What's Whole Foods' 365 All About?

| About: Whole Foods (WFM)

By Ian Ritter

Whole Foods (NASDAQ:WFM) is launching a small-format store, called 365.

The name is in reference to its private-label brand of goods that are relatively inexpensive compared to its other high-end and organic products that coined the term "Whole Paycheck."

So far, there are three openings, with set dates, for the concept scheduled to open this year. The first will be in May in Los Angeles' hip Silver Lake neighborhood. Locations in Oregon, outside of Portland, and in the Seattle suburb of Bellevue, are forecast to open this coming summer. More stores are already planned for select areas around the country, including the East Coast.

The story behind the launch

This comes at a good time for Whole Foods. The grocer seems to have hit some headwinds when it comes to its most recent sales reports.

Whole Foods Market saw same-store sales decline by 1.8 percent, year over year, during the company's first quarter. Even though the grocer had record total sales of $4.8 billion, comparable store sales declines are not normal for the retailer. Net income also dropped during the quarter, but it's not as if the retailer is struggling. Whole Foods has a total of 30 new stores on tap for the coming year, in addition to the three Whole Foods' 365 units that are set to open in 2016.

There are a lot of advantages to Whole Foods' 365. For one thing, ALDI and Trader Joe's, both known for selling high-quality products at inexpensive prices, are expanding rapidly around the country, and have great customer loyalty.

To compete with these chains, it makes sense for Whole Foods to have another concept that will cater to the same consumer base that might steer away from the grocer due to the expectation of high prices.

Plus, Whole Foods is experiencing significant pressure from The Fresh Market (NASDAQ:TFM), Sprouts Farmers Market (NASDAQ:SFM), as well as regional higher-end chains, that target a wealthier consumer looking for organic and healthy (expensive) food products.

Regardless, the news about Whole Foods' 365 is good for retail real estate landlords. Whole Foods is a credit tenant, and the new concept will average 30,000 square feet. This means that its size will be more flexible than its full-line stores, which have been curving upwards of 40,000 square feet, depending on the locale.

The smaller format will give landlords opportunities to put the stores into smaller spaces, especially in retail strip centers and mixed-use buildings, where we have seen a glut of retail store closings so far in 2016.

Where others have failed

But, there is still a lot of uncertainty around the initiative. Consumers will have to experience Whole Foods' 365 before it can be determined a success or not.

A similar-sounding concept, Fresh & Easy, owned by the U.K.-based giant Tesco (OTCPK:TSCDY), opened a few years ago in the super-competitive California grocery market. It was a chain that promoted healthy food for inexpensive prices. Fresh & Easy, also in a small format, shut down after opening 200 stores and losing well more than $1 billion, after the concept was terminated last year.

The upside with Whole Foods, though, is that it has a name recognition that people associate with experiential retail. Many think, and for good reason, that they decide to shop at the company's stores for an experience that is beyond a simple transaction. They go there to taste good samples of food, take cooking classes, and eat at its cafes. There is bound to be plenty of excitement about the concept that will draw plenty of shoppers into Whole Foods' 365.

With measured expansion plans, there is little reason to believe the concept won't work, and it could be an overall benefit to the commercial real estate industry that draws increased consumer traffic.