Whole Foods is Manhattan’s low price grocer
In case you didn’t already know it, it’s expensive living in the Big Apple. How else can you explain a Bloomberg Intelligence report, which found Whole Foods having lower prices than D’Agostino, Fresh Direct, Food Emporium and Gristedes.
According to the report, a basket of 97 items sold at Whole Foods cost $391.39 compared to $398.44 from the online grocery service Fresh Direct and $458.84 at Gristedes.
In recent years, Whole Foods has been making an effort to keep prices low to move beyond its Whole Paycheck image and drive traffic to its stores. The company recently launched a national ad campaign to promote "both our value and our values."
In the chain’s third quarter earnings call, via Seeking Alpha, co-CEO Walter Robb said this was the tenth consecutive quarter where Whole Foods’ costs increases were higher than its retail price increases. Mr. Robb said the company has seen some payback as a result of its "value efforts" in categories such as produce.
"If you come into the produce department and you look at a big category like apples, we want to make sure that there are always good price points for really good value apples and then mid-tier and then some of the higher-end like Honeycrisps," said Whole Foods’ president A.C. Gallo. "We definitely make sure that the categories have a nice range of prices, but we also want to make sure that we are doing some very good regular promotions, ongoing promotions in each of these categories, which usually creates a lot of real excitement and the kind of prices that people remember."
Discussion Questions
Must Whole Foods have the lowest price for its “value efforts” to attract shoppers and drive higher rings? Will Whole Foods be significantly more successful if it gets beyond its Whole Paycheck image?
I’m not a believer in “the lowest price wins” particularly. I do think Whole Foods has to remain close on price, and be really sharp on items that are also available elsewhere. I can still remember being gobsmacked by the price of a bottle of seltzer—a common brand available at all grocery stores—that was priced almost double at Whole Foods. That was bad.
The company’s core value is “trust” in its products. Anything that gets in the way of that is bad, anything that allows that to shine is good. So being in the ballpark price-wise is important. But “local” and “organic” are still the two most important words in its messaging.
Look at it this way—a few years back, Walmart started carrying organics, and many were predicting mass defections from Whole Foods to them. Didn’t happen, precisely because of the trust factor.
The market basket study was surprising to me. I would have though that Whole Foods would be at or higher than some of the other stores in the city. That being said, are we looking at a short-term effort to gain market share and then raise the prices? Time will tell. Store operations in New York City and the costs involved say that sooner or later, Whole Foods will need to improve margins and then raise prices. And might I dare to say, New Yorkers will not only expect it, they will continue to shop there if the quality of the product remains and the customer service levels remain—and they will.
Creating a value perception in Manhattan (where price expectations are high) may be easier than on a nationwide basis. The “Whole Paycheck” image dogs Whole Foods across the country, even as shoppers recognize that it offers higher-quality or more specialized goods than you will find at a midtier grocer or discounter like Walmart. But the study raises two key questions:
It’s a tricky balancing act to combat a perception of high pricing without compromising the company’s reputation for quality and uniqueness.
Lowest prices are not the only way to express value, so Whole Foods does not need the lowest prices to offer value. The whole paycheck image goes along with quality, so switching from quality to value is a challenge but possible. Offering a range of choices makes sense as a way to create value and maintain quality. Trying to switch to lowest prices would be a mistake because it is inconsistent with the established image, would not fit well with current customers, is difficult to maintain and creates a negative spiral.
Whole Foods needs not have the lowest price but it needs to be more in line with everyone else, as lots more mainstream grocers are now carrying organic, natural and better-for-you. It also has to maintain quality and, thereby, trust with the consumer. It will be somewhat more successful if it sheds the Whole Paycheck image, but it won’t make a huge difference.
I do think that working lower prices in Manhattan, where so many media mavens live, is wise. These media types, by and large, will figure that what happens in NYC and Columbus Circle is obviously the way of the world, and write all about it, giving Whole Foods great publicity nationwide. Not a new strategy, but still a smart one.
Whole Foods doesn’t need to have the lowest prices, they need to successfully counter the perception that their prices are the highest. Whole Foods’ management has been talking about lower prices, and they have cut prices, but the message has yet to resonate with consumers. In many markets where Whole Foods competes against Kroger, Trader Joe’s, Costco et al., they are the high-price leader.
