Whole Foods pivots into 365

The grocer wants to become a new kind of food experience

Whole Foods shares are down a lot from their highs and the company keeps struggling. It’s hard to pin down what exactly is going wrong. Competition is one factor. Others is also bad press and some fatigue in terms of new product innovations.

As a consequence Whole Foods has chosen to pivot. They aim at becoming a new kind of food experience. They opened the first 365 stores which are part of this strategy. The other part is a continuous flow of high profile flagship stores in trending locations.

In order to understand what they want to become it’s best to ask what kind of customer they are trying to attract. What is the need the cover, or what job do they aspire to do?

The new Whole Foods customer comes because they want a food experience and they don’t want to spend a lot of money. They want to buy ready to eat food there and/or buy something to prepare at home. Whole Foods is investing in food solutions, which is a fancy word for prepared food. The company wants to set new standards in how people experience ready to eat food at location. This is key to 365 and to the flagship store experience. The hired Tien Ho, a chef with high quality casual food experience, to spearhead this effort.

Another part of the new Whole Foods is technology. From viewing merchandize to ordering, checkout and inventory management. Whole Foods is aggressively investing in technology to change the food business from an operational point of view. This should help improve the return on capital invested. If 365 becomes a success the multiples for this part of the business should increase a lot, to mid to high 20s. It reminds me of Oxxo.

This whole strategy is a pivot. It’s a new direction.

The company is pivoting because the legacy business is not working anymore. It’s barely growing. Selling high quality groceries doesn’t cut it anymore. It looks like competition is catching up.

I am not clear why, but the numbers confirm it. Whole Foods doesn’t have the cache anymore to grab market share from the other grocers. Comparable same stores sales are dropping, which is a first for this company.

Pivots are difficult from an investor perspective. While comps are falling the stock is falling with them. But there is cash flow and there is plenty of stuff to be excited about for the future.

It’s hard to put a number of the value of the 365 initiative. Currently Wall Street is putting nothing as value. It’s too small and too early. What is the value of 365?

I think it’s high since it is not only about 365 but also about how the company is transitioning from high quality grocer to new kind of food experience. This will attract new types of talent and also help shape the legacy business. It will particularly help shape the flagship stores and the experience in them.

Conclusion

Whole Foods is in midst of a pivot and the stock is reflecting this transition. There is lots of potential and judging by the amount of energy and initiatives the company is putting in, the future will look brighter again. It is particularly important to note that none of the competitors with the exception of Starbucks are as aggressive as Whole Foods. We expect Whole Foods to come back to mid single digit comps and aggressively grow the 365 brand.