Washington - Whole Foods Market has known for some time that it is a
business in need of course correction.
But its imperative to do so may have gotten more urgent this
week, after an activist investor and some affiliates disclosed a nearly 9
percent stake in the company and urged it in a regulatory filing to explore
dramatic moves to stage a turnaround, including possibly putting itself up for
sale.
Jana Partners, the investor, encouraged the organic grocery
chain to do a top-to-bottom re-evaluation of its strategies and practices. Jana
said it hoped to have discussions with Whole Foods management about everything
from its real estate portfolio to customer analytics to inventory management
and labour scheduling.
It remains to be seen which of those steps Whole Foods will take,
and whether any of them will make a difference.
In a statement, the grocer said: "Whole Foods Market
welcomes investment in the Company and is open to the views and opinions of all
of our shareholders. We value constructive dialogue toward our shared goals of
creating shareholder value, successfully executing on our strategic priorities
and taking actions that will position the Company for continued success."
One thing, though, seems hard to ignore: Jana has a point.
The retailer saw a 2.5 percent decline in comparable sales last year, a measure
of sales at stores open at least a year. Its forecast for 2017 isn't too
cheery, either; the company predicts it will deliver comparable sales of
"-2.5 percent or better."
That's a concerning pattern for a chain that has every
reason to be successful in this moment, in which shoppers are gravitating
toward healthy food, and when an increasing share of the grocery industry's
sales are coming from the fresh items such as produce and meat that Whole Foods
built its reputation on.
Whole Foods' challenges are wide-ranging, but one of its
biggest hurdles is attracting more customers. According to data from Kantar
Retail's ShopperScape survey, the organic grocer had a 7 percent penetration
rate back in 2009 when it had some 273 stores.
In other words, 7 percent of respondents in Kantar's
customer survey said they shopped at Whole Foods on a monthly basis. Since
then, the chain has been on a breakneck march to open more stores, its fleet
now numbering more than 430 locations. So what is its market penetration now,
with all those added stores? Just 8 percent, according to Kantar. It's
practically unchanged.
That means its major capital investments in building those
stores - and the ongoing expense of staffing and maintaining them - have not
done much to grow its share of devoted shoppers.
Grocery industry analyst
Diane Sheehan, a grocery industry analyst with Kantar, said
this might in part reflect the fact that Whole Foods stores are sometimes
clustered close together. For example, she pointed to the suburbs of Chicago,
where the chain has three stores in a four-mile range.
That means those stores probably are not expanding the base
of Whole Foods shoppers; they're just fighting among themselves for the same
crowd.
Across the wider retail business, talk abounds of being
"overstored," the industry's term for having too many stores. Whole
Foods doesn't have that problem, exactly, but it has its own version of it. It
is overstored in certain neighbourhoods.
Meanwhile, as Whole Foods aggressively courts millennials
with in-store wine bars and date-night cooking classes, Kantar's research finds
that it has lost some Generation X and baby-boomer shoppers over the past five
years.
"They are leaking tons of shoppers in those non-core
demographic groups," Sheehan said.
Leaning so hard on millennials may have long-term benefits but for now whole foods is missing out on sales due to its weakened resonance
with older consumers.
Where are those shoppers going? Likely to one of the
competitors that has elbowed into the organics business.
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Simple Truth, the private-label organics line from Kroger,
delivered an eye-popping $1.7 billion in sales last year, surely snatching some
spending away from Whole Foods. Target, Walmart and others are also ramping up
their offerings in the category. And many shoppers prefer that these outlets
allow them to get organic and conventional groceries in one place.
They can get their grass-fed beef and Coca Cola in one trip,
for example, or they can get their cage free eggs without having to shell out
for natural unbleached paper towels.
All of these problems suggest it's going to be tough for
Whole Foods to find avenues for growth in the immediate future. Indeed, check
out Kantar's forecast for its growth rate in edible grocery sales over the next
five years compared with the prospects of its competitors.
Jana Partners has had a couple of recent successes urging
change at major companies; In February, it pushed drug maker Bristol-Myers
Squibb and luxury retailer Tiffany & Co to shake up their boards of
directors.
However Jana's pressure on the grocer plays out, this much
is clear: The cultural phenomenon that Whole Foods was essential in creating is
poised to leave the chain behind. It's up to its leaders to make sure that
doesn't happen.