An Inside Look at the New Whole Foods Market Concept: 365 By Whole Foods

As more and more people have adopted a healthier diet, natural and organic specialty grocery stores like Whole Foods Market (WFM) are finding that competition is catching on to the trend. What was once labeled a small, hippie niche of the food market is now going mainstream. Products from companies like Annie’s, once able to set stores like Whole Foods apart, can now be found almost anywhere. As a result, WFM is finding that it can retain its loyal customer base that is willing to pay a little more for higher quality ingredient standards, locally sourced products, and a wonderful in-store experience, but it is getting harder to find new customers. Many people are perfectly happy with their traditional stores and not very eager to pay any more than they have to for groceries. The result is that WFM remains a profit-generating machine, but sales per store have plateaued. The stock has also reversed course, currently trading for $28 per share, down about 50% over the last 18 months.

The company continues to open new flagship stores across the country, as there continues to be a significant amount of demand for the original concept. But in order to try and expand their reach across even more customer types, WFM has created the “365 By Whole Foods” store to grow alongside the core store brand. The country’s third “365” store recently opened in Bellevue, WA, not too far from my home in Seattle and I decided to go check it out. The company has said the goal was a smaller store with fewer SKUs, focusing on cheaper items (lots of generic store branded items) and lots of automation in order to keep development and operating costs low (which further allows them to be more aggressive on price). Here are some photos of what I found:

This location actually an anchor store in Bellevue Square mall, occupying what used to be a JC Penney. During mall hours, you can access the store directly via escalator.
This location is actually an anchor store in Bellevue Square Mall, occupying what used to be a JC Penney. During mall hours, you can access the store directly via escalator.

 

Modern design interior but not a lot of fancy fixtures. Probably costs a lot less to build out than a flagship WFM store.
Modern design interior but not a lot of fancy fixtures. Probably costs a lot less to build out than a flagship WFM store.

 

Rather than run their own in-store restaurant, 365 locations will partner with local chefs to bring in fast casual dining options.
Rather than run their own in-store restaurant, 365 locations will partner with local chefs to bring in fast casual dining options.

 

Same goes for the coffee counter... outsourced to a local Seattle company.
Same goes for the coffee counter… outsourced to a local Seattle company.

 

With the goal of lowering costs, digital signage was very prevalent, including all of the pricing labels. You need less staff if you don't need humans updating prices all the time.
With the goal of lowering costs, digital signage was very prevalent, including all of the pricing labels. You need less staff if you don’t need humans updating prices all the time.

 

Automation is a trend. Here is a do-it-yourself tea kiosk.
Automation is a trend. Here is a do-it-yourself tea kiosk.

 

Weigh your own produce. Saves time at checkout and you don't get any surprises  on cost.
Weigh your own produce. Saves time at checkout and you don’t get any surprises on cost.

 

Whole Foods is known for their prepared foods and it is a huge money-maker for them (more than 10% of sales). Again, rather than not knowing how much your container will cost (priced by weight at regular WFM stores), now there is flat rate pricing.
Whole Foods is known for their prepared foods and it is a huge money-maker for them (more than 10% of sales). Rather than not knowing how much your container will cost (priced by weight at regular WFM stores), at 365 there is flat rate pricing.

 

WFM will sell some fast casual meals itself. Order and pay at the kiosk and it is sent to the kitchen for preparation.
WFM will sell some fast casual meals itself. Make your selections and pay at the kiosk and your order is sent to the kitchen for preparation.

 

I picked up my tacos at the back of the store when they were ready (computer monitors show your order's progress).
I picked up my tacos at the back of the store when they were ready (computer monitors show your order’s progress).

 

Craft beer is as hot in the Pacific Northwest as anywhere. No shortage of local brews to choose form.
Craft beer is as hot in the Pacific Northwest as anywhere. No shortage of local brews to choose from.

 

Interesting idea here; digital signage promoting the products on the aisles of the end caps. WFM makes money on advertising as well as actual sales. Smart.
Interesting idea here; digital signage promoting the products on the aisle end caps. WFM makes money on advertising as well as actual sales. Smart.

 

Overall, I was very impressed with the 365 store. Will it cannibalize regular WFM stores? Probably some, if they are close by. Will some people be attracted to the prices which skew to the lower end and are competitive with places like Target or Safeway? I think so. Will WFM see a strong return on investment on this store format? I certainly think so. The big question is how many stores like this the market can support and what others do in response. I am not sure anyone can pinpoint those answers at this point, but good for them for trying to address a clear hole in their store offering.

In the meantime, WFM stock is extremely attractive at $28 per share, in my view. At 7x EV/EBITDA and a history of opening stores that trounce the competition in terms of sales per square foot and profitability, I suspect WFM’s future remains bright and that the business will continue to be a cash cow. The stock price today does not really reflect such a viewpoint, hence my optimism.

Full Disclosure: Long shares of WFM at the time of writing, but positions may change at any time.