The Whole Foods Strategy Isn’t Whole

Why cannibalizing yourself to compete never works

Published: Wednesday, August 19, 2015 - 16:32

There’s an interesting strategic play being made by Whole Foods Market. In the midst of the company’s nearly $2 billion one-day drop in market value a few weeks ago came the announcement of a shareholder lawsuit. Whole Foods had already come under legal pressure concerning claims of overcharging, but this new lawsuit claims securities fraud.

Now, when shareholders file a lawsuit like that, it’s not a good thing. Especially not when Millennial buyers—those between the ages of 18 and 34, and a segment Whole Foods has failed miserably in attracting—snicker at the chain’s exorbitant prices and refer to it as “Whole Paycheck.”

Whole Foods has decided to adopt a market-segmentation strategy to reverse its downward trend—a strategy aimed squarely at Trader Joe’s, a solid Millennial brand. Whole Foods plans to launch a chain of smaller, lower-priced stores that focus entirely on stock bearing the Whole Foods private label, 365.

Whole Foods is going to try to out-Trader Joe’s Trader Joe’s. This should be fun to watch, strategically speaking.

If you’ve never shopped at either Whole Foods or Trader Joe’s, know this: Trader Joe’s is a loved brand by nearly every segment, not simply the Millennials, and not simply because of its low prices, but also because of its unique product and shopping experience based on simply being human.

Trader Joe’s has a stranglehold on the Millennial demographic, even though the grocery chain is considered by most brand strategists to be one of the authentic Gen Y brands. However, Trader Joe’s is quirky; it doesn’t claim to be all things to all people, and Millennials identify with that. The rather limited array of items, the mix of generic and exotic foods, the self-deprecating house brands with hilarious names, the lower-than-average prices, and “real people” employees offering the food equivalent of an Apple-like expertise on what’s in your basket make for exactly the kind of value equation younger customers are looking for.

The chain has done a phenomenal job at creating a truly unique culture, one obviously embraced by every employee at Trader Joe’s. When you can make being a cashier in a small specialty food market a highly sought-after position for a Gen Y-er, you’re onto something.

Industry experts suffering from the curse of knowledge would disagree with me when I say that Whole Foods and Trader Joe’s play in essentially the same general space—grocers offering fresh, healthy, organic food. As a consumer I view them as shopping alternatives, and thus competitors. I make my shopping decisions on the very different strategic choices each has made; as a result, I avoid Whole Foods like the plague and visit Trader Joe’s as often as three times per week.

And I’m far from being a Millennial.

In fact, although I have only personal experience to support this assertion, it seems like Trader Joe’s has managed to please every shopper segment. I love the store. I don’t know anyone who doesn’t love it (and I know a lot of people). Like most Trader Joe’s patrons, I’m fiercely loyal. I can’t get everything I need there, but the net result of that is this: Because I’m forced to go to a cold and unfriendly Vons to grab something I need but can’t find at Trader Joe’s, it actually underscores what I detest about Vons while reinforcing my love for Trader Joe’s. In other words, my lousy experience at Vons makes me long for Trader Joe’s.

Weird, I know. But it is what it is.

The Trader Joe’s strategy is rock solid, and the proliferation of the brand (not to mention top- and bottom-line growth) is proof positive. Trader Joe’s buys direct from suppliers, sells few brands other than its own, and passes that savings on to the consumer. It has far smaller store footprints than Whole Foods but sells twice what Whole Foods does per square foot.

So, Whole Foods is taking a Trader Joe’s strategy by launching its 365-brand stores. Let’s stop and think about that for a minute and ask: What must be true for this to be a good strategy?

The heads of state and strategy at Whole Foods must have said something like this to themselves: “If we build a store called 365 that effectively offers the exact same Whole Foods products at lower prices, people will stop shopping at Trader Joe’s and shop at 365.”

I can tell you that if I were in that strategy session, I’d blurt out, in my best Jerry Seinfeld voice, “Who are these people?!”

I’ll tell you where people will stop shopping: at Whole Foods. And they will continue to shop at Trader Joe’s because 365, at least from what I can gather, offers no other value proposition than lower prices. My bet is that the 365 offerings won’t be lower than Trader Joe’s in any case.

Being a profitable business that offers the lowest prices almost mandates that you take a low-cost provider position, which in turn requires you to rethink everything about your business. You must be relentlessly vigilant on systems, standards, and costs. You need a deep understanding of your cost structure. You must be willing to say, “We’re not for everyone; you either love us or hate us.”

And here’s the catch: Prices aside (because price and cost are two different things), there can only be one low-cost provider in any space. Think Southwest Airlines. Think Walmart.

So what the Whole Foods strategy will probably do is anger, if not completely alienate, its current customer base, which will feel like Whole Foods is even more of a rip-off than it is now. 365 will cannibalize Whole Foods in the short-term, and I wouldn’t be surprised if the whole chain implodes in the long term.

The Whole Food strategy isn’t a whole strategy. It’s a fragmented one that pits itself against not another player, but itself. In other words, the real competition won’t be Whole Foods vs. Trader Joe’s; it will be Whole Foods vs. 365.

A half-dozen 30,000 sq. ft 365 stores are opening on the West Coast in 2016, with a doubling of that the following year.

What Whole Foods has going for it is that the projected growth for organic food is roughly 11 percent annually. Which is to say, the tide is rising for all concerned. Still, Fresh ‘n Easy tried coming into this market, with dismal results. It just closed 30 southern California stores. Haggen Food Grocery Stores is trying, and is cutting hours and heads as I write.

Following the 365 announcement, Whole Foods shares fell 10 percent—which came on the heels of the company missing earnings projections for three quarters in a row. The shareholder lawsuit announcement caused a double-digit drop.

It would seem that Whole Paycheck has some payback coming.

First published Aug. 10, 2015, on Matthew E. May’s Creative Strategties blog.

About The Author

Matthew E. May

Matthew E. May counsels executives and teams through custom designed facilitation, coaching, and training using four basic ingredients: strategy, ideation, experimentation, and lean. He’s been counseling for 30 years, a third of it as a full-time advisor to Toyota. He is the author of four books, the latest The Laws of Subtraction (McGraw-Hill, 2013), and is working on his fifth book. His work has been appeared in The New York Times, The Wall Street Journal, Harvard Business Review, and many other publications. May holds an MBA from The Wharton School and a bachelor’s degree from Johns Hopkins University.