Will Whole Foods manage healthy profits?
Jun 25, 2007
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Who would have thought that a single shop could create so much interest within the retail industry and media? But this is certainly the case with the first Whole Foods Market store that opened in London on June 6.
The US-based operator (WFMI) has brought its upmarket offer to the UK in order to tap into the current desire by consumers for authentic, healthy and high quality produce. We are not even talking the equivalent of a Waitrose here as Whole Foods is seriously upmarket and is understood to be benchmarking its offer and pricing against that gastro paradise Borough Market in South East London.
What also makes the proposition interesting is its sheer size. At 80,000 sq ft it is a quantum leap away from the 5,000 sq ft stores in the small specialist Fresh & Wild chain, which Whole Foods bought in 2004 as a means of researching the UK market.
So what exactly are the prospects for this new foodie emporium? Although the pricing will be super-premium in the extreme the high quality of the products and the visual appeal of its merchandising should ensure that it will successfully attract masses of hungry and inquisitive customers – in much the same way as Harrods’ food hall.
But whether the store can deliver a return on investment for Whole Foods’ shareholders in the US is highly questionable. Part of the problem is that the store will be costing a packet to run. Its rent will be nose-bleeding high as will its wage bill because it uses an above-average number of employees, and there is the potential for high levels of wastage because a large proportion of its produce is fresh.
To offset these costs Whole Foods will have to really crank up its sales per sq foot, just as it does in the US, where it is understood to accrue £400 average sales per sq ft - double that of other national players. The only problem with this is that it is still nothing like the impressive £1,000 that Tesco achieves in the UK.
Admittedly the operating costs for its Kensington store will be much higher than for any other outlets that it might open in the future in less affluent areas of the country. But in these other locations there will then be the issue of whether customers will be willing to pay the super-premium prices that Whole Foods will be demanding.
Adding to the challenge for Whole Foods is the fact that all the UK’s major grocers now have high-end ranges of their own. The private label ready-meal ranges such as Tesco’s ‘Finest’ and Sainsbury’s ‘Taste the Difference’ will provide stiff competition. The supermarkets have also been increasing their exposure to organic and natural products with Waitrose leading the way – it now has an 18% market share of total UK organic sales.
Recent data from TNS Worldpanel showed sales of organic products were up by 30 per cent for the 12 weeks to mid-February. In recognition of how foods stuffs have been going down the healthy and organic route as well as recognising the threat from Whole Foods Tesco slyly copyrighted the ‘Wholefoods’ brand name in the UK last year.
Even the more downmarket players such as Morrisons and Wal-Mart-owned Asda along with the German-based Aldi have been increasing their premium and organic ranges. Lidl has gone as far as to state its aim of deriving 20 per cent of sales from organic products.
What this all means is that the point of difference of Whole Foods in the UK is far less than it has historically been in the US. Jonathan Pritchard, food analyst at London-based Oriel Securities reckons “If they’d come two years ago then the time was right but they didn’t and the majors have now cut them off at the pass.”
Over this period organic produce has become increasingly difficult to source in the UK as domestic operators have fought for the limited supplies available – with most having to resort to air freighting goods in from overseas.
What this suggests is that Whole Foods will have a tough time finding sufficient stocks to fill its shelves. Although this will unlikely be too much of a problem for the first store it could become a bigger deal further down the line if/when Whole Foods expands its operation within the UK.
And the plan certainly is to open further outlets, according to John Mackey, chairman and CEO of Whole Foods, who recently said: “If it does really well, say as good as our New York stores do, then we’re going to do a lot more stores in the UK, and we’ll probably try to do one in another capital in Europe.”
This would certainly be sensible as it would enable the company to reduce its overall fixed costs by leveraging the costly infrastructure that it has put in place for its Kensington store.
But again this will be a challenge because the fight for suitable-sized stores in the UK between the major grocers is ferocious and Whole Foods would be in their fighting for prime locations where the competition will be most intense. It will need to pay top dollar prices for sites, which will only add to the difficulties it will face in reaching profitability in the UK.
What might help it reach profitability is its secret weapon – foodservice. Its Kensington store has one whole floor - with 250 staff - set aside for food preparation for its 11 restaurants and takeaways. These will not only likely be a good earner in their own right but will also act as strong footfall drivers for the rest of the store.
This in-store eating brings something genuinely new to the UK food scene and will hopefully be copied by the domestic grocers as it will undoubtedly make food shopping a whole lot more interesting in this country.
So while there are undoubted challenges for Whole Foods in the UK it must be hoped that it does ultimately prove to have a sufficiently profitable model as an injection of excitement into our supermarkets is much needed.
By Glynn Davis for The Daily Reckoning. You can read more from Glynn and many others at www.dailyreckoning.co.uk
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