Should Whole Foods Buy Trader Joe's?

NEW YORK (TheStreet) -- I'm watching Howard Schultz build an empire at Starbucks (SBUX). Outside of Apple (AAPL) and Amazon.com (AMZN), there's not another company -- across spaces -- doing what Starbucks does, as well as it does.

Starbucks is a tech company in a retail coffeehouse's clothing. At first blush, you might place them on the same level as Whole Foods Market ( WFM), but Starbucks really is the superior company for the long-term.

On most days, I have nothing even remotely negative to say about Whole Foods from consumer and investor perspectives. Love the company. Really like the stock. However, when I conduct a multi-method stock market ethnography that puts Starbucks and Whole Foods side-by-side, I start to see flaws. Let's explore them over a bottle of Cherry Chia Kombucha and a venti Chai Tea Misto, 1/4 hot water, 3/4 steamed soy milk, plenty of foam.

We'll get to the all-important Trader Joe's stream of semi-consciousness in a minute, but Starbucks doesn't dominate because of scale and size; it wins because it's cutting edge.

Technology

Thanks to TheStreet's Robert Weinstein, I got my hands on a Starbucks Steel Gift Card. This is the premium-quality SBUX card, loaded with $400 and on sale for $450 in a limited quantity of 5,000. They sold out in minutes. And now, they're popping up on Ebay for outrageous prices with a majority of the actual bids coming in as high as $700 to $800.

I was thrilled to get my hands on one. As a relatively new Starbucks addict, I'm grateful to Robert. Why is this relevant? It's relevant because the Starbucks iPhone app I downloaded a few months ago has made me a loyal customer. I hit Starbucks at least once a day now; sometimes twice.

The app got me in the door. Combined with friendly baristas and a solid drink, it keeps me coming back. Talk about driving engagement. That's exactly what the app does. It's exactly what Starbucks intended it to do. It's brilliant. Play with the app. If you don't walk away with a better understanding of what I mean by Starbucks is a tech company you're not taking the papers.

Whole Foods needs to do something like this. The standard Whole Foods customer, at least in my neck of the woods, is the typical Starbucks customer. They're tech-savvy, iPhone-toting modern-day yuppies who already have or are starting to have guppies. Playing with an app in a grocery store is the ultimate diversion from the everyday monotony of life.

There's no excuse for this shocking reality: Safeway ( SWY) has a pretty solid shopping app -- one you carry with you and use throughout the store -- Whole Foods does not.

Whole Foods Should Buy Trader Joe's

If you live in a place without a Whole Foods or Trader Joe's, you want one, the other or both. If you live in a place that has both you probably shop at both. I go in waves, but, ultimately, I split time almost evenly between the two stores.

Trader Joe's has more than 350 stores. Highly concentrated in California, but scattered across the nation and still growing fast. Trader Joe's continues to saturate new markets. For instance, my parents, who live in Western New York, will have one nearby when the chain opens in Amherst, a suburb of Buffalo.

Whole Foods needs to do like Starbucks and take Trader Joe's out.

On the surface, it looks like overkill, but not if Whole Foods handles it strategically.

Trader Joe's stores tend to be much smaller than Whole Foods Markets. In the last couple of years, as Whole Foods has focused more on its "generic" Everyday 365 line, the two have converged on price. While Whole Foods still sells items at a considerable premium to Trader Joe's, it's no longer Whole Paycheck. You can still drop absurd amounts of money on cheese and salami, but you have more choices than ever before a various price points.

If I'm Whole Foods, I turn a handful of Trader Joe's stores into one-stop-shops for Everyday 365 products and Trader Joe's-branded items. Make it the Whole Foods Market corner store concept with a small produce section and an expanded beer section.

Morph another handful of Trader Joe's into full-fledged Whole Foods stores. And maybe experiment with a concept or two at a couple others.

Listen, at this point, this is back-of-the-envelope dreaming that I intend to flesh out in future articles. But, it kicks off a larger point -- Whole Foods needs to do more to stay competitive long-term. It owns a lifestyle consumer today -- quite impressively -- but that could change in a flash. It needs to be more like Starbucks from tech and aggressive-strategic growth standpoints.

I also understand that messing with the Trader Joe's concept would upset a lot of people. We're passionate about these specialty, gourmet grocery stores. But, trust me, Trader Joe's diehards will get over it. They all shop at Whole Foods anyway (even if they say they don't) and they're the same people who claim to hate Starbucks while sipping a grande, extra-hot, double, skinny, no-foam latte with a shot of peppermint.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.

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