Why Jana’s Involvement Can Have The Future Looking Fresh For Whole Foods

Last week, Jana Partners announced that it has taken a 9% stake in Whole Foods Market, Inc. (NASDAQ:WFM). Among the changes Jana hopes to enact is:

…pursuing opportunities to improve performance by advancing its brand development and by addressing core operating deficiencies in areas including customer loyalty and analytics.

Through technological, customer focused solutions, Whole Foods can recapture market share and differentiate itself once again in the supermarket space.

When Whole Foods Market was founded in 1980, it was one of only a handful of natural food supermarkets in the United States. Over the next three decades, Whole Foods opened new geographic markets nationwide through expansion and strategic acquisitions. By the first decade of the 2000’s, Whole Foods helped ignite a national shift in consumption, as a first of its kind and best in class purveyor of natural and organic foods. By focusing not only on the customer experience in its physical stores, but also shinning a spotlight on the differentiation in the higher standard of products it sourced, WFM was able to redefine how people thought about food origination.

Whole Foods was first measured by the American Customer Satisfaction Index (ACSI) in 2007. With a below industry average score of 73, it was much closer in customer satisfaction to Wal-Mart’s (NYSE:WMT) supermarket offering (71) than to the industry leader Publix (OTC:PUSH) (83). This was perhaps due to customers still adjusting to value proposition that allowed Whole Foods to charge premium prices. However, over the next four years Whole Foods recorded an unprecedented four straight annual increases in their ACSI Score. From 1/2008 to 1/2013 Whole Foods saw its sales increase 53% while consistently maintaining 34% gross margins, far higher than the 21% average gross margins of its competitors. WFM’s strong customer satisfaction allowed it to exhibit pricing power and led to the traditional fundamental improvements that increased its stock a phenomenal +123% over that timeframe (vs S&P 500 -2.9%).

A well-established underpinning of microeconomic theory is that consumers will spend their money on the goods that bring them the most utility. With customer satisfaction as a proxy for utility, this is a concept well founded in classical economic theory and well proven in academic studies from sources ranging from Dr. Claes Fornell (considered the father of customer satisfaction) to the world renown consulting firm McKinsey and Company. WFM’s stock price has been particularly sensitive to customer satisfaction changes as shown in the graph below.

It is easy to see the very strong relationship between the changes in WFM’s ACSI score and the performance of the stock in the subsequent year. However, one cannot simply look at the stock price of WFM in a vacuum and draw the conclusion that changes in WFM’s customer satisfaction were predictive of future stock performance.

The way that customer satisfaction as a metric ultimately gets disseminated to the market at large, is through revenue and earnings surprises. As the ACSI collects customer data about their satisfaction and, by extension, their future buying behavior, those increases or decreases should make their way to the top line of the company within 1 – 3 quarters
(depending on a product’s buying cycle). We expect strong/increasing customer satisfaction companies to have revenue surprises at a greater than market rate and therefore outperform the market in the subsequent year. Here to, the relationship between WFM’s satisfaction score and stock performance is very strong as seen in the table below.

Please note that the ACSI change listed for any above year took place at the beginning of that time period, and thus the relative return of WFM to the S&P 500 is what took place in the 12 months after the satisfaction measurement. In 6 of the 7 one year periods following the release of WFM’s annual ACSI score, the stock either over or underperformed the S&P 500 in the correct direction as indicated by satisfaction changes at the periods beginning (one of the periods listed above had an ACSI score that did not change and was not counted as correct or incorrect).

In the table, the only notable deviation from expectation is the 2015-2016 period where an increase in satisfaction was met by a huge underperformance vs the market. It is however important to note, that while WFM underperformed on an annual basis, there was a mid-year shift where it changed from over-to-underperforming. At the time, each company was only being measured annually by the ACSI and thus was susceptible to timing issues. As we can see, ACSI dropped enormously during the next period and therefore, had WFM been remeasured mid-year, the change in satisfaction might have been apparent sooner. Moving forward ACSI is changing its data collection process so that each company will be measured on a monthly basis, diminishing the probability of mistiming these huge movements.

