The first preview emerged a few weeks ago when Amazon acknowledged that the Whole Foods \”365\” format would no longer exist. Later, it was further acknowledged that all 12 of those stores would be converted to the Whole Foods banner.

The 365 format was originally designed to offer shoppers an alternative to the more costly shopping trip to a Whole Foods store by offering product under the 365 private label that is priced below similar national brands. Clearly, it was an attempt to compete directly with Trader Joe\’s and Aldi, both of which depend almost entirely on their own brands sold at low prices.

The explanation for the folding the 365 stores was that the price spread between Whole Foods stores and 365 had diminished to the point that 365 was no longer needed.

I think there\’s a lot more involved than that. As I predicted in The Robin Report a little more than two years ago when 365 began, the concept was flawed and perhaps doomed to failure. That\’s because food retail customers return to the store much more often than, say, department-store shoppers. Food customers know the prices of items they buy frequently.

Known Price Points

Therefore, while department stores and apparel-brand owners might prosper with outlet stores, often located away from their conventional stores, Whole Foods located its off-price offer near its main stores appealing consumers well acquainted with food prices.

To the minor extent that 365 stores offered better price points, they also implicitly shouted out that Whole Foods stores were overpriced. Not good marketing.

In any event, Amazon is now consolidating its Whole Foods stores into a unified whole, but that leaves a big hole when it comes to any sort of a low-price offer. That would seem to counter Amazon\’s current strategy to appeal to lower-income shoppers. It already offers a lower-price Prime membership level to recipients of Medicaid and other public-assistance programs.

This is where the new supermarket chain comes in. The Wall Street Journal, the primary source about the new chain, stipulates that the first store will open in Los Angeles at year\’s end with others to follow in San Francisco, Seattle, Chicago, Washington, D.C. and Philadelphia. It is worth mentioning that the WSJ\’s news article has no identified sources, but it\’s virtually certain that Amazon was involved in spilling the beans.

The new chain will begin in populated areas, as reported, and likely mimic Trader Joe\’s and Aldi by mostly offering private labels – including Amazon\’s own – at conspicuously favorable price points. Moreover, informed speculation has it that Amazon could acquire small grocery chains of a few stores each to facilitate expansion of the new chain. Publicity on that point will identify buying opportunities for Amazon.

Small Town, Big Opportunity

If it\’s the case that expansion by acquisition of small chains is in the offing, it\’s interesting to note that small grocery chains tend to exist in lightly populated areas. Both the chains are small and the stores comprising such chains are also small. That suggests that after Amazon\’s new concept gets its footing in larger markets, it can be rolled out in less-populated places, for example in the plains states of the upper Midwest where no current Amazon store format would otherwise seem to fit. In sum, Amazon\’s new supermarkets will give it a store fleet to appeal to cost-conscious customers and that will fit well into new territories, such as rural areas and small towns.

Incidentally, reports have it that the new supermarket chain is yet unnamed. If I were on Amazon\’s board I would propose \”Prime,\” a name that Amazon already uses and that has a food-related meaning.

Finally, I\’ll offer caution that much reporting about Amazon\’s intentions is ill-informed, premature or nothing more than a trial balloon floated by Amazon to see how the competition reacts. So, the immediate eroding of equity values of heritage food retailers such as Walmart and Kroger that accompanied the news about Amazon\’s purported intensions is doubtless premature, if warranted at all. As for other retail categories, far as we know, Amazon has no store-based ambitions beyond food and its own Amazon Books and 4-stars.

It has been almost exactly one year since Amazon made its stunning buyout of specialty grocery retailer Whole Foods Market for $13.7 billion. So, what better time than now to take a look at how the whole thing is proceeding.

It’s difficult to assess with great precision whether sales and profits at Whole Foods have risen or declined under Amazon’s ownership. As a publicly held company, Amazon doesn’t break out results for its subsidiaries, so we’re left to surmise a lot. Thus, I would surmise that Whole Foods is probably performing a little better on the sales side, but isn’t chalking up big wins in profitability.

