Analysis of Whole Foods decision to cancel 365 expansion
Eighteen months after Amazon acquired Whole Foods, the path forward for the company is becoming clearer.
Before the end of 2018, the tentacles of Amazon’s presence in food included Whole Foods Market grocery stores, Whole Foods 365 grocery stores, Amazon Go convenience stores, Whole Foods grocery delivery through Instacart, Whole Foods grocery delivery through Prime Now, dry grocery delivery through Prime Pantry, and fresh grocery delivery through AmazonFresh.
Last month, Whole Foods terminated its relationship with Instacart, making Prime Now the only delivery service for the chain.
This week, Yahoo Finance reported that Whole Foods announced to employees that it would not be expanding the 365 format as previously planned. The rationale given was that Amazon was already lowering prices at Whole Foods and so the price difference between the two formats would not be as pronounced as originally expected.
The news of Whole Foods putting the brakes on its 365 expansion did not come as a surprise to Kantar analyst Diana Sheehan.
“As Whole Foods has come out and said that they will be expanding in 2019 and beyond, and as Amazon Go and that team looks to expand, I think there are just (only) so many formats that they can focus on, and it comes again back to placing their bets in the places where they feel that they can have most impact,” Sheehan said.
“I think that that 365 concept really had still been on the drawing board and it’s easier to pull back on that than pull back on Amazon Go — which I think from a technology perspective, but also honestly from a gap in the marketplace perspective, really meets the needs of that kind of bridge between convenience store and grocery store — (or on) the expansion of ... their core Whole Foods concept to reach new consumers,” Sheehan said.
Private brand opportunity
Since the early days after the acquisition, Amazon has worked to change the price perception of Whole Foods. Amazon has already lowered prices, and some expect that adding more private-brand items to the assortment will be another way the retailer cuts costs so it can keep prices lower.
Britain Ladd, CEO of Six-Page Consulting and a former Amazon executive, said as much to Yahoo Finance. Sheehan agreed.
“That is a natural strategy that is consistent with what we’re seeing across the board in grocery,” Sheehan said. “When Amazon acquired Whole Foods, (the 365 brand) was really one of the biggest assets that they bought, so I think that kind of really looking at and leveraging 365 within their core stores, looking to bring that as an assortment option in a more visible way to Amazon Go stores, is really a smart strategy to move forward, but it’s also a necessary strategy given where shoppers’ mindsets are today.”
Data consultancy dunnhumby, which recently released its annual ranking of retailers based on financial performance and emotional connection to consumers, described private brand as key to value perception and overall success.
“Six of the top 10 private brand performers are in the first quartile of the (retailer preference index) overall,” dunnhumby wrote in its report. “Additionally, many of the most successful traditional regional grocers occupy the second quartile, and they complement a highly relevant assortment with a strong private brand, allowing them to maintain solid price perception.
“Lastly, the private brand is a key element in driving both price and quality perception and thus overall value perception, where retailers in the bottom two (quartiles) are struggling the most,” dunnhumby wrote.
Sheehan also noted that private brand has an important place in the price-value equation.
“That connection to private brands versus branded, seeing that price differential between the two, but also then seeing high quality private label, all come into play in driving shopper loyalty,” Sheehan said.
Whole Foods should be able to take advantage of that dynamic, Sheehan said.
“Shoppers who currently buy 365 have already proven their loyalty when they jumped at the chance to buy 365 on Amazon for nonperishable products — and even in the fact that the 365 format concept had some legs in the markets where they launched it,” Sheehan said.
“At the same time that Amazon is redefining what retail is with concepts like Amazon Go, what you’re seeing them do in letting (Whole Foods CEO) John Mackey and that Whole Foods group operate as a traditional grocer," Sheehan said. "They’re allowing and recognizing the core leadership of Whole Foods to lean into honestly what makes a good traditional grocer, with this private brand piece, while at the same time benefiting from the sophistication and technology advancements they have in other places.”