Companies pursuing a differentiation strategy often face a serious challenge when low-cost competitors begin to infringe on their turf. Some customers may opt for lower-priced options. As growth slows for the differentiated player, it may try to boost profits by cutting costs. If it goes too far though, the differentiated player may further erode willingness-to-pay on the part of some customers. The company may get caught "stuck in the middle" at some point, no longer clearly as premium and differentiated as it once was, but clearly with higher costs and prices than the most efficient low-cost and low-priced rivals.
Whole Foods faces this conundrum today, as reported this week by the Wall Street Journal. The company faces slowing growth, in part because low-cost rivals such as Kroger have expanded their organic food offerings, while offering consumers much lower prices. Whole Foods has responded by announcing a plan to "save about $300 million a year by September 2017, partly by eliminating more than 2,000 jobs." That plan involves centralizing some key tasks and streamlining processes to generate more efficiency. Whole Foods Co-CEO John Mackey understands the risks. He said, "We want to evolve the structure in such a way that we take out redundancy and waste, and at the same time though, weâre not diminishing the culture, the empowerment efforts that make Whole Foods Market special."
The Wall Street Journal article goes on to explain, "Transferring more authority to headquarters and automating more tasks risks harming Whole Foodsâ 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."
Whole Foods clearly still has a solid position as one of the premium players in the supermarket industry. However, the warning signs are there. They must be careful about compromising their well-crafted and highly successful competitive positioning, as they cope with lower growth rates.