Part of the reason is the flywheel effect: Prior to Amazon’s buyout of the company, Whole Foods’ sales and profits had declined year over year for quite a while. Just prior to the buyout, Whole Foods’ annual sales were at about $16 billion, and declining. It’s likely that sales have increased because of Amazon’s influence and reputation. Amazon earned much virtuous publicity soon after the buyout for cutting some prices. But, in reality, the previous management had been cutting prices for a while, but shoppers didn’t notice.

Shopper Distrust

At that point, shoppers had learned to distrust Whole Foods, so they didn’t really believe that prices were coming down. When Amazon made a few price-cutting moves, shoppers believed that prices were actually falling because they trusted Amazon more. Bolstering that, Amazon is now rolling out a program that gives Whole Foods’ shoppers an extra 10 percent off some sale- and high-volume items if they’re Prime members. This will definitely help the price image and deliver perceived added value to Prime members.

As for profitability, there are many changes Amazon is making at Whole Foods that may pay off in the future. For instance, Amazon is turning to more centralized buying and stripping from store and regional management authority to bring in local products. There’s no doubt that centralized buying better leverages the buying power of an organization, while localized buying diffuses it. The question for Amazon is how far that can go before shoppers begin to perceive that Whole Foods has changed too much. Indeed, based on my own frequent visits to Whole Foods, it’s increasingly noticeable that many previously available products have vanished from the shelves. That’s not all good.

Mackey’s Annoyance

Incidentally, Whole Foods co-founder and CEO, John Mackey, has made no secret of the fact that the top-level executives Amazon has salted into the organization don’t always meet with his approval. “Amazon has probably gotten more disagreement from me than any other single person and possibly more than everyone else combined,” Mackey asserted. He added that he’s well positioned and ready to be fired by Amazon if it comes to that. Mackey didn’t specify why he has become an Amazon critic, but I would bet it’s about product changes that could rob Whole Foods of its previous identity.

Maybe the most important consideration, though, is what the future of Whole Foods holds under Amazon’s tutelage. As always, the future is inscrutable, but for sure there’s a lot going on at Amazon, much of which will affect Whole Foods’ path going forward. For instance, there’s the matter of delivery. Amazon has initiated delivery services from Whole Foods stores in 19 cities that feature one-hour delivery for a $7.99 fee and two-hour delivery for free if the order is for $33 or more. Just try to buy more than a couple of items at Whole Foods without parting with $33. Concerning delivery, it’s important to notice that other retailers that have attempted to fulfill high-volume online orders using working stores as depots find the system unworkable because of the crowding and store chaos it causes.

And then there’s Amazon’s new plan to augment its own delivery network. Amazon already runs a fleet of 35 aircraft delivering product to 70 package-distribution points. It now plans to start another delivery service to accomplish the costly “last mile” delivery. The idea is that entrepreneurs can lease Amazon-marked trucks and uniforms from Amazon to make deliveries using their own employees. Companies with up to 100 employees driving up to 40 trucks will be permitted.

Amazon Grapples with “Last Mile”

This concept offers to Amazon the same advantages that Uber and the like reap: Amazon will no doubt see profitability from the new delivery network while escaping obligations involved in hiring employees. Beyond that, the cost of failure is transferred elsewhere. In the future, this service will compete with UPS, FedEx and the USPS. The last has been the object of criticism from President Trump who claims, without data to back it, that the USPS loses money by being Amazon’s “delivery boy.” Not incidentally, Amazon founder and CEO Jeff Bezos owns the Washington Post newspaper, a frequent Trump critic. Bezos owns that newspaper personally. It isn’t an Amazon subsidiary.

Finally, as if to underscore its reach, Amazon has just acquired online pharmacy PillPack to enter the drug-distribution business.

So, in sum, the future looks pretty good for Whole Foods, and better than it would have been without Amazon and, I’ll confess, better than I thought it would be. Yet, let’s keep in mind that despite all the publicity constantly heaped on Whole Foods and its new owner, Whole Foods remains a very small player in the total food-distribution universe. Its stores are thinly spread across the landscape and together they don’t even have a two percent share of food sales in the U.S.

But regardless of the size of Amazon’s footprint in the food business, it casts a long shadow. There’s hardly a supermarket chain left that hasn\’t done something to react to Amazon, whether the current moment calls for action or not. Even the smallest chains have instituted some sort of delivery or pick-up option. The largest chains are now deeply involved in customer-relationship technology, among other forms of technology. We may decide someday that the food industry’s competitive defenses erected to blunt the Amazon-Whole Foods combination are the most important feature of this whole saga.

