An analysis of the locations selected for the first 365 by Whole Foods Market Inc. stores shows overlap with not just other grocers, but with Whole Foods Market Inc. itself, raising concerns about cannibalization and competition, according to Oppenheimer.
The first of Whole Foods new concept stores is scheduled to open on May 25 in the Silver Lake section of Los Angeles. The company has signed 13 leases so far with stores slated for Gainesville, FL; Houston, TX and Bellevue, WA, among other nationwide locations. The Lake Oswego, OR store will be the next to open in July.
The new stores are aimed at millennials and will offer a line of products at more affordable prices than at its flagship stores. They will be smaller too, at between 25,000 square feet and 30,000 square feet, and offer features like Instacart ordering and delivery.
Oppenheimer analysts mapped the new 365 by Whole Foods Market locations in relation to legacy Whole Foods
stores, as well as competitors including Sprouts Farmers Market Inc.
and Fresh Market Inc.
See also:Kroger, Fresh Market, Sprouts are grocery store winners in ‘barbell’-shaped market
Analysts found four 365 by Whole Foods Market stores within five miles of a Whole Foods Market location.
“In our investor conversations, sentiment remains quite negative toward the potential success of this concept,” they wrote in a Thursday note.
“Cannibalization and the risks associated with creating a new concept from scratch with limited testing remain our primary concerns, along with strong incumbent chains including Sprouts Farmers Market and Trader Joe’s in the value space,” the note said.
The biggest overlap was with Trader Joe’s, the chain known for its value-conscious private label produce and Hawaiian-shirt-wearing staffers. Ten of the first 13 365 locations are within five miles of a Trader Joe’s. Six 365 stores are just a mile from Trader Joe’s.
Seven 365 by Whole Foods Market stores are within five miles of Sprouts Farmers Market, and six are within five miles of a Kroger, as the following table illustrates.
|Distance between 365 by Whole Foods Market & competitors (in miles)|
|365 by Whole Foods Market||Kroger||Sprouts Farmers Market||The Fresh Market||Trader Joe’s||Whole Foods Market|
|Bellvue Square, WA||4.7||5.0||1.5|
|Cedar Park, TX||5.0||12.2||12.8|
|Evergreen Park, IL||13.7||6.1|
|Lake Oswego, OR||8.2||4.9||5.5|
|Los Alamitos, CA||3.0||2.7||3.3||5.1|
|Russian Hill, CA||11.1||0.6||0.4|
|Santa Monica, CA||0.6||3.9||0.6||1.3|
|Silver Lake, CA||4.1||3.7||1.0||6.1|
|Source: Oppenheimer *SFM competing location in LA coming May 2016. Kroger supermarket banners only. Doesn’t include price impact warehouse stores, etc.|
Still, the 365 by Whole Foods Market concept should make the company more competitive and help Whole Foods move away from its “whole paycheck” reputation, said Oppenheimer analysts.
See also: Whole Foods downgraded at BMO Capital Markets based on negative price perception
“We believe the new concept could be a way to capture share in markets that are too small for a legacy Whole Foods Market store and to gain new value-oriented customers in existing markets,” the note said. “Whole Food Market management has demonstrated a successful track record over time in opening stores of all sizes, which bodes well for future success.”
One grocer that has felt the pain of having competition in its backyard is New York-based Fairway Group Holdings Inc.
which has been pushed to the edge of bankruptcy due to the onslaught of Whole Foods Markets and other similar grocery chains on its turf.
Fairway shares have plummeted since it disclosed in February that it needs to raise capital and improve its financial performance to avoid breaching covenants on its bank loans. The stock was quoted at 39 cents on Friday.
See also: New York grocer Fairway nears default as competitors close in
In Fairway’s case, some of its troubles have been attributed to rapid expansion and overwhelming debt. But the company itself has admitted it failed to identify and adapt to the changing habits of its customers. Oppenheimer is confident Whole Foods isn’t making a similar mistake.
“In an ideal scenario,” Oppenheimer analysts wrote, with reference to Whole Foods, “we would want the chain to test the concept before going full steam ahead with the launch. We suspect the management team is taking a more aggressive approach given a rapidly changing environment and the desire to retain its market leadership.”
Whole Foods shares were up 0.1% in afternoon trade Friday, but are down 39% for the past year. The S&P 500 is down 1.6% for the last 12 months.
View more information: https://www.marketwatch.com/story/365-by-whole-foods-locations-raise-fears-of-cannibalization-2016-04-15