So, the question remains, what changed about people’s satisfaction with Whole Foods and how can a Jana led intervention get them back to the top? It is likely that originally, customers were satisfied by the broad array of organic options and the availability of sophisticated prepared foods which Whole Foods was the first of its kind to bring to most geographic markets. This gave WFM a relative monopoly in the space, lending them the power to charge premium prices without angering their customer base, regardless of any continued innovation and focus on the customer experience. However, as is the case with most successful innovations, competition such as Trader Joe’s, Fairway, Wegman’s and Kroger (NYSE:KR) began to copy the Whole Foods model. Giving their stores a similar look and feel and offering an ever growing variety of natural and organic products. Whole Foods can no longer differentiate itself on a superior quality of their product offering and therefore needs to refocus on technologically led, customer focused improvements to the shopping experience in the physical store itself and the way that customers interact with the brand.

Jana Partners, with their strong reputation as an activist firm and their historical success in dealing with food service companies such as ConAgra Brands, Inc. (Ticker: CAG) looks to be on track to have Whole Foods looking fresh once again.

Originally posted at Seeking Alpha.

Josh Blechman is the Director of Operations and Capital Markets at ACSI Funds.

Department Store Dilemma: Less Foot Traffic, Better Customer Service

At a time when online shopping sales keep growing and malls keep emptying, customers who still make the trip to brick-and-mortar venues may be in for a surprise: better customer service. According to surveys conducted during the busy holiday season by the American Customer Satisfaction Index, key aspects of the department and discount store customer experience are much better in 2016 compared with the prior year. Not only did shoppers report higher satisfaction overall, they also encountered cleaner stores, more courteous staff, and a much speedier checkout process.

Less foot traffic brings shorter lines and customers gain when staff have more time to offer personal service and keep merchandise in order. But less foot traffic is hardly sustainable as a massive wave of store closings sweeps across the industry and some of the oldest names in the business—Macy’s, Sears and Kmart, and JCPenney—shutter property after property.

Traditional department and discount stores have made strides with omnichannel offerings and website satisfaction shows an uptick to 79. On the other hand, sales and promotions are not as common (down 3% to 78) and perceptions about locations and hours are starting to erode as more stores close (-2% to 82). While customer satisfaction may be getting a short-term boost from better service, in the long run, consumers may get frustrated if favored locations close and they need to go farther to reach stores.

Going head-to-head with online shopping, brick-and-mortar languishes behind. With an overall ACSI score of 78 (up 5.4%), department and discount stores trail internet retail by 5 points. Coming in at 83 (+3.8%), online retail now ties for third place in customer satisfaction among 43 ACSI industries. Simply put, shopping online is so easy and convenient that it continues to place pressure on traditional retailers not only in terms of sales, but in just getting people into stores.

At the customer experience level, the advantages of online shopping remain clearly delineated, as in past surveys. While checkout speed at stores has improved greatly, it still pales in comparison with the convenience of online purchasing (88). Moreover, department and discount stores are not keeping up with merchandise selection—including brand names—or inventory availability. Perhaps most telling, however, is that despite store staff becoming more helpful and courteous, the industry does not have an edge over the customer support offered online via live chat, help pages, and call centers (both score 79).

ACSI Retail Report 2016 »

Consumerist: Maybe Emptier Stores Mean Higher Customer Satisfaction? »

Columbus Business First: With Fewer People at the Mall, Retailers See Customer Satisfaction Ratings Rise »

NBC NEWS: Despite Declining Sales, Do Shoppers Still Prefer Brick-and-Mortar Stores? »

Health and Human Services Department Drives ACSI Gain for Federal Government

Better government websites, including updates to HealthCare.gov, help boost citizen satisfaction with the federal government overall in 2016. The gain is a welcome reprieve for U.S. federal services as it reverses three years of eroding satisfaction.  In fact, ACSI data show citizen satisfaction reaching its highest level since 2012—up 6.4% to 68.0 on a 100-point scale.