We live in an era of chaos. Government-by-chaos isn’t working out too well, and retailing in the era of chaotic disruptors is facing big risks as well.

But hope prevails. When it comes to retailing, sometimes there’s opportunity in chaos. That’s certainly true when it comes to food retailing. Some supermarket retailers are pulling threads from restaurants and other forms of foodservice to create a hybrid that looks different, feels different and will be a part—and maybe a big part—of the future of food retailing.

Borrowed Concepts Yield Powerful New Formats

New food retailing models have many permutations but their current highest creative expression is the grocerant, which is a combination of a full-line supermarket, with all its usual departments, plus a restaurant, maybe a bar and sometimes a lot of other foodservice offerings.

Grocerants provide an interesting efficiency proposition since foodservice ingredients can be sourced directly from the supermarket side.

Before we get to that, let’s look at some of the alternative ways consumers can access food, a few of which are pretty close to being grocerants. Some are new and some have been around for a while, however, these alternative delivery systems are growing in popularity and success.

• Food Halls have sprung up in recent years as something of a food-cum-entertainment concept. High-profile food halls can be found in New York, Los Angeles and Chicago. Multiple vendors offer a myriad of upscale food choices under one roof. The halls offer a few gourmet pantry staples to take home, prepared-food items to eat off-premise or an on-premise meal at a full-service sit-down restaurant or bar. Food halls aren’t quite grocerants as they lack many key supermarket staples and CPG categories, but they trend in that direction.
• Many conventional supermarkets also present product that is ready-to-eat, or ready-to-heat at home. Some supermarkets feature self-service seating areas for customers who want to consume a meal in the store. The best example of such a supermarket is Wegmans, which offers restaurant-quality, fresh-prepared food at many of its locations, complete with seating areas. Wegmans also operates grocerants. But in the main, this type of eat-in, take-out format also falls short of being a full-scale grocerant because it lacks restaurant-like service elements. But it’s close.
• A few other forms of food retailing have either sprung up or are on the march, reflecting the depth of disruptive activity facing conventional supermarkets. They include food trucks, urban and rural farmers’ markets and urban produce vendors that often set up on a sidewalk near a conventional food store. Farmers’ markets make the farm-to-fork movement a real possibility in highly urban markets such as New York City.

Grocerants

One especially impressive example of a grocerant is the newly opened Whole Foods store at Bryant Park in New York. The store, at 43,000 square-feet on two levels, is unusually large by Manhattan standards. It features the usual offerings of a Whole Foods store; namely, an edited selection of food and nonfood items. In addition, there are several restaurant options at the store. Here are some of them:

• An outpost of “Frankies 457 Spuntino,” a well-known Italian restaurant in Brooklyn. The in-store version features various popular specialties such as salads, sandwiches and store-made pizza.
• “Sushi Kano by Genji,” featuring Japanese dishes along with omakase service, i.e., the chef selects a variety of small plates for the table.
• \”Harbor Bar,” a raw bar featuring oysters, lobster and a variety of other seafood. A cocktail, wine and beer selection is available.
• “Simit + Smith,” a food cart offering Turkish-style breads, such as simit, served with cheese and olives.
• “Produce Butcher,\” a service department where store personnel will butcher any produce item at a customer’s request. Produce can be grated, chopped, cut, sliced or custom prepared in any way a customer likes. These butchers aren’t just for meat anymore.
• Several other carts and kiosks offering coffee, pizza, toast, sandwiches and the like.

Whole Foods’ use of the grocerant format at this location represents good marketing tactics, the area is heavy with office workers who are on the lookout for lunch opportunities and a meeting place for after-work socialization. The supermarket side of the store is useful for workers who want to take a few items home, and it appeals to residents in the area who want to make a fuller shopping trip.

Whole Foods, of course, is not the only example of a grocerant. Wegmans, as mentioned earlier, runs full-service restaurants at several of its locations in its home state of New York, along with other mid-Atlantic states. Wegmans’ restaurants operate under the names of Next Door, The Burger Bar, The Pub, and Amore.

