest organics grocer, selling more than $4 billion in organics annually according to the Seattle Times.
SUPPLY HAS CAUGHT UP WITH DEMAND
The number of organic farms has doubled and nearly tripled in many states. At the same time, the number of product launches with better-for-you, natural claims has skyrocketed. Natural Products Expo West, the industry’s largest US trade show breaks attendance and exhibitor records with each show. This year’s event was attended by over 80,000. If Americans crave healthier options, the market has responded with gusto.
Contrary to the media reports, it doesn’t seem like this situation has caught WF completely off-guard. In fact, John Mackey announced that they were resetting the growth plans of the company to refocus on existing assets in February when he also announced they were entering into a partnership with Dunnhumby to better understand and refocus their brand strategy with consumer-centric insights. Done well, this investment could help Whole Foods reconnect with their passionate base of core consumers and cater their offerings to best serve them.
The Whole Foods dilemma is similar to the struggle of many brands who experienced high-growth by being initially highly differentiated. In simplistic terms, based on initial success, brands confidently expand in numerous directions and widen their appeal. In the meantime, they start to attract attention in the market and more and more competitors enter the space to compete for the same customers. If the brand is well-established like the Whole Foods brand, they can ride the wave of loyalty and first-to-market status for a while but eventually you come to a time where you have to step back, reassess and remember what made the brand beloved in the first place, what drew people in and kept them coming back far beyond the products that you sell. The heart of the brand. It begs us all to consider whether brands founded on serving a specific niche are threatened as their “niche” becomes more and more popular. If so, where is that tipping point where a niche needs to be redefined to protect the brand from becoming “common”?
In my opinion, for Whole Foods, that place of brand distinction lies in the full experience. Most stores are small format, easy to navigate and frankly, beautifully decorated and merchandised. They are inviting places that lead the shopper from discovery to discovery of products that you don’t typically find in mainstream stores. They are especially adept at catering to the shopper who loves finding small, local brands. The store personnel at Whole Foods stores are consistently more knowledgeable about products and it shows in their attention to customer service. Many stores offer community gathering space, classes on various health-minded topics and even coffee/ hot food bars. It’s a combination of features that ladder up to an experience that people feel good about. For many consumers, identifying themselves as a Whole Foods shopper is a badge that makes a statement about their values.
When Whole Foods stops trying to cater to everyone (please don’t make me mention the 365 concept) and instead centers itself once more around its core, they will reset the brand for the future. They can’t successfully go back to the Whole Foods of ten years ago but there is plenty of room in the market for them to innovate to meet the evolving needs of the natural consumers of tomorrow.