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Health and Human Services (HHS), which oversees implementation of the Affordable Care Act, experiences a significant uptick in user satisfaction (+8% to 67) compared with a year ago. Moreover, citizens interacting with HHS now account for the biggest slice of the ACSI respondent sample, which gives the department the prime responsibility for the 2016 government-wide satisfaction gain.

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Departments at the high and low ends of the spectrum also show gains in user satisfaction for 2016. The popular National Park Service puts the Interior Department at the top (78), along with the State Department, which many Americans access for passport issuance and renewal. The low end belongs to Treasury (59), whose tax-collecting mission via the Internal Revenue Service is unlikely to appeal to most citizens.

Among the key aspects of government services tracked by the ACSI, website quality has improved the most, which shows that better e-government also contributes to higher citizen satisfaction.

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ACSI Federal Government Report 2016 »

24/7 Wall St.: Satisfaction With Federal Services at 4-Year High »

CBS News: Americans Give Uncle Sam a Surprising Positive Review »

ExecutiveGov: ACSI Report: Federal Govt Services User Satisfaction Score Rose 6.4% in 2016 »

Federal Times: Satisfaction With Federal Services Hits 4-Year High »

Health Insurance Megamergers: Customer Satisfaction Outlook

January proves rough on plans for health insurance megamergers as two deals appear to be hitting barriers. The proposed union of Aetna and Humana has been blocked by a federal judge as being likely to reduce competition substantially. According to the Justice Department, less competition would lead to higher prices and lower quality. The merger of Anthem with smaller rival Cigna is expected to undergo a similar fate in court this month, prompting Anthem to push back its merger end date to April.

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Given that the health insurance industry already has below-average customer satisfaction compared with all sectors and industries in the American Customer Satisfaction Index structure, it seems unlikely that more consolidation would give consumers the quality of service they crave. On a 100-point scale, the industry scores 72, which lags well behind the national ACSI average of 75.4 (as of Q3 2016).

Of the two mergers that are running into roadblocks in 2017, neither would bring together high-scoring entities. The health insurance leaders in 2016, Aetna and Anthem, would both be combining with companies that score at or below the industry average. For Anthem, Cigna would likely be a significant drag on policyholder satisfaction as the latter scores rock bottom for a second consecutive year. Cigna, despite its large year-over-year gain, still ranks in the lower 40 among 300+ companies in the Index.

ACSI Finance and Insurance Report 2016 »

National Banks Improve the Customer Experience

Across the bank industry—from large national banks to small regional and community institutions—the customer satisfaction momentum in 2016 is positive. Banks overall surge 5.3% to a score of 80 on the ACSI’s 100-point scale. This rising trend is one of the more surprising results from the ACSI’s report on the Finance and Insurance sector as it holds true across nearly every big bank.

Smaller size, however, continues to distinguish the top tier as community banks and credit unions remaining pacesetters. In general, more personalized service and the ability to offer lower fees make for happier customers. Nevertheless, both super regional banks and national banks post substantial gains, with the latter moving up 6.9% to 77.

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ACSI data show that big banks are making progress toward improving the customer experience. From the variety of financial services available to call center operations, national banks earn better ratings compared with a year ago. The critical website user experience is deemed more satisfying (up 2% to an ACSI benchmark of 85), but community bank websites set the pace at 88. When it comes to face-to-face contact, small banks earn the top mark for courtesy and helpfulness (91)—a level of excellence that staff at big banks have yet to attain (86).

Among the largest U.S. commercial banks, Citibank heads the field in 2016 with a 12% leap to 82, a score that rivals the satisfaction level of credit unions and nearly matches smaller community banks.