Competitive Edge

Grocerants present several advantages over a stand-alone supermarket or restaurant, not the least of which is the ease of sourcing foodservice ingredients. From the food-retailing perspective, grocerants help lift the store above competitive threats such as online delivery and meal kits. That’s because a grocerant is really an entertainment venue, and we all know that entertainment can’t be delivered by an online food retailer or in a meal-kit box. Moreover, grocerants bring in a different type of shopper: those seeking meals, not pantry staples, thereby opening the potential of crossover shopping.

From the restaurant point of view, co-locating in a grocerant exposes its brand to a large volume of new customers. Many shoppers go to a supermarket once a week, or more often; restaurants are lucky if they get repeat business a few times a year. Grocerants build traffic, with crossover potential.

In more general terms, grocerants demonstrate the value of borrowing concepts from other retail forms. They are, after all, really the nostalgic side of a department store. From their earliest days, department stores had one or more restaurants within their walls. That remains true to this day, and mall-based department stores are starting to get that message. Supermarkets are back to the future with leveraging restaurant brands that are popular with their retail customers.

So are there other borrowings that retailers might consider? Try these:

• Costco and Home Depot have lunch counters that give shoppers a quick way to get fed.
• Bed, Bath & Beyond stores have gourmet-food sections under the “World Market” moniker.
• Apparel store Urban Outfitters sells home goods and has coffee bars.
• RH sells apparel in addition to upscale curtain rods.
• Many restaurants sell private brand goods as mementos, such as condiments and apparel.

It’s a big world out there. If you’re out of original ideas, take a page out of other retailers’ playbooks, borrow the best concepts and then make them your own with your special spin.

Dear Doug:

While unknown sources say that Walmart is not interested in making a bid for Whole Foods, I’m sending this note anyway, hoping you have not made that decision yet.

Steal the Whole Foods deal away from Amazon!

Reach down into your deep pockets and outbid them with a vengeance. Even though it’s been rumored that Target, Costco, or Kroger might jump into a bidding war to stop Amazon’s relentless effort to leapfrog itself into the grocery space, Walmart is the only likely candidate to have the financial muscle to do so, according to JP Morgan. Do the math: At the current offer of $42 a share for Whole Foods, it comprises only 3 percent of Amazon\’s market cap and only 6 percent of Walmart\’s. It would match 64 percent of Kroger\’s, 48 percent of Target’s and 19 percent of Costco’s.

Regardless of Walmart’s financial capability to win a bidding war, I believe there are strategic synergies and opportunities to be gained as well. It’s pretty clear that your and Marc Lore’s apparent race is to become Amazon’s biggest nightmare at the least, and to eventually create a bigger and better marketplace, at best.

From a defensive perspective, Walmart’s greatest advantage over Amazon is in the grocery space, where it is the leader owning about a 25 percent share of the roughly $700 billion market (Amazon at 1.1 percent and Whole Foods, 1.7 percent). And if Walmart won the Whole Foods acquisition, it would slow Amazon’s deliberate march to become a major player in the grocery sector, a goal that CEO Jeff Bezos has committed to, along with apparel.

Essentially, Amazon would be set back to their current testing mode Amazon’s most recent test model is Amazon Go, a cashier-less and associate-less, digitally driven, self-shopping grocery store that is still being tweaked. Not nearly ready for prime time rollout, the “Go” concept could end in “Gone.” AmazonFresh grocery delivery service is still being perfected. Their acquisition of about 460 Whole Food locations could gain greater traction making the “last mile” even shorter. In addition to shopping, these stores would provide distribution and pick-up points as well as test platforms for technology and delivery system innovations.

In my opinion, Amazon needs this acquisition. In an over-stored, slow-growing grocery sector, being piled on by more and more competitors including European giants Lidl and rapidly growing Aldi (and a sector in which a mere 3 percent is sold online), Amazon needs to establish a national physical presence to be a player in the space. And since Bezos’ philosophy from day one has been to “get big fast,” building out a national fleet of food stores would take too long. Worse, while doing so, Walmart, Target and the other major grocers will have integrated and perfected their digital and physical capabilities, thereby neutralizing one of Amazon’s competitive advantages.

