Whole Foods and Bad Analysts

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As is par for the course in this up-up-and-away market, Whole Foods appears to be feeling the singeing of activist investors looking for start-up like capital gains rather than dividends from an adult business.

The analysts have chimed in and the plan? Cut costs, and lower prices. Oh, and reduce the differentiators that’s made Whole Foods the sort of store we think of it as being.

The strategy prescribed by analysts sounds curiously similar to the sorts of strategy that’s been continuously not working for department stores, as evidenced in another Bloomberg article – where it’s obviously not working in spectacular fashion.

The store was never a price-competitive one. It never descended into the discount mud with Kroger or Safeway. Its draw was completely different. It is a destination store for a targeted audience.

If it’s losing shoppers it’s not because of the price (if price is the issue, they’d not have shoppers to begin with), it’s because the novelty of the store has worn a bit. The typical Whole Foods shopper isn’t that concerned about price, and they’re certainly not concerned enough to make the switch because the local grocery chain is having a sale. The switching is probably happening because the novelty of the store has aged to the point where the excitement to go has been bested by the convenience of a closer conventional grocery store.

What are the unique aspects of Whole Foods that attracted people to gladly pay more than other stores? Those aspects are many. For a start, it’s the pageantry of luxury where its shoppers can be seen affording to shop for artisanal local cheese and pay the organic tax. It’s because the store is also a very interesting restaurant offering many items that are new, exotic and perhaps even refined. It’s because the store carries local items like micro-brews and a far better wine selection than Yellow Tail or Fetzer (sorry Yellow Tail and Fetzer, but you know what I mean.)

Basically Whole Foods is the grocery store equivalent of buying a Tesla. The analysts’ rational, price conscious shopper probably wouldn’t buy a Tesla, they’d buy a Corolla (sorry Toyota, but you know what I mean) and drive it to Aldi.

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To wit, a price conscious shopper at Whole Foods

Dialing these things back doesn’t increase profits, it removes differentiation. Ask Macy’s about how well that worked out. 

So what is Whole Foods to do? It should stop listening to retail analysts and look at its own data. Look at how shoppers move through the store. Find the differentiators that aren’t denominated in dollars – the answers aren’t there.

The stores became magnets for foodies and affluent customers who were more likely to buy kale than iceberg lettuce. “

The real strategy is to create again an aspirational destination for shoppers. To double down on the perception of exclusivity in the event of shopping is key. Create reasons other than the necessity of buying eggs and bacon to come to the store, and more importantly, stay at the store longer.  Raise prices.

Think this is a preposterous idea? Well, let’s go back to Economics class and visit what’s called the Veblen good. Below is the graph for such a product.

veblen_saas
Yes, this graph is obviously for SaaS app pricing, but I like execution and text. Besides the economic concept still holds true whether for an app or a Ferrari.

Looks quite different than the regular supply and demand curve, right? Well when we leave the rational world and look at how real people behave, we get the Veblen curve where when something is priced high enough it’s perceived as higher quality and thus in greater demand.

So while analysts may be right about lowering prices to be more competitive for companies like Aldi and Safeway, they’d better reconsider what sort of shopper Whole Foods has because they operate far to the north of the Veblen curve vertex.

 

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