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Wells Fargo slips out of first place for customer satisfaction not by suffering an ACSI decline, but by showing less improvement than its competitors. Adding just 1% to an ACSI score of 76, Wells Fargo is now below average. Closing in on Wells Fargo, Bank of America (+10%) and Chase (+6%) are tied at 75.

Stock performance for big banks mimics their ACSI changes. Since February, Chase, Citibank, and Bank of America have each shown solid gains, whereas Wells Fargo’s stock lagged its national competitors even before news of improper sales practices broke.

ACSI Finance and Insurance Report 2016 »

Media Post:  Citibank Leads National Banks In Study »

Health Insurers Doing a Better Job at Basics

The health insurance industry is getting better at meeting policyholder needs as satisfaction rises 4.3% to 72 on ACSI’s 100-point scale. Among the big insurers, Aetna and Anthem tie for first place at 75 after posting large gains. Kaiser Permanente follows closely at 74, with Humana inching up to meet the industry average at 72. At the low end, Cigna trails the field at 67 despite earning this year’s biggest increase in policyholder satisfaction. This positive momentum is tempered by the fact that health insurers remain in the bottom dozen among 43 ACSI industries.

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Nevertheless, ACSI data show that the industry is making strides in key areas of the customer experience. Policyholders are the most pleased with access to primary care doctors (ACSI benchmark of 80, up from 78 in 2015). Claims are easier to submit and coverage of standard medical procedures is viewed more favorably. Call centers also receive a higher rating, but show ample room for improvement (73).

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TIME/Money: Americans Are Actually Happier With Their Health Insurance Companies Now Than They Were Two Years Ago »

D Healthcare Daily: Despite Rising Costs, Americans Report More Satisfaction With Insurance Plans »

Sears: Will it be Lights Out or Back in the Groove with Customers?

Sears, once a stalwart American brand, is currently a shadow of its former self, having fallen on hard times with both shoppers and investors alike. Back in 2001, Sears was tied for second among department and discount stores in terms of customer satisfaction, according to the American Customer Satisfaction Index. Since then, the chain has managed to beat the industry average only once in 14 subsequent years.

Looking at the last decade of ACSI scores and stock performance for Sears, the period from 2009 to 2013 shows customer satisfaction trending upward by 4% while stock price falls over 57%. The reason for this outcome lies in the connection between stable, or even increasing, customer satisfaction and a dwindling customer base.

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Customer satisfaction plays a vital role in competitive industries in large part because consumers can vote with their feet. That is, customers who do not like a company’s service can simply go elsewhere. The ACSI measures a company’s customer satisfaction by talking directly to the customers themselves. In situations where unhappy consumers leave en masse, the only remaining customers are the ultra-loyal.

In the case of Sears, these loyal customers are likely patronizing the store for reasons other than satisfaction, such as price, proximity, or tradition. In such situations, a rise in customer satisfaction can indeed coincide with a decrease in revenues—a red flag in terms of future financial performance. As dissatisfied customers defect to competitors, the diminished pool of customers includes a greater percentage of shoppers who like the experience for a specific reason. During the period 2009 to 2013, the rise in customer satisfaction for Sears coincides with a steady depletion in sales.

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In recent years, even the most loyal Sears shoppers have seen their satisfaction decline. The company now ranks second-to-last among department and discount stores. With an ACSI score of 71, Sears beats only Wal-Mart at the low level of 66. In comparison, industry leaders Nordstrom and Dillard’s score 80 or higher. It is no surprise to see Sears report terrible earnings for the third quarter of 2016. For Sears, the challenge ahead lies with improving the customer experience. Unless the company succeeds in becoming more customer-centric, it is unlikely that Sears’ faltering financial position will turn around.

PC Satisfaction: Apple and Samsung Vie for Top Slot

Apple personal computer and tablet owners have a long track record of loving their chosen product, checking in with a customer satisfaction rating of 84 for 2016 on the ACSI’s 100-point scale. While Apple’s ACSI leadership in the personal computer industry is well established, Samsung surges 6% to second place, just a point below Apple this year.