Walmart, with its 25 percent share dominance of the total grocery market, and now combined with Jet.com and its e-commerce geniuses, is racing forward on jet fuel (pun intended), and will just keep pushing Amazon further behind if Bezos can’t acquire his way to scale. If Amazon has to build their own stores, by the time they get to whatever scale size they need to compete, they will be a day late and a dollar short.

Opportunity Knocks

So Doug, cut Bezos off at the pass and consider the following synergies for a Walmart acquisition (I’m assuming you have figured this out, but just in case…)

• The Whole Foods brand has a younger more upscale consumer following, which fits the same consumer profile that the Jet.com acquisition brought to Walmart. And it’s obvious Walmart plans to continue the strategy of pursuing younger, digitally savvy customers with their recent acquisition of Bonobos which will operate alongside MooseJaw, ModCloth, ShoeBuy and Hayneedle, under the direction of Jet.com’s Marc Lore. Marc would also be the best architect for “digitizing” the Whole Foods model.
• Whole Foods has been struggling for the last couple of years due to competitive pricing pressures from the onslaught of new competitors as well as traditional grocers pivoting their assortments to fresh, localized, natural organic products and prepared foods. Walmart, with its vast number of distribution facilities and superior logistical and supply chain capabilities would be able to considerably reduce the Whole Foods cost structure. Furthermore, Whole Foods would benefit from Walmart’s huge buying power to get the lowest possible vendor prices. Both of these significant efficiency measures would provide Whole Foods competitive and profitable pricing power as well as providing more value for consumers.
• And, by the way, the Aldi chain has been in the U.S. since the 1970s, and is arguably the fastest growing grocer due to its incredibly low prices. This also highlights the importance of getting Whole Foods pricing structure down quickly, which Walmart can accomplish more effectively than Amazon (well, there is that “Amazon doesn’t need to make a profit” thing).
• Another strategic opportunity for Walmart is that overnight, a Whole Foods acquisition gives Walmart 460 new (not overlapping) footprints in more upscale locations. The acquisition would also provide new pickup and delivery points for any of Walmart’s products ordered online. Quid pro quo, Walmart’s fleet of close to 5000 U.S. stores becomes pickup and distribution locations for Whole Foods online orders.
• In select Walmart locations, Whole Foods could occupy adjacent space or as “shop-in-shops,” thus, providing quick, non-capital intensive national growth.

The Walmart Advantage

Walmart acquired Jet.com and Marc Lore to gain a new, younger and more affluent consumer market. They also bought Lore’s knowledge and credible skills in all things digital, including the e-commerce model that Jeff Bezos is eating the world with.

So Walmart now has the perfect combination of its own expertise in all things “physical” retailing, including all things grocery (as the largest grocer in the world), with Jet.com catapulting Walmart into the digital world.

On the other hand, Amazon is the unquestioned expert in all things digital, but they are still dabbling and testing all things grocery. And apparently the dabbling is going too slowly for Bezos. He wants grocery expertise and a path to dominance, now. He wants and needs Whole Foods.

End Note

Doug, don’t let him get it. If you do, you will be inviting a fox into the hen house. You have the clout and many solid reasons to steal Whole Foods out of the clutches of Amazon.

Go for it.

We talk a lot about disruptors and how they have turned retailing upside down, challenging the very existence of entire industry sectors. So here’s another disruptor to put into the mix: activist investors.

The beleaguered Whole Foods chain is on the move at last.

The retailer of organic and specialty food product has just made some uncharacteristically dramatic moves by bringing aboard five new directors and pledging to accelerate long-pending marketing and efficiency initiatives.

Of course, there’s a lot more to it than meets the eye, namely that the impetus for change came from activist investors that have been publicly urging Whole Foods to get turnaround efforts underway and consider a sale of the whole company.

Those investors are Jana Partners, which owns 8.3 percent of Whole Foods’ shares, and Neuberger Berman, which owns 2.7 percent. Together, those investors own 11 percent of Whole Foods.

That raises the question: Is Whole Foods making changes that will ultimately result in a stronger company that is lifted by increasing sales and profitability? Or is Whole Foods seeking to placate the investors to buy some time?

I would bet on the latter, but let’s find out more by looking at what’s going on.

