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Smaller boxes work for Whole Foods

Whole Foods Markets' push to target smaller markets with smaller stores is performing well above expectations.

February 16, 2012

The following is an excerpt from a recent conversation on RetailWire, reproduced here with kind permission.

Whole Foods Markets' push to target smaller markets with smaller stores is performing well above expectations. Combining above-plan sales with healthier store economics, the success is encouraging Whole Foods to more aggressively pursue smaller market openings.

Co-CEO Walter Robb said last week that Whole Foods' smaller, typically suburban market stores are "generating a lot of excitement." At a new store opening in the quarter in Folsom, CA, 1,000 customers waited for the doors to first open, including some who had camped out overnight. The welcoming was particularly encouraging since Folsom, located about 20 miles outside of Sacramento, was one of the areas particularly feeling the housing collapse.

"In many cases, these markets offer less competition, allowing our differentiated store experience to stand out even more in the marketplace than it does in some of the larger, more competitive markets," said Mr. Robb on Whole Foods' first-quarter conference call with analysts, transcribed by Seeking Alpha. "The economic case is compelling because rent is significantly less and with the smaller size, our capital spend is less as well."

AC Gallo, president and chief operating officer, added that, depending on the region, overall state taxes, payroll taxes and utility costs can be lower as well.

Overall, the six stores opened in the first quarter were 17 percent smaller in size — averaging 38,000 square feet — yet produced average weekly sales per store of $561,000. That translated to 29 percent higher sales per square foot of $776 versus the prior year's new store openings. New stores also produced about 450 basis points higher store contribution versus last year's class. Besides Folsom, new stores in the quarter opened in Jamaica Plain, MA; Minnetonka, MN; Yonkers, NY; as well as its first stores in Oklahoma City and Scotland.

Whole Foods first began exploring smaller stores under 40,000 square feet in 2008, down from traditional 50,000 to 70,000 square-foot boxes. Finding success with some as small as 25,000 square feet, the strategy was accelerated last year as part of an expansion plan to reach 1,000 stores.

"When you combine that with lower rents, lower build out and smaller total footprint, with high sales per square foot, it's a very powerful economic model," said Mr. Robb.

RetailWire BrainTrust comments:

Whole Foods will continue to do well with smaller stores as long as these stores do not shortcut the prepared foods, baked goods, meats and seafood that consumers in these markets adore. Whole Foods can probably carry a few less cans and containers in the central aisles and get by with lower inventories of such items. In my opinion, this approach works. - David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates

Their sales area runs about 60% of total area and they like to see $25 per square feet of sales area per week. So if they are doing $561k in 38,000 total area, that's about right for them. I'm seeing much smaller stores in markets with lower populations of high income people that are well educated. Smaller stores mean higher sales per square foot and that's what Whole Foods needs. We are seeing stores now being built under 25,000 square feet in smaller markets with large prestigious colleges. You can't build a 60,000 square foot store in a small town, big college market; it would not make financial sense.- David Livingston, Principal, DJL Research

Unless you are a hardcore Whole Foods shopper who has bought into the entire lifestyle it serves, WF is a "boutique shop" anyway. Whether it is the produce, fresh fish, prepared foods, or unique items, you go there specifically to get what you want. This would seem to lend itself quite well to a smaller format positioning. Congrats to Mr. Robb and company for this one. - Ben Ball, Senior Vice President, Dechert-Hampe

It's really quite simple. For a store with 40,000 SKUs, 20,000 of those will only contribute 5% of total sales. It's true that those 20,000 play an important role in attracting shoppers to the store (shoppers LOVE stores that have EVERYTHING), but those 20,000 have a tremendous sales-suppressing effect on the other half, which is actually what the shoppers will mostly buy. Retailers actually HIDE what shoppers want to buy in an indiscriminate sea of merchandise, and some retailers think shoppers love this "treasure hunt" model of retailing. It is brain dead.

This is the real factor driving the success of the small store movement. A big store with twice the SKUs is more attractive to shoppers, but won't deliver the sales performance until retailers become actual salesmen and learn how to sell the few items in the presence of the many. - Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

Whole Foods has cultivated a premier, exclusive image with high-quality products provided in relatively sparse locations. Since one of the primary drivers of grocery purchases is convenience, consumers have reacted well when provided with Whole Foods close to their neighborhood, rather than only in the major metros. By relaxing the requirement on market size to justify a very large square foot store, the company has opened themselves strategically to underserved growth markets.

Other retailers with similar strategies include Target and Trader Joe's. Trader Joe's already has a smaller footprint, which would make them a very good fit for the small market strategy. Target would require innovation to provide some version of their breadth of products in a smaller more economic store environment. - Mark Price, Managing Partner, M Squared Group, Inc.