There’s a hidden gem in Whole Foods (NASDAQ: WFM) store portfolio that might explain why Amazon (NASDAQ: AMZN) bought the struggling supermarket operator.
The gem is Whole Foods’ Aldi clone 365; which is quietly being rolled out in Los Angeles. A 365 is a smaller, no-frills store with greatly reduced customer service and lower prices. Like Aldi; or Trader Joe’s, 365 sells high-quality food at lower prices and it lacks a lot of traditional supermarket amenities such as a deli.
It also takes advantage of technology to reduce costs much like Amazon’s Go experimental grocery store in Seattle. Instead of asking an employee about wine, customers at 365 check prices and information about vintages on an iPad or an app, Los Angeles Times reporter Andrew Khouri noted. This sounds like Aldi; where customers famously have to put up a 25¢ deposit to “rent” a shopping cart, the quarter is retrieved if the cart is returned. That limits labor costs because no associate has to be sent out to the parking lot to collect carts.
Whole Foods is Trying to Clone Aldi
The huge profits and fast growth of the privately-held, German-based Aldi; and its’ archrival Lidil, are clearly the inspiration for 365. Business Insider writer Hayley Peterson noted that the floor plans in 365 look like a like those in revamped Aldi stores.
Aldi is now the fifth largest grocer in the United Kingdom and it is spreading fast in the United States. The company currently around 1,600 stores in the USA and plans to expand to 2,500 locations by 2022.
Imitating Aldi seems counterintuitive for Whole Foods, because Aldi seems like the anti-Whole Paycheck. Its prices are up to 50% lower than traditional grocers, and its markets are famously no frills. Yet like Whole Foods, Aldi has a cult-like following there are Facebook pages devoted to bring the discount grocer to particular cities.
Why Whole Foods is trying to be more like Aldi
Somebody at Whole Foods has certainly noticed Aldi’s success and that of Lidil subsidiary Trader Joe’s.
Joe’s has made serious inroads into the high-quality and organic grocery sectors with lower prices and specialty products such as imported commodities. Like Aldi Joe’s sells a limited selection of merchandise at very low prices; although it emphasizes a higher level of customer service.
The idea behind 365 is to counter Trader Joe’s and take Whole Foods into new markets. 365’s smaller new frills footprint can be adapted for communities where a traditional Whole Foods would not work such as working class neighborhoods and small towns.
It would also be easier and cheaper to roll out because of the smaller size and reduced labor costs. Another advantage to 365 is that Whole Foods can use it to capitalize upon resources from its stores.
Hot entrees and deli foods can be prepared at a regular Whole Foods and taken to 365 locations. Whole Foods can also create an app which customers would use to order foods prepared at a regular store that can be picked up at their neighborhood 365.
Whole Foods’ Income is Collapsing
It is also easy to see why Whole Foods is investigating new concepts, its’ income is collapsing despite revenue growth and expansion. Whole Foods reported a net income of $604 million in March 2015; that fell to $510 million in March 2016, and $402 million in March 2017.
This explains why Whole Foods started closing stores in first quarter 2017. It also tells why Whole Foods management was so anxious to sell out to Amazon they wanted to avoid a collapse or a situation like that at Supervalu (NYSE: SVU) where the stock was trading at $3.29 a share on July 17, 2017, despite revenues of $14.97 billion reported on March 31, 2017.
Whole Foods’ numbers are disturbingly reminiscent of those of Supervalu’s. The organic grocer revenues of $15.86 billion on March 31, 2017; Supervalu operates several grocery chains; including Cub Foods and the Save-a-Lot discount grocery outlets.
One reason why Whole Foods sold to Amazon was to preserve its stock value. Another was to keep from getting gobbled up by Aldi, Lidl, or Kroger (NYSE: KR). Kroger; which already owns Harris Teeter and Marianos, would love to get Whole Foods. Owning Whole Foods would get Kroger into major markets like New York, and Miami, and it would be an ideal outlet for marketing its’ $1.7 billion Simple Truth organic and natural brand.
Why Whole Foods Needs Amazon
All this also explains why Whole Foods needs a deep-pocketed benefactor such as Amazon. It simply lacks the resources to launch a new grocery chain such as 365.
Currently there are just a handful of 365 stores; five in the Los Angeles area. A sixth is scheduled to open in August in Santa Monica. Around 12 365 stores are planned nationwide over the next two years. That’s hardly enough to turn Whole Foods around or make up for falling income.
Amazon would be able to pump enough money into Whole Foods to roll 365 out in a big way. Perhaps branded as 365 Amazon Go, and incorporate some of the technology being tested at the Go store.
Why Amazon wants Whole Foods and 365
An obvious use for 365 locations would be as a pickup and drop off location for Amazon merchandise and returns. Another would be as a place where people would be able to pay for Amazon purchases with cash. This might help Amazon expand its business in working class neighborhoods; where people are less likely to have credit cards and bank accounts.
Other uses for 365 locations would be for pickup of Amazon Fresh orders and hot food prepared at Whole Foods stores. If 365 can be integrated with the growing network of Amazon fulfillment centers it might be a game changer in retail.
This means that 365; and not the supermarkets, might be the real reason Amazon bought Whole Foods. Therefore both Whole Foods and the US grocery industry might be changed beyond recognition by Amazon and 365.