Mark Ritson: Whole Foods’ strategy for 365 is classic brand architecture – but will it work?

Organic supermarket chain Whole Foods is diversifying. Last week, it announced that alongside its existing 400 Whole Foods locations it was launching a new chain of branded stores in the US under the brand name ‘365’.

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For superficial, tactically oriented marketers who like shiny things and new launches this is positive news. But wiser, strategic marketers should be more circumspect. Launching new brands is always a tricky corporate moment.

On the positive side, Whole Foods’ new brand allows it to access a different market segment from the one it serves. Co-CEO Walter Robb says the new stores will be “geared toward millennials”. That sounds trendy but behind the statement is a ton of shopper research that shows a younger generation searching for better quality, natural products but are not looking for it among the aisles at Whole Foods. According to Supermarket News editor Jon Springer: “[It has] identified millennial shoppers, younger shoppers who are very particular about what they eat, but also tough about what they can spend on food.”

That is an important observation because aside from opening up a new segment of the market it also demonstrates another advantage of a second brand – the ability to play at a different, lower level of the value curve. Whole Foods has been remarkably successful at not only building brand and attracting customers  but also maintaining premium prices. If you have visited one of the company’s UK locations, you will know that its excellent assortment of organic offerings does not come cheap. That’s true back on home turf too where Whole Foods typically enjoys a 15% to 20% premium over its US rivals. The introduction of the 365 brand allows the company to enjoy two distinct points on the pricing elasticity curve.

365 Whole Foods Market

That’s important for Whole Foods because its original model, which launched 35 years ago, has been so successful it has attracted the ultimate capitalist compliment – competitors. Imitators such as Trader Joes have arrived, traditional retailers like Safeway have introduced more organic fare to their shelves and local farmers’ markets have enjoyed a 21st century renaissance. While the chain’s same store sales continue to grow at about 4% (a rate Tesco would give its confectionery aisle for), that’s half what the company once delivered and its share price has stumbled. A new brand offers the chance to supplement and stimulate growth.

But it’s not all good news. Whole Foods executives have talked up the complementarity of the two sister-brands with shoppers being able to do their weekly shop at a Whole Foods and an occasional top up at 365. That’s great in theory but the opposite scenario is equally possible – one in which a significant proportion of Whole Foods’ customer base shifts all their business to the lower-priced 365 chain and Whole Foods keeps customers but loses significant margins. In my experience, companies launching a second brand talk complementarity pre-launch, and cannibalisation post-launch.

A bigger worry is that managing two distinct brands will begin to draw too heavily on the resources of the once focused Whole Foods organisation. There’s nothing more strategically beautiful or financially viable than a single-branded house. One brand position, one organisational culture, one brand tracking system, one annual meeting, one employer brand. By the same token, there’s nothing more organisationally risky than the decision to double up and diversify the brands under management. Any moron can throw a ball into the air and catch it, only a few can juggle successfully and not drop both balls on the floor. Not everyone has the management resources and core competencies to be P&G. There’s a reason why most strategy consulting firms operate as branded houses.

So far, Whole Foods appears to be doing everything right. It has not created a new brand in 365 but rather taken it from an existing, and successful, value line. Don’t create brands if existing ones will suffice. I’m also a fan of the decision to name the new stores ‘365 by Whole Foods Market’. It’s a classic example of the endorsement approach to brand architecture – a great option that allows the new brand to target and position itself differently while relying on a welcome injection of brand equity from the parent brand.

With up to 10 stores planned for 2016, only time will tell whether the company will regret or relish its second brand.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Josh Parks 19 Jun 2015

    yes, picking 365 was relatively clever. The sub-brand already has status with Whole Foods customers. Also interesting was the Strategy to Trademark a bunch of names a little over a month ago, to throw off competitors and/or buy time for final decision making. Given the choice of 365 it’s likely that they knew what they were doing all along. Clever.

  2. Jon P 21 Nov 2016

    We used to shop at Whole Foods for special stuff, like high-quality meats and seafood, cheeses, and organic produce. Then we’d go to Star Market for more staple items. With the addition of 365, many of those staple items are similarly priced at WF. The result is more business from us on the low end in addition to the pricier stuff we buy there. Whole Foods is a more pleasant place to shop than a big chain market—and I tend to trust them more when it comes to the purity of the food. I can’t speak for millennials, but for me, this is a winning strategy.

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