Whole Foods Markets' push to target smaller markets with smaller stores is performing well above expectations. Combining above-plan sales with healthier store economics, the success is encouraging Whole Foods to more aggressively pursue smaller market openings.
Co-CEO Walter Robb said last week that Whole Foods' smaller, typically suburban market stores are "generating a lot of excitement." At a new store opening in the quarter in Folsom, CA, 1,000 customers waited for the doors to first open, including some who had camped out overnight. The welcoming was particularly encouraging since Folsom, located about 20 miles outside of Sacramento, was one of the areas particularly feeling the housing collapse.
"In many cases, these markets offer less competition, allowing our differentiated store experience to stand out even more in the marketplace than it does in some of the larger, more competitive markets," said Mr. Robb on Whole Foods' first-quarter conference call with analysts, transcribed by Seeking Alpha. "The economic case is compelling because rent is significantly less and with the smaller size, our capital spend is less as well."
AC Gallo, president and chief operating officer, added that, depending on the region, overall state taxes, payroll taxes and utility costs can be lower as well.
Overall, the six stores opened in the first quarter were 17 percent smaller in size — averaging 38,000 square feet — yet produced average weekly sales per store of $561,000. That translated to 29 percent higher sales per square foot of $776 versus the prior year's new store openings. New stores also produced about 450 basis points higher store contribution versus last year's class. Besides Folsom, new stores in the quarter opened in Jamaica Plain, MA; Minnetonka, MN; Yonkers, NY; as well as its first stores in Oklahoma City and Scotland.
Whole Foods first began exploring smaller stores under 40,000 square feet in 2008, down from traditional 50,000 to 70,000 square-foot boxes. Finding success with some as small as 25,000 square feet, the strategy was accelerated last year as part of an expansion plan to reach 1,000 stores.
"When you combine that with lower rents, lower build out and smaller total footprint, with high sales per square foot, it's a very powerful economic model," said Mr. Robb.
What's the likelihood that Whole Foods will continue to find success with its rollout of smaller stores in secondary markets?