2 Reasons Whole Foods Market's Smaller Stores Could Be a Success

Whole Foods Market's recently reported third-quarter numbers reinforced views that growth at the organic food retailer is stalling. Whole Foods' same-store sales (comps) have been consistently falling and missing analysts' estimates. In the latest quarter, comps increased just 1.3%, missing analysts' expectation of a 2.8% rise, and the story has been the same for quite some time now.

Source: Company website. Chart by author.

Does this mean all's lost? Not quite. As fellow Fool Jeremy Bowman recently noted, comps at Whole Foods' stores open for less than five years are promising in the third quarter comps were up 8.7%. In this context, the company's plan to open not just new stores but a completely new chain, "365 by Whole Foods Market," which will run parallel to its existing format, makes sense. Many see the new idea aimed at millennials.

Whole Foods touts the new format -- which is slated to begin opening with a handful of locations next year -- as offering "convenience and everyday low prices," providing a "fresh format and unique product assortment." Let's look at some of the reasons investors should be confident in this venture.

Changing with the timesWhole Foods has all along catered to a niche set of customers that swear by its products' high quality and enjoy the complete in-store shopping experience. Though this niche is still intact, it's not growing at a pace the company and its investors are used to.

Organic products' appeal has spread to the masses and demand for cheaper yet high-quality products has gone up with cost-conscious shoppers, especially millennials (those born between the early 1980s and the early 2000s). General retailers such as Wal-Mart andKrogerare capitalizing on this trend by offering organic goods at lower prices than Whole Foods.

Whole Foods, too, wants a share of this market and the small-scale format is geared toward that. It will use "innovative technology" to make shopping more fun and convenient something that would attract younger crowds.

Source: Whole Foods

Millennials are always on the lookout for the best deals and a fun shopping experience. Getting these shoppers into the Whole Foods fold could be of great value to the company as they are 80 million in number with an estimated $200 billion of buying power annually.

Whole Foods plans to open five of these stores by the second half of next year and double the openings in 2017. The new stores will reportedly shrink to an area of about 25,000 square feet, as opposed to the 40,000 square feet characterized by the usual Whole Foods outlets. The company has 424 Whole Foods Market stores, which it plans to expand to more than 1,200. The company says the new format could become as big as the parent.

Taking a leaf out of other success storiesWhen world's biggest retailer Wal-Mart saw comps at its big-box stores in the U.S. fall, it turned to the smaller format Neighborhood Market to spur sales. The behemoth realized that smaller stores situated locally, and stacked with affordable supplies, had more potential to intrigue a wider audience than its sprawling supercenters.

Though sales at these stores form a small portion of Wal-Mart's total revenue, they have generated healthy comps and contributed nicely to overall same-store sales at the company. Neighborhood Markets tend to be one-fifth the size of the supercenters .

Source: Company website. Chart by author.

Privately held organic food retailer Trader Joe's has reportedly been generating more revenue per square foot than Whole Foods through its smaller format stores, and has been a hit with millennials. So, it was only a matter of time before Whole Foods thought along these lines.

Whole Foods is trying to strike a balance -- remaining true to its original vision as well as charting new territories. On one hand, its fixed buyers could continue shopping from the original Whole Foods stores, while a new crowd could pick up stuff from the smaller stores. The plan looks reasonable and, if successful, Whole Foods could tap into millennial spending power as well as the success others have had with smaller stores and less expensive organic fare.

The article 2 Reasons Whole Foods Market's Smaller Stores Could Be a Success originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. ICRA Onlineand Eshna Basu have no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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