New Whole Foods chain 365 faces tough mission: Cut prices without being 'cheap'

(This version of the May 25 story corrects paragraph eight to show that Trader Joe’s sells produce by piece and package, not by the pound)

LOS ANGELES (Reuters) - Whole Foods Market Inc WFM.O unveils its new 365 grocery chain on Wednesday with a bright and airy store that offers lower prices and more technology than the company's namesake shops. To thrive, though, experts say 365 has to beat its many rivals without hijacking customers from Whole Foods itself.

The chain, which debuts in Los Angeles' Silver Lake neighborhood, is critical to Whole Foods. In the fiercely competitive market for fresh fruit and vegetables, its sales are being whittled away by Sprouts Farmers Market Inc SFM.O and other rivals who are undercutting Whole Foods on price, if not always matching it on quality.

Low prices are the top demand even among shoppers prioritizing goods promoting health and wellness, said Richard Vitaro of market research firm AlixPartners. “I don’t think we can underestimate the power of frugality,” said Vitaro.

From the start, 365 has targeted reduced overheads and increased customer convenience, said Jeff Turnas, president of the chain. Whole Foods said recently it has signed 19 leases for 365 stores around the United States, without disclosing financial targets for the new chain.

“Our goal is to compete in the marketplace without lowering the Whole Foods standards,” Turnas told Reuters during a recent store tour. He said 365 stores will complement Whole Foods’ premium, full-service sister brand - often dubbed ‘Whole Paycheck’ in popular culture in reference to its perceived higher prices.

But the new chain will have to work hard to avoid being labeled “a cheaper Whole Foods”, said Kevin Kelley, a principal at strategy and design firm Shook Kelley, which has worked with Whole Foods and other grocers.

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365’s messaging is breezier than its serious elder sibling’s. One sign offers “Free air guitars”, while a “Silver Kale” mural next to the meat case is a fun, foodie nod to the chain’s first neighborhood, known for a hipster feel.

About half of the brightly colored fruits and vegetables at 365 are non-organic, a greater proportion than at Whole Foods. Produce is priced per piece or per package, as at cult discounter Trader Joe’s, rather than by the pound.

365 stores will be about a third smaller than the average Whole Foods outlet, and carry roughly a quarter the number of products - reducing real estate and merchandise-related costs.

Staffing is leaner and no longer specialized. An iPad app replaces wine experts, while meat, cheese and fish are in “grab-and-go” packages - meaning no butchers or cheese and fishmongers.

While 365 takes aim at budget gourmets and cash-strapped "millennial moms", grocery experts said it also needs to appeal to people who buy from a range of other food sellers, from Kroger KR.N and Walmart WMT.N to AMZN.O, restaurant delivery companies and meal kit providers such as Blue Apron.

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Some are skeptical that 365 stores will hit the mark. “I don’t see them generating the efficiency they need to balance value and quality,” said Bill Bishop of retail consultancy Brick Meets Click.

Shook Kelley principal Kevin Kelley disagreed: “Whole Foods gets culture,” he said, and has the experience to successfully choose what goes on the shelves in smaller 365 stores.

Roger Davidson, a consultant who has held key positions at chains such as Wild Oats, which was acquired by Whole Foods, Walmart and Texas grocer H-E-B, is betting on 365 succeeding. But amid intensive competition in the sector, Davidson said 365 has little room for error.

“They have to make it work,” he said.

Reporting by Lisa Baertlein; Editing by Peter Henderson and Kenneth Maxwell