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[19 comments]

Smaller Boxes Work for Whole Foods

February 13, 2012

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.

FINANCIALS:     [NASDAQ:WFM]

Discussion Questions:

Discussion Questions: What do you think are the reasons behind Whole Foods' success with smaller stores in secondary markets? Are there other retailers that you think would benefit from a similar strategy?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What's the likelihood that Whole Foods will continue to find success with its rollout of smaller stores in secondary markets?

Comments:

Whole Foods will continue to do well with smaller stores as long as these stores do not shortcut the prepared foods, baked goods, meats and seafood that consumers in these markets adore. Whole Foods can probably carry a few less cans and containers in the central aisles and get by with lower inventories of such items. In my opinion, this approach works.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

Their sales area runs about 60% of total area and they like to see $25 per square feet of sales area per week. So if they are doing $561k in 38,000 total area, that's about right for them. I'm seeing much smaller stores in markets with lower populations of high income people that are well educated. Smaller stores mean higher sales per square foot and that's what Whole Foods needs. We are seeing stores now being built under 25,000 square feet in smaller markets with large prestigious colleges. You can't build a 60,000 square foot store in a small town, big college market; it would not make financial sense.

David Livingston, Principal, DJL Research

We all want to be "whole" people and sadly most of us aren't. We've been ripped apart, analyzed beyond meaning, categorized inhumanely and manipulated to fulfill the needs and greeds of others.

That may sound melodramatic to some but ask yourself where you feel most 'whole', most integrated, most human: a) in a Trader Joe's, the corner bakery and the like; or b) a giant warehouse with bare concrete walls and industrial shelving you can't even reach? Maybe that whole "cocooning" thing we talked about a decade or so ago is being reincarnated into retail.

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Ian Percy, President, The Ian Percy Corporation

Without the benefit of specific consumer research, my suspicion is that Whole Foods shoppers are embracing the new smaller formats for a couple of reasons. First, many of these shoppers are already familiar with the Whole Foods concept and its array of offerings. As a mature Whole Food's shopper, they already have a really good idea as to which departments and categories attract them. Traversing fewer aisles and overall square footage in pursuit of their favorite offerings is likely very attractive to them.

Secondly, and of equal importance, is the inherent intimacy this new, smaller format likely offers. With intimacy comes perceptual advantages of more aromas, personal service and other attributes that attract shoppers to Whole Foods.

Finally, I think we are seeing the etchings of a general retailing trend in re-evaluating the notion of bigger is better. Grocery shoppers who now have expanded their consideration set to include smaller specialty stores, are obviously embracing more concise, more efficiently designed stores. I would expect to see more format downsizing.

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Mark Heckman, Principal, Mark Heckman Consulting

The reasons this works were stated by Mr. Robb. Shoppers need these options in smaller markets, just like shoppers in larger markets do. Plus, the overhead will be much less. I'm also guessing that some of these municipalities will offer sweet incentives to attract such a prize.

Success will continue if they target markets that have few options for shoppers, or where the options have not kept up with the times and are undifferentiated. People want what Whole Foods offers. Market size should not be an issue.

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Dan Raftery, President, Raftery Resource Network Inc.

Admittedly, I'm not a Whole Foods shopper, but I would assume the 80/20 rule applies to them as it does to most retail. The exact numbers are likely different, but there is no question that in the larger format stores there are items for which sales are very slow compared to other items. By taking these items out (as long as they are not integral to the Whole Foods experience, regardless of sales) means a lot less space is needed. That coupled with the lesser competition means Whole Foods' smaller market strategy is likely to continue to generate success.

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Steve Montgomery, President, b2b Solutions, LLC

I don't know that other retailers could get beyond the numbers and still focus on the shopper experience. Whole Foods could not achieve the uptick in profitabiity without consumers. Duh! But my feeling is that there are retailers who strive for economic goals without integrating the consumer variable into the equation.

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Joan Treistman, President, The Treistman Group LLC

Location, location, location. Opening a new store location successfully requires one critical requirement: the population of potential customers will spend enough to cover the costs -- occupancy, payroll, and working capital. By lowering the cost side of the equation, new locations with smaller populations open up as potential targets. It doesn't hurt that these markets are typically under-served by competition.

Smart move.

Bill Emerson, President, Emerson Advisors

Unless you are a hardcore Whole Foods shopper who has bought into the entire lifestyle it serves, WF is a "boutique shop" anyway. Whether it is the produce, fresh fish, prepared foods, or unique items, you go there specifically to get what you want. This would seem to lend itself quite well to a smaller format positioning. Congrats to Mr. Robb and company for this one.

