I really appreciated this Wall Street Journal article on how Whole Foods is adapting its corporate strategy to the current economic downturn. Their direction: shift away from a gourmet/”Whole Paycheck” focus and toward “healthy eating”. Founder and CEO John Mackey sees this adaptation as a movement in focus back toward his original commercial impetus:
After 15 years as a gourmet destination selling prime beef, crusty white bread and rich chocolate cake, Whole Foods will re-embrace its original emphasis, mirroring Mr. Mackey’s personal conversion to healthier eating — and reflecting consumers’ reluctance to spend money on the company’s pricier foods. …
… The blunt-speaking Mr. Mackey said the company’s product selection had veered off-course.
“We sell a bunch of junk,” he said, vowing to promote healthier lifestyles for its customers and employees. “We’ve decided if Whole Foods doesn’t take a leadership role in educating people about a healthy diet, who the heck is going to do it?”
This tweak (and it does seem to be a tweak to me, not a major geologic shift) makes sense when the shopping population shifts toward being more cost-conscious. More interesting to me, though, were Mackey’s comments on the extent to which Whole Foods competes with both Trader Joe’s and Costco, and how the economic downturn has amplified that competition:
The company is also keeping a closer eye on low-cost rivals, such as Trader Joe’s and Costco Wholesale Corp.
“We have a policy that our 365 private label has to match Trader Joe’s prices, unless there is a significant difference in quality, in which case it probably shouldn’t be a 365 product,” he said.
Costco, which Whole Foods tended to ignore two years ago, is now considered an important competitor. The warehouse store is even tougher than Trader Joe’s, because it is “harder to match Costco without going bankrupt,” he said. In some regions, Whole Foods has started to bundle items — a dozen pork chops or several boxes of breakfast cereal — to offer volume discounts.
I have long seen this dynamic at work in my neighborhood between Trader Joe’s and Whole Foods, and the attention to Costco is also interesting. Mackey is right that they can’t compete with Costco by matching prices, but if they can find a way to combine volume discounts with product differentiation along quality dimensions, I can see that being effective. Extrapolating from my own experience, we go to Whole Foods once a week/every 10 days in the summer (we subscribe to a farm, so from June to October we don’t need to buy vegetables), but I only go to Costco 4 times a year, in large part because of the volume purchases, but also because it’s always so crowded and the parking lot is a nightmare. In other words, high transaction costs! If consumers with shopping patterns like that can get some volume discounts at Whole Foods, they should see some revenue effects.
Note also the antitrust implication of this rivalry. It implies that the market definition for evaluating the Whole Foods-Wild Oats merger in 2007 should not have been restricted to “natural” or organic stores, and thus reinforces the critique of the FTC’s challenge of that merger.