Straddling the Grocery Store Game

NEWS MADE EVERY DAY

This article originally premiered on Michael Roberto’s blog.

Supermarket News reported yesterday that Whole Foods will not be opening additional 365 format stores. The company had launched the small-format 365 stores two years ago in an attempt to provide a less expensive option targeted at millennial shoppers.

Professor Michael Roberto, D.B.A.
By Professor Michael Roberto, D.B.A.

CEO John Mackey explained the move in a memo to his staff: “However, as we have been consistently lowering prices in our core Whole Foods Market stores over the past year, the price distinction between the two brands has become less relevant. As the company continues to focus on lowering prices over time, we believe that the price gap will further diminish.” 

Count me as someone who was skeptical of this strategy even before Amazon acquired Whole Foods and began to lower prices in the traditional stores.  Let’s take a look back at the original rationale for the 365 stores.  Annie Gasparro of the Wall Street Journal reported on the strategy in 2016:

Announcing the plan last month, executives said these new stores would have a trendier atmosphere, with high-tech ways of interacting with shoppers that help keep its costs down.  Some retail analysts said the value-focused chain, which is expected to largely carry private-label foods, could help Whole Foods compete with Trader Joe’s, which tends to attract younger shoppers who want affordable, natural foods.

A Reuters article by Lisa Baertlein, published in 2016, revealed some skepticism about the 365 strategy by industry analysts:

“Our goal is to compete in the marketplace without lowering the Whole Foods standards,” Turnas told Reuters during a recent store tour. He said 365 stores will complement Whole Foods’ premium, full-service sister brand – often dubbed ‘Whole Paycheck’ in popular culture in reference to its perceived higher prices. But the new chain will have to work hard to avoid being labeled “a cheaper Whole Foods”, said Kevin Kelley, a principal at strategy and design firm Shook Kelley, which has worked with Whole Foods and other grocers.

This article is part of our Professor’s Perspective series—a place for experts to share their views and opinions on current events.

Why did the 365 format struggle to gain traction?   I would argue that it’s a classic example of a straddling strategy.   The 365 format was caught somewhere in between the traditional business model of Whole Foods and the very successful contrasting business model at places such as Trader Joe’s.  (For more on Trader Joe’s, you might check out a recent Freakonomics episode in which I participated.) Straddling often occurs when incumbent players try to react to successful entrants.  Consider how the legacy airlines tried to cope with entrants such as Southwest and Ryanair.   Among the failed responses were straddling strategies such as United’s Ted, Delta’s Song, and British Airways’ Go brands.  For more on straddling, check out this short video clip from one of my Great Courses lecture series. 

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