What should we make of the announcement by WFM that it’s launching a new chain of supermarkets–smaller stores, selling less expensive merchandise, targeted to Millennials?

preliminaries

I was an early investor in WFM.  My family shops there on occasion.  But I haven’t followed the company for years.

Over almost any period during the past decade, the traditional supermarket chain Kroger (KR) would have been a better investment.

The stock’s strong performance from the depths of the recession comes in part from its starting point–a loss of over 3/4 of its stock market value and the need for a $425 million cash injection from private equity firm Green Equity Investors.

my thoughts

new brand–As I once heard a hotel marketing executive say, “You don’t start selling chocolate ice cream until the market for vanilla is saturated.”  Put a different way, if there’s still growth in the tried and true, it’s a waste of time to segment the market.  Therefore, the move to a second brand signals, at least in the minds of the managers who are doing this (and who presumably know their company the best), the end to growth in the first.

less expensive food–Pricing and brand image are intertwined.  Paying a high price for goods can confer status both on the product and the buyer.  Lowering prices can do the opposite.  It seems to me that WFM judges it can’t lower prices further in its Whole Foods stores without risking the brand’s premium image.  It may also be that WFM thinks it needs the pricing to pay for the big stores/prime locations it already has.  That would be worse.

smaller stores–This is less obvious.  The straightforward conclusion is that WFM has exhausted all the US locations where the demographics justify a big store.  My impression is that this happened years ago, however, when WFM began to decrease the square footage of its new stores.  On the other hand, it may also be that in their search for “authenticity,” Millennials react badly to big stores.

Millennials–Millennials and Baby Boomers are each about a quarter of the population.  Boomers have about twice the income of Millennials.  But as Boomers fade into retirement, their incomes will drop.  Millennials, in contrast, are just entering their prime working years, when salaries will rise significantly.  So targeting Millennials makes sense.

It’s not surprising that WFM shares dropped on the news.   It signals the end of the road for the proven brand and a venture into the unknown for which no details have been provided.  Why announce this now in the first place?