Whole Foods Sheds Pricey Image to Survive Recession

The food retailer has done surprisingly well, holding its own in what's now been a yearlong assault on any store considered expensive.
The food retailer has done surprisingly well, holding its own in what's now been a yearlong assault on any store considered expensive. (By Daniel Acker -- Bloomberg News)
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By Caitlin McDevitt
Sunday, August 9, 2009

If you're looking for green shoots, stop by the Whole Foods in Paramus, N.J. Wander in past the multihued display of locally grown flowers into the oasis of produce for which the upscale grocer is known: twenty-some types of leafy greens and pristine arrangements of flawless fruit, from rolling mounds of kiwis to deep bins of shiny crimson cherries.

Beyond that, the store stretches on and on. Measuring 63,000 square feet, it's one of the biggest Whole Foods locations, and it opened at a terrible time -- when the downturn was in full swing in March. Naysayers at the time predicted that the lavish store would elicit an underwhelming response, but so far they've been wrong. The store has exceeded sales expectations and, in the words of chief executive John Mackey, its customer volume has been "phenomenal."

If Whole Foods were perishable, it probably would have expired this past year. But instead, it has done surprisingly well, holding its own as a high-end food retailer in what's now been a year-long assault on any store considered expensive. While its performance hasn't been dazzling -- the downturn hurt sales and dampened expansion plans -- it hasn't been dismal, either.

On Tuesday, the grocer reported a better-than-expected third-quarter profit of $35 million and a sales increase of 2 percent -- signs that the supermarket is already beginning to feel rejuvenated. "We haven't been hearing that anywhere else in the luxury retail space," says Scott Mushkin, a Jefferies supermarket analyst. Such optimism has fueled the grocer's soaring stock price, which is up 191 percent this year. In the same period, Safeway and Kroger have each fallen close to 20 percent.

So what's kept Whole Foods healthy? "We have shown that we can adjust if we have to," Co-President and Chief Operating Officer A.C. Gallo said in May. The ever-expanding grocer has markedly scaled back and is opening only half the stores it had planned for 2009. The Paramus store was one of only three new Whole Foods opened in the second quarter, and the sprawling store may be one of the last of its kind.

Whole Foods is shifting away from the mega-mart model and focusing instead on opening smaller, less labor-intensive stores, like the new store that recently opened in Capitola, Calif. -- at 23,000 square feet, it's half the size of most new Whole Foods.

Yet, from the very onset of the recession, Whole Foods had to do more than just trim expenses; it needed to prevent an exodus. As of last July, one-fifth of shoppers surveyed by research firm Retail Forward said they had already switched grocery stores to save money. Whole Foods' reputation as an expensive place to shop -- it's been nicknamed "Whole Paycheck" -- made it especially vulnerable to losing its customers. Instead of hunkering down and holding out for the economy to recover, Whole Foods began to experiment with ways of convincing customers that it was, in fact, an affordable place to shop, without actually slashing prices storewide.

To ensure that budget-conscious customers didn't write off Whole Foods, the retailer ramped up the marketing of its promotions through newsletters, coupons and its Web site.

"About a year ago, we launched a campaign to make our customers aware of the value that there was in the stores," says Whole Foods spokeswoman Libba Letton. The "values" Whole Foods has been hawking -- unlike the "everyday low prices" of a discount retailer such as Wal-Mart -- are mostly sales on items that vary from week to week. "We would rather invest in a strong promotion where people are clearly getting a value than, say, just trying to drop prices, everyday price, here or there," Gallo said in the May conference call.

In the same call, Co-President Walter Robb pointed out that, according to tracking done by research firm Nielsen, the negative perception about Whole Foods' pricing had dropped from 20 to 10 percent over the past few months.

"While it hasn't been an overnight shift, we believe we are starting to change the dialogue about our prices and hopefully the perception as well," he said. Though analysts doubted Whole Foods' ability to flip its image at first, many, such as Mushkin, are impressed with the results. "It was actually a smart move to emphasize value in the store," he says. "It kept their customers coming in, even if those customers were trading down once inside the store."

If you don't believe Whole Foods can be affordable, its staff will be happy to show you that it is. Just ask Nancy Katz: Selling Whole Foods' budget-friendlier image is part of her job, as a Whole Foods "value tour" guide. By leading customers around the store and pointing out deals, she aims to debunk the assumption that everything at Whole Foods is expensive.

"We've been trying to change that perception," she says. On a recent tour, she flagged a sale on melons and organic lemonade selling for $1.99 a bottle. "You can't get that price at 7-Eleven," she said about the drink. She emphasized the value of the store's private-label goods as well, pointing to a container of store-brand organic baby greens which sells year-round for $6.99 a pound. She also noted that wherever you go, you'll still have to pay a premium for organic food, explaining that a price point isn't everything: "Value means getting a good exchange for your money."

At least for now, enough Whole Foods shoppers seem to agree.

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