Whole Foods trying out whole new ways of retailing

It's rethinking retail

At a recent industry conference, Whole Foods Co-CEO John Mackey was talking about the challenges of retail competition when he made an intriguing point. Amazon.com is positioned, he said, to subsidize its partner pricing indefinitely, thereby harming competitors by forcing them to sell at lower-than-sustainable prices.

To be fair, his broader point was that when venture capitalists subsidize pricing of the companies they invest in, they don't have deep enough pockets to do it long enough to hurt a company like Whole Foods, which reported $15.4 billion in its most recent annual report.

"If you’ve got competitors that are being held up by venture capital money that are subsidizing their pricing in order to give sales like Thrive Market is doing or Plated and Blue Apron are doing eventually, it can't do that definitely. Well, Amazon can, but no one else can," Mackey said, during a panel at the Oppenheimer 16th Annual Consumer Conference on June 22.

But even though his reference to Amazon was an aside, the point is worth exploring. What he's talking about is the classic loss-leader strategy. That's where products or services are sold below cost, with one of two rationales. First, it generates sales of accessories that are so high-margin that it makes it all worthwhile, such as low-cost proprietary razors that can only work with high-cost, frequent-sale specialty razor blades.

The second rationale, though, is that the low prices force rivals to compete at a loss that they can't afford, ultimately driving them out of business — or at the very least, out of your neighborhood.

Amazon is the e-commerce monster, seemingly competing with every e-tailer anywhere selling almost anything. It does that through a huge number of partner deals with tiny merchants. It's easier, though, to pressure those merchants to lower their prices (a merchant selling for even a few cents more than a rival Amazon partner takes a big hit in sales) rather than subsidize. Was Mackey's point purely academic?

Some other interesting Whole Foods takeaways from the panel:

  • 365: Is Smaller More Desirable?

One of the experiments that Whole Foods is most excited about is 365, which is a series of stores that are physically smaller (about 25,000 square feet versus a traditional store that tops out at 55,000 square feet), need far fewer staff (as few as 80, compared to full stores that can need as many as 600) and have far fewer products (about 7,000 SKUs compared with a typical store housing 25,000 SKUs). The 365 stores also have smaller kitchens and fewer specialized areas.

Company officials had hoped the stores — which ostensibly offer lower prices — would appeal to a different group of shoppers, but they assumed it would result in a smaller number of items purchased at any one time. Turns out, customers bought more.

"We didn't want to put a lot of expectations on it because we weren't exactly sure what was going to happen," Mackey said. "The register system we had, we didn’t have conveyer belts because we’re expecting with a much smaller store (and a smaller product mix) that we would get a lot more smaller baskets, but that’s been the opposite. We’ve getting bigger baskets than we traditionally get at Whole Foods. So that’s been a surprise."

Jason Buechel, the chain's CIO and executive vice president, said he was hesitant to draw too many conclusions from the first trial.

"It’s pretty early and it’s just one store, so it’s very difficult to use generalizations. We put a big emphasis on produce both on our selection and our pricing and we feel like that’s the real competitive advantage for our company, so we’ve double downed on that, and what it's doing with produce is driving the overall store sales, so produce is very successful for us," Buechel said, adding that the rollout gave executives a chance to play with different ways of running groceries.

"Because we’ve put an entirely new organizational structure in that store, it's very differently organized than Whole Foods, we took, I don’t know, 1,000 basis points out of cost, something like that, and that’s all reflected in terms of investing in lower prices with less service, less service meat and less service seafood, but the interesting thing is we’re doing just as much business in seafood, so that’s a big learning for us."

Buechel added that they found the 365 stores pulling in a lot of Trader Joe's shoppers. "It’s a different customer at 365. I never saw so many Trader Joe’s bags in a Whole Foods Market store before," Buechel said. "I was kind of joking that we should trade them out two 365 bags for any Trader Joe's bags brought in. That was interpreted by our team as too unfriendly, so we didn’t do that."

In short, they are dealing with some hugely fundamental grocery questions. They cut back on service and options, but sales maintained. Is that a sign that cutbacks in other stores can be made at no sales loss? Or does it merely mean that this first store was advertised as having lower costs so a lot of people wanted to try it? If those sales are simply a result of the new store being a shiny new object, that will become clear in five to six months when the novelty wears off.

Also, these locations are new locations for the Whole Foods chain. How much of those sales reflect the interest in something positioned as healthful and fresh? A meaningful test, down the road, would be to replace an existing store with this new format and see how the old shoppers reacted, via purchases, to the new store.

Still, all of these testing caveats — does it really mean what it seems to mean? — aside, these surprises are quite interesting. Retail should watch these 365 results carefully. If this trend holds up for months and repeats itself in various markets, it could provide a new outlook for retail.

Another critical consideration, which didn't crop up during the panel's chat: Whole Foods has a well-earned reputation for delivering excellent customer service. A cutback in services could hurt that reputation, which is the key reason these smaller stores are not being branded Whole Foods. If it ultimately tanks, the Whole Foods brand could end up undamaged.

  • Tokenization and CRM: Can They Work Together?

It's important to remember that for much of its existence, Whole Foods has refused to do any kind of a CRM program, because it feared that it would be viewed as too invasive. Apparently, those days are long gone.

But if Whole Foods is actually doing what it is suggesting it's doing, it's trying to use payment card data to track shoppers as they move from store to store. Retailers are not supposed to use payment card numbers as makeshift customer identification numbers. Then again, American businesses were never supposed to use Social Security numbers that way and we all know how well that turned out. When was the last time you were asked for a Social Security number where the request had anything whatsoever to do with Social Security?

Yeah, but I digress. Whole Foods isn't quite using payment card numbers to identify shoppers, but it's apparently getting awfully close. It's using payments tokens to do that. In short, using a unique number that represents one payment card number sounds a lot nicer.

"One of the great things with [the chain's] POS is that it allowed us to tokenize credit card data. So now we can take our (CRM) data with our tokenized data and its helping us inform real time decisions," Mackey said. "You take 365 as an example. Some of these capabilities are going to allow us to understand what customers are shopping between the 365 stores as well as the rest of the L.A. stores, where is the crossover, how is that changing the overall spend. So this is something that we really do not have a lot of capabilities in the customer data space."

To what end? "As you're seeing the digital coupon side of things in our newest point-of -sale solution, we allow the ability to do personalized offers directly, one-to-one for individual customers. They can only redeem those things once versus a lot of our legacy pieces where you don't have the ability to control that in a more generalized offers. So we can reward and recognize customers," Mackey said.

Who needs a loyalty card when shoppers always use the same Visa, MasterCard or Amex? This is a dangerous strategy. If you're worried about invasiveness, this is a good way to alienate customers, especially if your co-CEO talks about it publicly.

And aside from any creepy concerns, the problem is that it may not work. What if the shopper switches a favorite card? They suddenly become invisible and they stop getting those nice offers. What if they use Apple Pay and change their default card?

Copyright © 2016 IDG Communications, Inc.

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