Whole Foods Introduces "365" Stores to Compete with Trader Joe's

Increasing competition in the Supermarkets and Grocery Stores industry leads Whole Foods to open first spin-off store targeting value-driven millennials.

The US supermarket chain Whole Foods is set to open its first 365 by Whole Foods Market store in LA’s Silver Lake neighborhood. The highly anticipated spin-off store will be about two-thirds larger than an average Whole Foods location and will primarily stock the company’s premium private label 365 brand merchandise.

The new store will offer amenities such as online ordering, a self-service tea station and an in-store vegan restaurant. The 365 store concept is targeted toward value-driven millennials, who are often deterred from the “Whole Paycheck” stigma associated with traditional Whole Foods stores.

The company, which accounts for 2.6% of the $601.8-billion Supermarkets and Grocery Stores industry, plans to open two additional West Coast locations in 2016, along with 13 more locations announced to open across the country through 2017.

While feasibly the most publicized opening, Whole Foods is not the first grocer to launch a fresh format spin-off store banner. Similar to Kroger’s Main and Vine and Ahold’s bfresh banners, the 365 store concept is Whole Foods’ attempt to stay relevant in the highly saturated food retail market. Over the five years to 2016, the Supermarkets and Grocery Stores industry has grown at a modest annualized rate of 1.4%.

Although Whole Foods’ revenue growth has outpaced that of the industry, limited assortment stores such as Aldi and Trader Joe’s have expanded even more rapidly over the past five years. These stores are typically smaller in size and offer a narrower variety of competitively priced store brand products. Limited assortment stores have been particularly popular among the highly sought after millennial demographic, especially as a wider array of organic and premium-level private label products hit the shelves of these stores. While Whole Foods retails its 365 store brand merchandise at its current store locations, the new spin-off banner is a strategic move to compete head on with existing limited assortment stores, without compromising the high-end, niche-following standard of traditional Whole Foods locations.

Outlook

Over the next five years, the Supermarkets and Grocery Stores industry is expected to become more saturated and competitive. Along with Trader Joe’s and Aldi set to add additional storefronts, German discount grocer Lidl announced plans to enter the US market by 2018. Similarly, Whole Foods, along with many other national-scale grocers, is expected to continue expanding and improving its spin-off fresh format stores to stay relevant to the growing millennial market. With industry revenue only expected to rise at an annualized rate of 1.2% over the five years to 2021, such expansions and store updates will be a way for industry operators to maintain their market share, rather than a vehicle for expansion. As the competitive environment heats up and industry operators continue to invest in store enhancements, consumers will expect more value and experience when shopping for groceries, making such investments a necessity rather than a luxury for industry operators.