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The tight race between Apple and Samsung mirrors the two companies’ battle in the cell phone industry. As reported by the ACSI previously, Apple and Samsung were deadlocked for customer satisfaction in 2015 and remain just a point apart in 2016 (81 and 80, respectively). The caveat for smartphone satisfaction, however, is that Samsung’s current score of 80 reflects customer evaluations from March, well before the release and disastrous battery failures and fires of its Galaxy Note7. The first Note7 recall in September was followed by a second recall that included all replacement phones, prompting Samsung to permanently halt production and sales of the Note7. In 2017, Samsung will likely take a major hit in customer satisfaction for its product meltdown, much like Toyota did when it recalled millions of cars starting in 2009 due to danger of sudden acceleration.

In terms of the personal computer market, smartphones pose a threat to PC sales as tablets have not been the longer-term solution for mobility that the industry may once have envisioned. Interestingly, Apple and Samsung have very different strategies regarding the future of tablets. Apple is targeting business customers on the go with laptop-like features for its iPad, while Samsung tablets occupy their own space as devices for entertainment and browsing, rather than laptop replacements. The number-three PC manufacturer for satisfaction in 2016 is Amazon, another maker of tablets. At 80, Amazon falls short of the PC scores turned in by Apple and Samsung, but it easily matches their most recent scores in the cell phone segment.

For the overall PC industry, customer satisfaction improves 1.3% to 78, driven by better scores for tablets and laptops. Customer satisfaction for desktop computers remains unchanged year-over-year at 81, ahead of both tablets (+4% to 78) and laptops (+3% to 77). While this could be a good sign for traditional PCs, there is also the possibility that a shrinking customer base is leaning toward the more loyal desktop users. Moreover, two of the three leaders this year—Samsung and Amazon—specialize in tablets and other mobile devices, not traditional PCs.

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ACSI Household Appliance and Electronics Report 2016 »

24/7 Wall St.:  American Consumers Liking Their Electronic Devices More This Year »

Computer Dealer News:  New Report Indicates the PC is Alive and Kicking »

Digital Trends:  A New Research Report Shows Consumers Love Their PCs Despite the Market Doomsayers »

Domestic Automakers Catching Up to Foreign-Made Vehicles

ACSI annual reporting shows the automobile industry bouncing back after three years of declining customer satisfaction. The overall industry is up 3.8% to 82 on ACSI’s 100-point scale, with scores tightening between domestic and international manufacturers.

While foreign-made autos have long held the customer satisfaction advantage, domestics are catching up, rising to 81 overall compared with Europe and Asian carmakers at 82.

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2016-auto-dom-2016-bar Among domestic automakers, Ford keeps its lead, stepping up to 84, followed by GM (81) and Fiat Chrysler (78). Although U.S. auto sales were down in August, with signs that demand may have peaked, the good news for Detroit is that higher levels of customer satisfaction will make American autos more competitive.

Luxury cars have dominated the driver satisfaction rankings for years, but the industry’s top tier is now evenly split between mass market and luxury vehicles. Brand exclusivity may no longer be enough for luxury plates if consumers are finding little difference between premium and lower-priced vehicles. Across the top 10 plates for customer satisfaction, Ford’s Lincoln leads at 87, with Honda at 86. German luxury plate BMW is deadlocked with Toyota-branded vehicles at 85, while GMC and Subaru lock horns with upscale Infiniti and Lexus (all 84).

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The ACSI Automobile Report 2016 was released in August. View complete report »

Automotive News:  U.S. Consumers’ Satisfaction With Vehicles Reverses Years Of Decline »

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The Car Connection:  Lincoln, Honda, Toyota, BMW Are Tops In Customer Satisfaction (Acura, VW Not So Much) »

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