The Determine


Vision. Insight. Control.

May 29, 2015

Whole Foods Markets Shift Their Cost Model as They Target Millennial Shoppers

In March, I wrote a post for this blog about the Whole Foods grocery chain in which I asked the question: “How Much Can Procurement Change on Their Own?” I looked at how Whole Foods has defied the low margins commonly seen in grocery retail by employing an operational strategy that merges brand reputation, consumer identity, and high-quality products in justification of higher prices. Their procurement team is part of a top to bottom approach to creating the right value proposition for their customers.

Although they have been successful to this point, Whole Foods has found it difficult to expand their market share beyond their existing customer base. Whole Foods has never professed to be the supermarket for all shoppers, or even for most shoppers. They choose their markets carefully, making sure that the demographics in each area fit their business model. They do, however, need to find a way to build loyalty in other shopper segments that can later be channeled into the primary chain.

While their brand identity and values (including a strong commitment to corporate social responsibility) both appeal to younger shoppers, their premium prices are a deal breaker. In recognition of this obstacle, Whole Foods announced on May 6 that they would be opening a “sister chain” of stores emphasizing lower prices and greater use of technology. A separate team under the Whole Foods corporate umbrella will run the new stores.

The clear target of this expansion is Millennial shoppers. Whole Foods doesn’t want to have to wait until their income increases enough to allow them to shop in existing stores. Whole Foods “still has a problem on price,” Neil Saunders, the CEO of Conlumino (a retail consultancy) told USA Today just after the announcement. “[Millennials] just don’t have the disposable income to make that their destination of choice for grocery shopping.” It is worth noting that this announcement was made at a second quarter earnings release where Whole Foods had to explain that they missed earnings expectations. It is, therefore, reasonable to assume that this decision is less of a visionary choice on Whole Foods’ part and more of a necessity if they are going to remain a player in grocery retail.

Procurement’s involvement in the launch of Whole Foods’ sister chain will likely be substantial. There will be the usual roles for us to serve around construction, capital equipment, facility maintenance, and service provider evaluations, as well as lots of tradeoffs to understand and new technology to incorporate.

The role for procurement professionals in the new chain will also include carefully laying out the costs and benefits of competing alternatives in direct or for-resale offerings: cost vs quality, narrow vs broad product selection, and brand name vs private label.

If the new (as yet unnamed) chain is to provide a lower cost alternative to traditional Whole Foods stores, it won’t last for long attempting to do so just by offering lower quality (albeit organic) products. This means that the new stores must lower their operating costs by running more efficiently, whether through lower energy consumption, equipment that minimizes the use of consumable supplies, or the resale of what would otherwise be waste.

If Whole Foods really wants to accomplish something unique, they will also employ collaborative supply approaches. They could pull in other brands or companies that do not compete with them directly but who are also looking to reach Millennials and by extension keep their own costs down.

What will be truly interesting as we watch this story unfold is whether Whole Foods can take the mismatch in their current versus desired customer base and be innovative enough with their operating and cost models to serve a wider range of shoppers.

By Kelly Barner