Decline and Fall

Whole Foods is clearly facing some big headwinds. To see how strong they are, it’s not necessary to look farther than comp-store sales. Six years ago, comp sales were approaching 10 percent, a number without precedent in contemporary food retailing. By 2014, a steep decline set in and by mid-2015, the measure slipped into negative territory — below minus 2 percent. During the most recent quarter, comp sales dipped to minus 2.8 percent.

What caused that is very simple. Whole Foods once had a near monopoly on organic and natural product, which gave it great pricing power. Then, competitors wised up and started to offer such product at much lower price points. So, without either exclusivity of product or pricing power, Whole Foods’ financial performance fell off a cliff.

As Whole Foods’ CEO John Mackey remarked recently, “Our competitors are not standing still.”

Well, that’s for sure. Consider: three years ago, Kroger rolled out its “Simple Truth” line of organic and natural product. That line now hands Kroger $1.6 billion in annual sales.

Astonishingly, sales of the “Simple Truth” private label line alone are approaching half of Whole Foods’ entire top line of $3.5 billion!

New Kids on the Block

So, Whole Foods has been poked into action, accounting for the turnover of the board. The aim seems to be to bring in new retailing and financial expertise.

The new directors are Ken Hicks, Foot Locker’s former chairman; Joe Mansueto, Morningstar’s founder; Scott Powers, a former executive at State Street; Ron Shaich, founder of restaurant chain Panera, and Sharon McCollum, a former Best Buy executive.

With those moves, five incumbent directors exited the board, including its chairman. A new chairman, Gabrielle Sulzberger, was drawn from the existing board.

Additionally, Whole Foods brought in a new chief financial officer, Keith Manbeck, previously with Kohl’s Corp. Whole Foods has vowed to further buff up its upper management tier with new hires.

Pivoting in Place

As for non-executive action, Whole Foods now intends to rapidly roll out its fledgling consumer loyalty program, to further lower prices and to seek in-store efficiencies. As for the last, the aim is to cut $300 million in operating expenses. Those changes no doubt are needed, but seem insufficient to fuel a turnaround.

Then there’s the new store initiative, the “365 by Whole Foods” format. Much has been made of the small-format, lower priced store. Yet, activity level for the store remains low. There are now four of them open with 22 more on the drawing board. The “365” store is obviously aimed at Trader Joe’s.

CEO Mackey spoke recently about the format, saying that, “We like the profit model that 365 offered.” He also said that “significant improvements” have been made to the format.

That seems to imply that “365” hasn’t achieved its expected sales potential, and that format tinkering is required.

As for the activist investors, they’ve issued statements to the effect that the changes at Whole Foods weren’t all they were seeking, but that they’re willing to wait a while to see what develops. So Whole Foods’ has bought some time.

Depending on what happens next, I imagine we’ll start to hear more about selling the company, which may be the best option for its future.

Here at The Robin Report, we talk a lot about disruptors and how they have turned retailing upside down, challenging the very existence of entire industry sectors. So here’s another disruptor to put into the mix: activist investors.

In an unusual turn of events, the sands are shifting under Whole Foods Markets—and now it’s in trouble.

In short order, Whole Foods, the quintessential upmarket food retailer, has gone from being a Wall Street darling to a Wall Street pariah. In rough terms, Whole Foods’ equity value has dropped by nearly half since winter. Even more disturbing, its comps in the first quarter were a meager 1.3 percent, or less than half of what they generally are. The last weeks of the second quarter saw comps at 0.4 percent. This indicates very serious sales slippage and suggests comps are headed for negative territory.

What’s Going On Here?

Whole Foods is now facing three major challenges, two of which have to do with price and one of which concerns its core product offer.

1. The newest challenge to Whole Foods is one of its own making. In New York City, the Department of Consumer Affairs found a “systematic” problem with short weights, meaning consumers were paying more for product than they should. News stories about that situation spread far and wide, and are what account for most of the near-term drop in comps.
2. The longer-term drop in comps has to do with the persistent consumer perception that Whole Foods product simply costs too much, even if it’s high quality, natural and organic. This remains the case even though Whole Foods has made some real progress in lowering many price points, a fact that remains invisible to many consumers.
3. In another pricing challenge, natural and organic product has gone almost entirely mainstream and is widely available at many supermarkets for far less. As I predicted earlier in The Robin Report, Whole Foods is relinquishing the product exclusivity it has long used to convince consumers to shop its stores and pay its prices. Whole Foods has since acknowledged that it was slow to recognize changing competitive dynamics.

