Will Whole Foods Dilute the Brand With a Lower Cost Chain?

Pilot stores in Detroit, New Orleans, Chicago

Whole Foods Market, the upscale purveyor of organic and local food, is opening a new store in economically struggling Detroit June 5 as part of its repositioning as a go-to grocery store for everyday staples for shoppers on any budget.

The chain will launch pilot stores in Detroit, New Orleans and on Chicago’s South Side in 2013 and 2014 that feature fewer staffers, lower prices, and more frozen and prewrapped food, said Whole Foods co-CEO John Mackey. “For every penny we cut off the price, we reach more people who can afford to shop with us,” he said.

In anticipation of the Detroit store opening, the company has been offering classes in community centers about how to shop frugally at its store, focusing, naturally, on Whole Foods’ own 365 private label line. Anne Howe of Anne Howe Associates, a shopper marketing consulting firm, commended the chain for going into so-called food deserts like parts of Detroit and New Orleans. ”They are trying to serve the needs of communities that others ignore completely,” she said.

But while getting more affordable, the company denied that its existing stores deserve their pricey reputation. “The premise that the healthy food we sell at our stores is expensive or elitist is false,“ Mackey said. “If you know how to cook and if you buy whole grains, beans and produce, you don’t need to spend lots of money,” he said.

Whole Foods’ price margins, however, show the retailer’s perception is probably warranted. In the last three years, the company reported gross margins (the amount a retailer earns from the sale of its products) of 34 percent to 36 percent, according to financial analysis site Seeking Alpha. (In comparison, Walmart’s and Target’s gross margins are about 24 percent to 29 percent.)

Experts see branding risk to Whole Foods’ high-quality image. “Whole Foods might be able to deliver a value proposition in these new locations by adjusting its assortment and pushing its 365 brand,” said Andrew Pierce, U.S. president of brand consultancy Prophet. “But if Whole Foods pushes into truly low income areas, it could create some discontinuity in the brand positioning. Whole Foods is perceived as high price and high quality, so unless carefully managed, there can be a disconnect.”

Meanwhile, the retailer continues growing but at a slower pace. For the quarter ended April 14, Whole Foods reported 13.3 percent sales growth and 6.6 percent same-store sales growth compared to the previous quarter. In each case the percent is less than last year.

Consequently, regional rivals that sell organic, fresh and local food are clearly on Mackey’s radar. He noted that two of them, Trader Joe’s and Wegmans, also nurture socially conscious cultures, similar to that of Whole Foods, which Mackey promotes as “Conscious Capitalism.”

But Whole Foods, with 350 stores and counting, is betting on experimentation to keep its brand robust. With 89 signed leases representing over 3 million square feet in its development pipeline, it’ll have ample opportunity to do so. “Everybody is copying last year’s model of Whole Foods,” Mackey said. “But we’re building the next one.”