Do they really want to compete with these other retailers on price? That message is a slippery slope. Whole Foods has successfully positioned itself on a message of quality and unique merchandise. Holding that mantle does not necessitate being the low-price leader.
Price is not, or at least should not be, the key to building the Whole Foods brand.
Of course the Whole Paycheck image isn’t helpful, but the more Whole Foods gets caught in the whole brand trap, the more it moves away from its core brand promise.
Time for somebody at Whole Foods to drink a little more of their own (organic, I’m sure) Kool-Aid.
Like Frank, I also wonder about that basket used to compare the retailers. My typical supermarket basket at Whole Foods would definitely cost more than elsewhere in my Manhattan neighborhood.
At the same time I’ve noticed other retailers have extended their hours to match Whole Foods. That suggests recognition of some loss of revenue. I’ve also seen additional produce discounts at the D’agostino and Food Emporium which could be a strategy to compete with the street corner produce vendors who offer much cheaper prices for fresh fruits and vegetables. They are all much less expensive than Whole Foods produce.
From my small window on the supermarket chains in my neighborhood it doesn’t appear that lowest price is the strategy. Instead I think the retailers are trying to convey that their prices are not always the highest. They are encouraging more visits to each to see what value is being offered on that day. And that occasional trip to the various supermarkets is easy and convenient in a geographic location where the walk from one store to the other is fewer than five minutes (no driving and no gas needed, no parking necessary). Finally, it’s the in-store experience of the shoppers (who check out the values) that will encourage more frequent visits—or not.
Of course this Whole Foods price comparison is an anomaly. The other competing grocers on the list have always been known for high prices, which are excused due to the high cost of real estate, labor and logistics in Manhattan. Of course the primary reason has always been limited competition within the dense neighborhoods they serve. Micro Econ 101.
In most other markets in the nation, Whole Foods will continue to look like a luxury grocer, which it is. Narrowing the gap has been a strategic maneuver. Its 365 private-label line has been a key factor in its drive to value. But the large markups on many branded, packaged and frozen prepared items make it clear that this is not a store for everybody.
As Warren notes, this is an amusing story for the New York media elite. Since I used to be among them, I can’t criticize too harshly. Whole Foods’ reputation elsewhere won’t change very much based on this pseudo-insight, however.
It’s really a great thing what Whole Foods is and has been doing in regards to providing great products at low, reasonable prices; especially in places where cost of living is high like Manhattan. It just goes to show that just because a business is meant to make money, that doesn’t mean a company can’t make money while providing a genuine great service to its customers. Whole Foods’ strategy is definitely a balancing act considering costs related to revenue; as according to the company’s CEO this has been the 10th consecutive quarter where the company’s costs were higher than its retail price increases. However I strongly believe that with good strategic risk management and great promotional marketing Whole Foods’ strategy is a winner.
Prices in NYC are already high, so Whole Foods will fit right in. The local New York neighborhood stores, who have enjoyed nice profits and little competition over the years, need to keep an eye on what’s going on.
The niche gourmet delis and pastry shops will still do well, but may have to shave off some margins, which the local customers will appreciate. NYC is unlike anyplace I have been, so Whole Foods will do OK, but the specialty stores that make NY will still have the draw they need to do well, because after all, it is NY, and people love to hang out at the local places, because they are one of a kind.
Selling price is a death sentence for the company and/or its suppliers. A close look at the troubles Walmart is facing will testify well in favor of this. At the same time, there are very few if any Walmart suppliers that are happy, independently healthy and stable. As soon as someone else comes along with a more market appropriate discount equation for penetration and success you will feel the pain of scaling down and perhaps even out. For more on this, read about the rise and fall of companies like Sears, K Mart, Crazy Eddie and many many more. Whole Foods should focus on the company’s pay check instead of media outcries. The value-added sales efforts would be easier to explain if the company had a better understanding of what it is and the specific ingredients necessary for success in their retail segment. This is where things seem to be getting away from them.
This sounds like a fluke. If it’s true Whole Foods needs to raise prices. A high price image has been very good for Whole Foods and I think they should keep it up.