While sales grew 8% to $3.6bn, it had been a disappointing quarter, admitted Mackey, with same store sales growth of 2.2%, which he blamed in part on negative PR from the New York DCA weights and measures audit.
Basket size also decreased at the end of the quarter, which he attributed to investing in lower prices and cost inflation in a few key product categories.
However, bosses were extremely excited by the potential of the new 365 by Whole Foods Market format, and have just signed five leases for stores in Los Angeles, Santa Monica, Portland, Houston, and Bellevue, Washington, said Mackey: “We are currently targeting up to five 365 store openings in the second half of next calendar year, with the expectation of doubling that number of openings in calendar 2017.”
365 format is 'going to open up a whole new set of customers'
Asked by one analyst whether it was the “primary goal to capture new incremental customers who don't currently shop Whole Foods or to capture additional trips from existing customers”, Mackey said:
“It's both…. We do think 365 will have some appeal to our existing Whole Foods customer base, and maybe… in some cases, it'll have a greater appeal to more value-oriented customer that we already have.
“But I think it's going to open up a whole new set of customers who, so far, have for various reasons, have not liked Whole Foods Market. Potentially, potentially, they think our prices are too high. There's no question 365 is going to have very, very competitive prices.”
‘The 365 stores are going to be incredibly profitable’
Asked about the costs associated with the new format, he said the 365 stores would have a simpler design and lower labor costs as they would require fewer staff, and fewer specialist staff.
He added: “We actually think we'll get superior ROIC (return on invested capital) with the 365 format. We're going to have significantly reduced capital investments, as well as significantly lower labor costs.
“If we get anything close to what Whole Foods Market sales per square foot are in our new stores, the 365 stores are going to be incredibly profitable, and with very high ROICs, even with reduced gross margins. Will there be some cannibalization of Whole Foods? I mean probably. But… it'll probably be less than when we open up an actual branded Whole Foods Market store, because it's going to appeal to a little bit different customer, we think.”
Friends of 365
David Lannon, executive vice president, operations, said that Whole Foods was also talking to local firms that might rent out space in the 365 stores: “We have this concept we're calling Friends of 365 where we're actually talking to interesting local suppliers that might rent out a small part of the space. So, again, our core store will be somewhere between 25,000 to 30,000-sq ft but we're also looking at opportunities to work with some local suppliers to give it some local flavor as well.”
Cowne & Co points to worsening store traffic trends; modest deflation... and continued cannibalization
Analysts at Cowen and Company said cannibalization was a big concern given that the first five 365 stores were in locations where Whole Foods already has a strong presence.
However, the 365 concept made sense, they added: "We continue to view a 365 assortment with higher private label and Responsibly Grown conventional produce penetration as enabling Whole Foods Market to increase its value proposition while differentiating the assortment from the flagship Whole Foods concept."
In the meantime, however, they reduced their Q4 2015 same store sales estimates for Whole Foods to +1% from +4% and its full year 2016 same store sales growth forecast to +2%, from +4% “to account for worsening store traffic trends; modest deflation in key product categories, such as produce and seafood, and continued cannibalization from store openings”.
We expect to cross the 500-store mark in fiscal year 2017
Co-CEO Walter Robb said Whole Foods had opened eight new stores in Q3, bringing the total to 422 stores in 41 states and three countries, adding: “We expect to cross the 500-store mark in fiscal year 2017, and over the longer term, continue to see potential for 1,200 Whole Foods Market stores in the United States.
“In summary, in this retail marketplace, which is more dynamic and competitive than ever, we believe we are taking the necessary steps to position ourselves for the long-term. While we acknowledge it is taking longer than we would have hoped, we believe continuing to invest in our price relevancy, our marketing and our technology is the right strategy to regain the sales momentum.”