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Ben Ball, Senior Vice President, Dechert-Hampe

Substituting big-box selections and price ranges for ease of access and lower prices in a depression with $4.00/gallon fuel costs is a tempting prospect that we now know can work. As for me, I would still want to see unemployment and mortgage stats before I build anything. As for Whole Foods, this management team is worthy of notice and a "Well done."

'gjarnoldjr'

They are successful because customers love the stores, but they aren't always accessible. All 'bigger' box retailers can utilize this smaller footprint prototype in their store assortment. A smaller footprint store usually has better financials and allows access to more real estate locations. You already see it with Walmart, OfficeMax, etc. Can you picture PetSmart with small city prototype?

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

It's really quite simple. For a store with 40,000 SKUs, 20,000 of those will only contribute 5% of total sales. It's true that those 20,000, 5%, play an important role in ATTRACTING shoppers to the store, (shoppers LOVE stores that have EVERYTHING,) but those 20,000, half the SKUs that deliver 5% of the sales, have a tremendous sales-suppressing effect on the other half, which is actually what the shoppers will mostly buy. Retailers actually HIDE what shoppers want to buy in an indiscriminate sea of merchandise, and some retailers think shoppers love this "treasure hunt" model of retailing. It is brain dead.

This is the real factor driving the success of the small store movement. But a big store with twice the SKUs is more attractive to shoppers, but won't deliver the sales performance UNTIL retailers become actual salesmen, and learn how to sell the few items in the presence of the many -- of course, by self-service.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

This looks like the Tesco model in Europe. It makes sense in many areas of a city or small towns. Natural foods interest is not limited to large, urban centers.

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Joe Nassour, Chief Technology Officer, RetailTactics

Not to be a wet blanket, and I wish them well -- I guess -- but 38K doesn't strike me as radically different than 50K; particularly when -- as some here have noted -- you shave off space-gobbling, low-margin departments. Now, if they want to come up with a 5K store, or develop a location that offers sales of $3K/square foot, then I think we have a real story.

'notcom'

Whole Foods could have 1,000 stores tomorrow, that's how popular/on target they are. Who's their competition? Ma and pa do not quite get the green cool that WF puts forth, and Trader Joe's (who does) doesn't seem to want to scale for some reason (they could have 1,000 stores tomorrow, IMO, as well). Besides, smaller stores gives WF the ability to get into more available spaces quicker, especially in urban areas. Win-win-win.

I just wish they'd get to the "Whole Foods Cafe." We could all use a better place to stop for something to eat, especially when on the road.

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Lee Peterson, EVP Creative Services, WD Partners

Whole Foods has cultivated a premier, exclusive image with high-quality products provided in relatively sparse locations. Since one of the primary drivers of grocery purchases is convenience, consumers have reacted well when provided with Whole Foods close to their neighborhood, rather than only in the major metros. By relaxing the requirement on market size to justify a very large square foot store, the company has opened themselves strategically to underserved growth markets.

Other retailers with similar strategies include Target and Trader Joe's. Trader Joe's already has a smaller footprint, which would make them a very good fit for the small market strategy. Target would require innovation to provide some version of their breadth of products in a smaller more economic store environment.

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Mark Price, Managing Partner, LiftPoint Consulting, Inc.

Location, location, location. Whole Foods has a great retail model that clearly needs more locations. The demand is clearly there. Now WF only needs to manage their resources and grow during a great time to get locations at an incredible price!

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Kai Clarke, CEO, American Retail Consultants

Convenience and proximity have been lacking features of the Whole Foods value proposition. Going with some smaller, closer locations should be a big boon for Whole Foods, especially for the busy, health-conscious shoppers looking for convenience and the ready-made meal options.

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Matt Schmitt, President, Chief Strategy & Innovation Officer, Reflect

Many of the secondary markets have pent-up demand for the Whole Foods offering. The economics dictate the store size, and it appears that even with the smaller footprint they are able to maintain the total store experience. I think that's the key point in maintaining or exceeding the others' sales per square feet. But at some point this will be a challenge; you can only shrink it so much without losing the essence. Perhaps a WF express will emerge someday. The smaller footprint isn't relevant for just secondary markets but will open up opportunities in ultra urban settings, which are very often under-served -- not just with the likes of WF, but also traditional grocery. Not only is there an opportunity for gourmet but for mainstream and indeed discount; but few have figured out how to make this work, how to bend and adapt the model. The incumbents thrive in what is privileged real estate, and with exceptions the quality isn't great. But there is a market, and someone will figure it out, and spoils (no pun intended) will go to them.

J Kent Smith, Global Consulting, Galleria RTS

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