Credit Suisse: Whole Foods' new 365 stores could cannibalize flagship sales

Dive Brief:

Credit Suisse analysts believe that new 365 concept stores opened by Whole Foods in Los Angeles could cannibalize the retailer's flagship locations, MarketWatch reports.
The better values and overall customer experience found at the millennial-focused 365 stores (so named after Whole Foods' in-house brand) are positives overall, but could steer shoppers away from Whole Foods, Credit Suisse analysts wrote in a note Thursday.
Part of the problem stems from the fact that the 365 stores are close to Whole Foods stores, according to a recent note from investment boutique Oppenheimer citing similar concerns, MarketWatch adds.

Dive Insight:

Off-price retail, commonly found in apparel sales, is a game that most everyone wants to play. Nordstrom has expanded its Rack stores and Macy’s entered the space with its off-price “Backstage” stores.

But several experts have told Retail Dive that while off-price is a natural segment to enter or expand, it could hurt higher-priced flagship stores. There’s some evidence of that: Consider that Gap suffered while its lower-priced Old Navy brand thrived, at least for a time.

However, a study from the University of Texas at Dallas found that customers who regularly shopped at one “leading specialty retailer with more than 400 retail stores and 100 exclusively sourced outlet stores” actually spent more at the retailer’s flagship store once they shopped regularly at its outlet store.

Private-label brands like 365 also can be a boon to grocery stores, because consumers like their value and the products deliver better margins. A fifth of U.S. consumers’ supermarket spending is on store brands, according to Nielsen, and 96% of consumers buy store-brand grocery products of some kind. Store brands even represent an avenue for customer loyalty.

The question is whether shoppers who frequent the new 365 locations will even find 365-label products in Whole Foods' flagship stores. Credit Suisse has doubts. “It’s clear to us there will likely be cannibalization of the traditional Whole Foods format where locations overlap,” analysts wrote.