What's Eating Whole Foods?

Whole Foods’ business is in decline, and they want to respond by offering more discounts and lower prices. A better idea is to focus on their best customers to find opportunities for profitable, sustainable growth.

On February 8th, Whole Foods reported its sixth consecutive quarter of falling same store sales. The company is closing nine stores according to the Washington Post, and is abandoning its plans to grow from 470 locations to more than 1200. Its stock has lost half of its value since it’s peak in early 2015. What is going on?

Organic food has never been so popular. Ironically, that is bad news for the brand that made organic foods a household name— Austin, Texas based Whole Foods Market. Organic food has gone so mainstream that conventional big box retailers are joining the fray. In fact, over 50% of organic food is now sold through a traditional grocery retailer like Kroger and Walmart.

Kroger introduced its Simple Truth brand in 2012 and called it their most successful brand launch ever. Walmart ramped up its organic food offerings in 2016. And super low-priced chain Aldi plans a massive US expansion based on expanding their range of organic and gluten-free products.

The conventional wisdom says that Whole Foods is losing because they can’t match the efficiencies of the leading grocery players. They don’t have a centralized supply chain, and their “whole paycheck” pricing model is no longer competitive. Why should a consumer pay more at Whole Foods when they can get organic food at their local supermarket for half the price?

How is Whole Foods responding? By announcing that they will be lowering prices. And creating a store circular with weekly sales items. And continuing to expand store locations, but creating smaller stores with lower priced product offerings in underserved markets.

Say what? Whole Foods plans to compete against the big box retailers by acting...like a traditional grocery store? Adopt a high/low pricing model. Open stores in areas that aren’t saturated with grocery options. Provide weekly incentives and in-store sales. Why does Whole Foods think they will win adopting a strategy that has failed repeatedly in the retail industry?

At Custora, we build customer analytics software designed to help retailers understand their best customers and use these insights to improve their go-to-market performance. As an outsider looking in, we would say that Whole Foods has a customer centricity problem. Their challenge is not based on pricing, or their supply chain inefficiencies. They have lost their focus on the Whole Foods customer. The customer that made Whole Foods the household name that it is today.

In our experience, loyal customers represent a disproportionate share of overall revenue for a retail chain. A recent study released by Demandware showed that the top 10% of a retailer’s customer base represented almost 60% of their overall store sales. So how should this change Whole Foods’ approach to growth and competition?

Whole Foods is taking the conventional retail approach. Need to grow revenue? Open more stores. Competition taking business from you? Lower prices, offer more promotions, and roll out new smaller store formats—365 by Whole Foods—designed to attract a new, more cost conscious consumer.

Our recommendation for Whole Foods would be to start by really analyzing their customers. We’d suggest taking a historical snapshot of their customer base from the previous year and doing a value tier segmentation analysis. Segment customers into groups based on both the amount they spent over the past year and an estimate of their future lifetime value for the brand (this is something that customer analytics software does automatically). Organize the groups based on their value to the business—top 1%, top 5%, top 10%, and so on.

Next, dig deep into the top customer tiers. What makes them unique? Where are they located? How did you acquire them? What items do they purchase? What share of their grocery wallet do they spend with Whole Foods? What share of their dining budget is spent with Whole Foods? Think beyond the obvious and consider the business from a broader perspective. Is Whole Foods an organic foods grocery chain? Or is Whole Foods a healthy eating company, helping customers make healthy choices every time they need a meal or a snack?

Take my wife and me as a mini case study. We happen to be very loyal Whole Foods shoppers. We would be platinum customers in the Custora parlance. We shop at Whole Foods every week to buy organic vegetables, meats, and milk. We also stop at their bar and have a drink before we begin. And we’ll typically order lunch or a few appetizers because their fresh food is so yummy and so good for you. Our purchase frequency is very consistent, our average basket size is well over $100 per trip, and we also buy higher margin prepared foods and often pick up a bottle of wine or a six pack of beer.

Now if they dug deeper they would find some very interesting insights about us.

  • Our spend at Whole Foods represents about 60% of our grocery purchases every week.
  • If you expand the window to what we spend on food that we eat at home, Whole Foods represents about 30% of our food purchases - we are also members of Plated and have 3–4 meal kits delivered each week.
  • And if you expand the window to what we spend on eating, Whole Foods represents about 10% or our budget. We’ll eat out at least twice a week for dinner, and 5–7 times a week for lunch.
  • We value convenience, but do look to save money whenever possible.
  • We’ve been getting circular catalogs and discounts in the mail from Whole Foods recently, but they aren’t for any of the things we buy and we haven’t used a single coupon.
  • We have to drive about 15 minutes to get to a Whole Foods from our home, or walk 2 blocks during the work day to get to the closest store.

 Let’s imagine that our profile reflected the profile of the top 10% most profitable Whole Foods customers. Some new opportunities for growth jump right out. Rather than try to get us to make more of our everyday grocery purchases at Whole Foods with the help of massive discounting, think about how to provide us with more of the food we eat at home. We would love to purchase Whole Foods meal kits—we already trust the quality of their produce and meats. And Whole Foods could easily make it much more affordable than Plated or HelloFresh who have to pay for insulated packaging and home delivery.  We would be happy to pre-order and pick up our meal boxes on our Sunday shopping trip from the drive-up refrigerator.  And we’d love it if our meals were paired with a suggested wine or new beer selection. Whole Foods can find ways to delight their most important customers while targeting market segments where they have an entrenched competitive advantage.

Whole Foods could also capture a greater share of our lunch expenditures. If my wife could have a fresh salad delivered to her office, she would do it every week. Or if I could order online and have a sandwich with a side of fresh vegetables ready for me when I walk down the block to the Chelsea Whole Foods, I’d be doing it all the time. Providing us with more opportunities to eat healthy food throughout the day would make us happy and provide a continuous source of growth ideas for Whole Foods.

Whole Foods could also help me on the nights that I don’t have a plan and want to grab something as I walk past the store on my way to the train. It would be fantastic if I could order a meal kit in the afternoon and pick it up outside as I rush past Whole Foods to catch the 6:40 express. Now imagine if Whole Foods tracked our purchases and collected feedback on the meals we liked and didn’t like. And if those insights were paired with a summary of our other purchases. Now an advanced customer segmentation platform like Custora could ensure that every mailer that I received was relevant and valuable to me. Coupons would be for the things I care about, and suggested meals would be based on the things Whole Foods knows I like. Whole Foods could do for healthy eating what Netflix has done for movies and TV shows.

Knowing your customers, using advanced segmentation techniques to improve the relevance of offers and communications, and designing new offerings to enhance your relationship with your best customers all sound so basic. But often times it is the basics that get overlooked in the heat of battle when stock prices are declining and executive jobs are on the line.

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