Whole Foods Works to Reduce Costs and Boost Clout With Suppliers
Moves aim to head off stiffer competition from the likes of Kroger and Costco
Whole Foods is seeking to save about $300 million a year by September 2017. PHOTO:PATRICK T. FALLON/BLOOMBERG
Whole Foods Market Inc., which has long given its local managers and regional bosses broad discretion over everything from buying cheese to store design, is whittling away at some of that autonomy in an effort to reduce costs and boost its clout with suppliers.
As stiffer competition erodes its profit growth, the natural and organic foods retailer is tweaking its management style by centralizing and streamlining some functions. The changes could be risky for the company as it tries to wring more efficiency from its stores without sacrificing the local flavor and specialty offerings that have been a cornerstone of its success.
Whole Foods is shifting more responsibility for buying packaged foods, detergents and other nonperishable items for the more than 430 stores to its Austin, Texas, headquarters. It is deploying software to simplify labor-intensive tasks like scheduling staff and replenishing shelves.
The chain also is seeking to save about $300 million a year by September 2017, partly by eliminating more than 2,000 jobs, a plan it announced last fall.
The measures are part of a broader push to beat back competition from retailers such as Kroger Co. andCostco Wholesale Corp.that have expanded their range of natural and organic products, and frequently offer them at lower prices. To lure shoppers, Whole Foods also plans to offer more discounts.
John Mackey, Whole Foods’ co-chief executive, has acknowledged the delicacy of the streamlining effort. “We want to evolve the structure in such a way that we take out redundancy and waste, and at the same time though, we’re not diminishing the culture, the empowerment efforts that make Whole Foods Market special,” he told analysts in November.
A company spokeswoman declined to elaborate on his comments.
The chain is under heavy pressure to boost its stock price and reignite sales growth. Whole Foods shares have tumbled about 45% in the past year, far outpacing the 5% decline in the S&P 500, and are down by more than half since October 2013. Sales growth at established stores has been anemic, and registered a rare decline of 1.8% in the quarter ended in January. That compares with consistent growth of at least 6% a quarter as recently as two years ago.
The stakes are also high on another front. Transferring more authority to headquarters and automating more tasks risks harming Whole Foods’ customer-friendly reputation and turning off shoppers who place a high value on local products, such as blueberries and hometown pasta sauces, and niche items, said Jim Hertel, senior vice president at retail consulting firm Willard Bishop,a unit of Inmar Inc.
The relative autonomy Whole Foods has long granted its stores and regional units—now 12—reflects a bedrock principle of Mr. Mackey, who helped open the first Whole Foods in 1980. Until the early 1990s, the chain’s stores bought their own staples, in part because he believed that kept them closer to their customers, said Tim Sperry, a natural-products industry consultant who was one of the company’s first regional buyers.“The battle that always gets waged [at supermarkets] is cost relative to localized consumer preferences,” said Mr. Hertel. The chain must take care not to “damage the reputation for being a top-quality location for regional products.”
Later, the chain took advantage of its growing size by introducing a regional system for buying such products in greater quantities at lower prices.
More recently, Whole Foods has centralized some functions such as most meat and produce buying. But it still leaves many decisions in the hands of regional and store-level workers. Regional presidents oversee the budgets and other aspects of building stores—something many grocery chains delegate to a special team. Regional and store-level cheese managers are responsible for finding and carrying local products. In addition, new store employees can’t stay on past a trial period of up to 90 days without the consent of two-thirds of their department’s employees.
The model worked well for Whole Foods for years as it grew rapidly and established itself as the leading retailer of natural and organic groceries. Its stores cultivated a loyal following and strong profit margins, despite a reputation for high prices that led some to dub it Whole Paycheck.
But the need to offer more competitive prices is stepping up the pressure for greater efficiency. A team in Austin is taking on additional responsibility for negotiating and buying packaged foods for the center aisles of its stores.
Computers will analyze a store’s data to project demand and re-order products, potentially helping Whole Foods better understand which stores would benefit from a greater variety of locally produced goods. PHOTO: PATRICK T. FALLON/BLOOMBERG
The company also is replacing four separate checkout systems—partly the legacy of acquisitions—with a single system that will enable Whole Foods to offer more discounts more quickly to shoppers based on their preferences.
Meanwhile, the retailer is consolidating its 12 inventory-management systems into one, through a partnership with software firm Infor Inc. It plans to automate the process of tracking the items on store shelves and submitting restocking orders, as other grocers have. Computers will analyze a store’s data to project demand, re-order products and potentially help Whole Foods better understand which stores would benefit from a greater variety of locally produced goods.
The company says the Infor setup also will reduce out-of-stock items and decrease spoilage.
Mack Graves, a senior adviser at California-based Panorama Meats, one of Whole Foods’s biggest suppliers of grass-fed, organic beef, has worked with the retailer’s regional divisions for two decades. But more than six months ago, he said, Panorama began dealing with the national office, which largely has taken over meat buying.
It made coordinating national beef promotions easier and may have lowered overall shipping costs for Whole Foods, Mr. Graves said, but now the grocer is slower to react and offer discounts where certain cuts of meat aren’t selling well. A Whole Foods spokeswoman declined to comment.
Still, he added, “The centralization of Whole Foods is here…and it’s going to get stronger.”
