High-End Grocery Store Will Divert Brick-and-Mortar Traffic to Net

Whole Foods Market Inc. is scheduled to launch an online grocery next week, and the company is determined to make it profitable quickly — even if that means diverting customers from its brick-and-mortar stores.

The high-end, guilt-free health food retailer on April 12 will begin a series of promotions for the www.wholefoods.com site, and the company hopes its upscale, well-educated customer base will easily adapt to buying their food electronically. Though the $1.5 billion company has no plans to abandon its 88 stores — or the other 32 it's developing — the firm wants its site to move into the black within two years.

“We're a grocery company. We can't do some of the things that these [venture capital-funded] Internet companies do, like lose money for 15 years,” said John Fischer, vice president of marketing at WholeFoods.com.

The Austin, TX, company operates stores under such names as Whole Foods, Bread & Circus and Wellspring Grocery, usually in affluent, urban areas and college towns. Whole Foods carries out 1.5 million weekly transactions, a number that has grown alongside a general rise in health awareness. The company's customer base demographically parallels the country's most frequent Internet shoppers.

Making Whole Foods' customers shop online is a task that falls largely to Fischer, and he has some unconventional plans for getting there. Perhaps most significantly, he and Whole Foods CEO John Mackey have decided to ignore channel conflict, Fischer said. New subsidiary WholeFoods.com will undersell the company's traditional stores.

WholeFoods.com expects savings on staffing, maintenance and construction to let it cut prices on some products as much as 35 percent below Whole Foods' regular prices. The company's foods generally have margins higher than the grocery industry's average of about 2 percent, giving WholeFoods.com further latitude to cut prices.

And what if such aggressive pricing eventually hurts the company's retail locations? It doesn't matter, Fischer said.

“The perception of channel conflict is flawed. If we worry about protecting our stores, somebody else is going to go online and sell our product mix and we're going to lose those customers,” he said.

So the company will begin marketing the site directly to its existing customer base. In April, Whole Foods locations will receive sign packages touting the site, and each store has received funds to carry out promotions of its own design. Coupons offering discounts for online purchases will be posted in checkout lines.

Whole Foods' 14,000 employees will get in on the act as well. Customers will enter their ZIP codes when they register at the site, and the company will use that data to track how much traffic each grocery store is steering toward the virtual store. Employees in stores coaxing the most shoppers to the site, relative to the stores' overall sales, will receive a pay increase of 30 cents an hour for the quarter. If their store slips out of the ranks of top traffic generators, they lose the raise.

All employees will receive business reply cards promoting a free groceries contest. They can either hand out the coded cards inside the stores or use another method, and Whole Foods will give out three hundred $100 bonuses and fifty $200 bonuses to workers driving the most customers to the virtual store. Separate line items on paychecks will outline what portion of each employee's earnings come from WholeFoods.com.

“I'm doing a little marketing experiment,” Fischer said.

In another step somewhat unusual for a new e-commerce venture, the grocery chain does not plan online promotions. Fischer, formerly of Net advertising agency Quantum Leap, Chicago, said he opted to avoid the roughly $40 to $60 it costs to acquire a customer through banner advertising. Since joining Whole Foods in October, he has hung a flag in the company's marketing department that warns, “No banners.”

“With 1 percent and half percent click-throughs, you can't sustain a business on banners. I'm not saying you can't build a brand with banners, but I'm saying you can't sustain an e-commerce business profitably with banners,” he said.

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