Curious Reactions

Some of Whole Foods’ reactions to these challenges have been strangely ham handed. Whole Foods has had a longstanding problem with short weights—In 2012, the company paid a $800,000 fine in California because of short weights. It has paid fines in other jurisdictions too.

In New York, inspectors said Whole Foods’ pricing errors were the most serious they had ever encountered. In response, John Mackey, co-CEO, said Whole Foods was a “victim” of overzealous enforcement because all food stores have pricing inaccuracies and they often fall in customers’ favor. He also pointed out that Whole Foods has a high percentage of random-weight items wrapped and weighed in store, which are more prone to error.

From the consumer point of view, this is cold comfort. Pricing integrity is one of the most important tasks retailers have. It simply must be done right.

Nonetheless, Whole Foods offered to give customers product for free if they noticed they were overcharged. For packaged food, that’s a step in the right direction. For random-weight product, it’s an empty offer. How many consumers have scales accurate enough to measure product weight and tare weight to determine what the price should be?

Even as the offer applies to packaged goods, it’s a strange one because it doesn’t include product that is mis-charged in customers’ favor. That means Whole Foods stores will tend to be full of underpriced product.

As for Whole Foods core product offer —natural and organic—it seems clear that it is losing its footing. Many other supermarkets sell more product in that category than Whole Foods does. Costco is now the nation’s largest purveyor of organic product. Kroger’s private label line of organic product is doing quite well. And so it goes with nearly every other major food retailer.

Of course, the fact that many players now offer natural and organic product at lower prices hammers home the idea that Whole Foods is overpriced. But there’s more: One bizarre price-related episode in California made Whole Foods an Instagram laughingstock. Whole Foods offered “asparagus water,” which consisted of a bottle of water containing three asparagus stalks. It was priced at $5.99. Whole Foods withdrew that absurd product. When customers laugh at you, it’s not good news.

The High-Price Solution?

So what is Whole Foods doing about that high-price image? In a move that looks very much like capitulation, Whole Foods intends to open something of an off-price store called “365 by Whole Foods.” The idea behind the “365” store is to offer its existing line of lower-priced product along with a few other products in a smaller-than-usual space. That move has more than a few strange aspects to it, starting with the name. The name might make a lot of sense to company insiders since “365” is the name of its private label. Maybe some consumers know that, too.

But to many other consumers, it will seem meaningless and unrelated to the iconic Whole Foods brand. It’s also unusual because it’s nearly without precedent to name a store after an existing private brand.

Typically, private brands are intended to further the aims of the core banner. Possibly Whole Foods was inspired by Canadian Superstore Loblaw’s “Joe Fresh” stores. Joe Fresh is Loblaw’s private label affordable-fashion apparel line. The “Joe Fresh” stores gave Loblaw the means to expand the label into new territory. In contrast, 365 product is available in all Whole Foods stores, so why invite customers to go elsewhere in the same market to get it? All planned “365” stores will be in existing market.

Finally, Let’s face it: The “365” concept is no more than a knockoff of Trader Joe’s. Unfortunately for Whole Foods, Trader Joe’s has quite a running start and has captured the high-quality, low price territory.

However, when it comes to targeting the Trader Joe’s customer, Whole Foods isn’t alone. Hard discounter Aldi intends to introduce a range of organic and specialty products that are positioned against Trader Joe’s. Aldi’s “Simply Nature” is already its fastest growing brand. Incidentally, if Aldi creeps too far upscale in terms of product and price, it too will enter the danger zone. Up to now, Aldi has been able to keep its core low-price discipline and image.

The Better Way

Whole Foods’ “365” project brings to mind the dilemma posed by other outlet stores. At what point do the lower prices available in an alternate venue start to erode the equity of the main store?

