
All companies are a niche in some broader definition of their industry.
Whole Foods Market, once the darling of the grocery industry, is facing a whole lot of problems. Poor shareholder performance threatens founder and CEO John Mackey’s position. New directors have been added to deter activist investors and improve relationships with major institutional investors. Some argue that for all its previous success, Whole Foods has not mastered Retail 101 and that is why it is failing. Perhaps – no retailer gets away with poor service and unnecessarily high prices these days.
From my perch, however, the core issue facing Whole Foods is its business model. Organic and healthy was once a unique niche within the grocery industry, warranting a separate store. Now, fresh and organic are mainstream.
Niches are alcoves — protected places. They exist in our natural world. In our economy, they’re specialized markets. By serving a narrower target market (Four Seasons versus Hilton) or offering a more restricted offering to a broader target market (NuVasive’s spinal surgery versus Medtronic or Stryker’s full product lines), niche companies succeed through the intense, focused effort they bring to a market.
Niche businesses are terrific until they are not. Five things can go wrong with a niche business model strategy.
First, broader-based competitors attack your niche and serve it better. Indeed, that is what happened to Whole Foods as leading grocery stores added fresh and organic to their brand attributes. In Madison, WI, Metcalfe’s ambiance, and offerings are as attractive as Whole Foods. Furthermore, I can pick up affordable paper towels at the same time.
Second, competitors serve the niche at a lower price point. When it comes to packaged goods and dairy, Trader Joe’s beats Whole Foods on the value scale.
Third, the niche disappears or shrinks rapidly. People still use Kodak film and imaging solutions. Just a whole lot fewer people. Digital technology image capture opened the floodgates to Schumpeter’s creative destruction forces.
Fourth, your product gets physically integrated into a larger platform offering more benefits. Think watches and cameras in an era of smartphones.
Fifth, the niche commoditizes and value (for customer and supplier) migrates to a higher place in the value chain for the end product. Consider healthcare. Many medical devices were once highly differentiated. Over time they commoditized – one option became as good as another qualified one – and value moved to managing data to improve health. Diabetes is a classic example – moving from skin pricks for sugar level measurement to embedded sensors that provide continuous information. Insulin infusion is now being automated based on automated data streams fed to embedded pumps.
Most companies serve niches. Grocery stores are a niche within retail and they are discovering that Amazon — who controls half of all on-line sales – is now their competitor. So understand your niche and pursue niche-saving strategies:
- Understand what niche you are in and identify potential competitors, not just current competitors. UPS moved into charter tourism flights by redeploying freight planes during the day to serve tourists.
- Be willing to change the business you are in to remain differentiated. Years ago, I predicted Netflix would fail, not appreciating the power of Netflix becoming a producer of content not just its distributor. Their move — adding winning, original TV shows, and movies — gave Netflix an edge over Apple and Amazon. More recently, Amazon has been creating content. (Question of the year: What is outside Amazon’s scope?)
- Do not miss technology shifts affecting your niche. IBM did, and it is still paying the price.
- Lead value migration. If EPIC (Madison-based leader of electronic health records) does not move faster to managing data and automatically extracting insight from it to improve health outcomes, the profits from its software will be at risk.
- Get acquired before the niche disappears. Many medical imaging niche companies (like Madison’s Lunar Technologies) sold out to GE Health, lest the imaging giant capture Lunar’s market share through internal development. Health systems value working with one service organization; consolidation of imaging solutions under GE Health met this need. I suspect sale will be the path for Whole Foods, likely to Amazon.
There is no one best “where to compete” strategy. Channel players that bring a lot of solutions to a narrow target market, niche players that specialize, and technology players that bring a narrow one ubiquitous technology into multiple markets all have their place. Your key requirement as a leader is to look into the future and decide what strategy is the winning “where you compete” answer for the future.
Whole Foods John Mackey was once a visionary but he became myopic. Don’t you.
Leave a Reply