We’ll see what happens as Whole Foods starts to roll out its first five “365” stores next year. Maybe the store will a big winner, but it seems more likely that Whole Foods would have done better to stick to its core strategy. Considering the cost and energy that will be expended on the new store, Whole Foods could have instead made more price investments and undertaken a stepped-up marketing campaign intended to convince consumers that its prices really are more reasonable than they might think.

To be sure, changing a retailer’s image is slow work, but sometimes it can be ultimately unsuccessful, as many retailers have already found out. Supermarket operator Food Lion has been working for quite a while to recapture its low-price image, and there’s still work to be done.

Supermarket operator Haggen is now closing more than two dozen of the stores it just acquired because it couldn’t find the right price to offer its consumers.

This is true across other retail channels, as apparel retailers such as Abercrombie & Fitch have discovered when they lost their core niche and value image. There are many avenues to success, but sticking to one core strategy and doing it well is very often the better way to success, regardless of the retail channel.

Whole Foods has succeeded beyond all expectations, but, strangely, that’s not all good for Whole Foods.

Whole Foods was founded 35 years ago in Texas based on the premise that there had to be a safer way to produce food than the mass-manufactured and over-processed approach. (Deep background: Whole Foods was originally named Saferway, a poke at supermarket chain Safeway.)

The Whole Foods concept was to leave conventionally manufactured food behind wherever possible in favor of natural and organic food, and to put a heavy emphasis on fresh. The concept also was that consumers would warm to the idea and pay a premium for such products. Development came slowly to Whole Foods because at the time, there was little consumer buy-in for such an idea.

That started to change. Over the years, Whole Foods evolved from a tiny operation to one with some 420 stores, albeit thinly spread. Most are in urban areas of the U.S, plus a few in both Canada and the U.K. Its sales volume is nearly $15 billion annually.

Through its growth trajectory, Whole Foods continued to preach the gospel that fresh, natural and organic food was a good path for consumers to follow to better health.

And so it came to pass. Many factors, including the growing presence of Whole Foods, played into the now-near-unanimous agreement by consumers that organic and natural food is far better than over-processed food.

Now that organics and natural food are all but completely mainstream, it might seem that Whole Foods would greatly benefit. However, the reverse may prove to be the case. That’s because Whole Foods hasn’t entirely shaken off the perception that its price points are absurdly high. Many consumers simply wouldn’t consider shopping Whole Foods, even if a store chanced to be nearby.

Meanwhile, incumbent food retailers haven’t been slumbering. They too are jumping on the organics and natural bandwagon.

For instance, Kroger, the largest conventional supermarket in the land with annual sales approaching $110 billion, inaugurated a moderately priced private label line called Simple Truth and Simple Truth Organics, both aimed at health-conscious consumers who feel locked out of Whole Foods because of price or lack of store proximity. The line is huge, about 2,700 stock-keeping units across multiple food categories.

In less than two years, the line now accounts for $1.2 billion in annual sales. Kroger says it is by a wide margin the most successful private label introduction it has ever had. Granted, the sales volume of the line isn’t much against Kroger’s entire top line. Conversely, in the not unlikely event that the line grows about ten fold, it alone would approach Whole Foods’ entire sales volume.

Kroger has plenty of company. Many other retailers are entering the organics game, and some did so earlier than Kroger. One example is membership club Costco. It may achieve sales in organics of $12 billion by the end of this year, nearly equaling Whole Foods’ top line.

All this has implications for manufacturers, too. Campbell Soup Co. is the quintessential packaged-food manufacturer. Nevertheless, it has been moving to natural and organic food and beverages lately, but by means of acquisition (that was probably to avoid muddying the message of the core brand). Yet, in recent weeks, Campbell rolled out a small line of organic soups under its own name: Campbell’s Organics. The line is expected to grow quickly. This is a big step for an old-line company.

Other manufacturers, including PepsiCo, General Mills, Kellogg and Coca-Cola, use various methods to burnish the image of their brands. The methods range from sponsorship of studies t0 paid opinions from dietitians, which conclude that these products aren’t so unhealthy after all. Results appear as blogs, on newspaper websites and sometimes as “native ads,” paid ads camouflaged as news articles.

The consumer stampede to organics shows once again that retailers who fail to see the gathering and maturing of a big consumer trend will be left behind. It also shows once again that sometimes pioneers are the ones with arrows in their backs.