Controversy over Whole Foods' new store highlights the company's biggest problem

Whole Foods' new cheaper chain of stores is off to a rough start.

The company recently announced plans to open the first of the new stores, called 365 by Whole Foods Market, in the Los Angeles neighborhood of Silver Lake.

Silver Lake residents had been looking forward to getting a regular Whole Foods store, however, and now some of them are outraged by the company's change in plans.

"The residents ... do not want a budget 365 store," reads an online petition against the store that was started by Silver Lake resident Dawn White. "People in this neighborhood are desperate for a local high end market with the best quality foods, which are often not the 365 brand. And the residents of this neighborhood can afford this. There is already a Trader Joe's just over a mile away so there is no need for another discount brand in such close proximity."

White said the company had misidentified Silver Lake residents as young bargain hunters, but, "The neighborhood is actually comprised almost exclusively of financially secure people in their mid 30s and above and many accomplished professionals with young families."

There's no way for Silver Lake residents to accurately judge 365 by Whole Foods Market, since we don't yet know what the stores will look like.

But their outrage is another sign that the new concept risks alienating some of Whole Foods' core customers.

The company has said the stores will be specifically designed to appeal to millennials with "modern, streamlined design, innovative technology, and a curated selection" of organic and natural foods.

There are two problems with that approach.

Targeting the stores toward millennials blatantly ignores shoppers over the age of 35, and it also suggests Whole Foods' current stores need major upgrades, Robyn Bolton writes in Harvard Business Review:

"By describing this new concept as 'geared toward millennial shoppers,' Whole Foods is essentially saying one (or both) of the following:

1. Gen X and Baby Boomer shoppers are fine with or even prefer old, cluttered stores that sell a confusing array of stuff at high prices.

2. We (Whole Foods) need to create new stores because our current ones are old and cluttered and sell all sorts of poorly organized stuff at high prices."

That's probably not what Whole Foods intended to communicate with the launch of its new chain of stores.

"But it was what I, and many of my Gen X and Baby Boomer friends and colleagues, heard," Bolton writes.

The lower prices at the news stores could also end up hurting Whole Foods' existing stores, according to Deutsche Bank analysts.

"It could backfire if price points are materially different, because an obvious price spread between the two formats could create doubts with their existing loyal customer base, and this could lead to erosion of their very strong brand equity," analysts write in a recent research note.

Whole Foods may face an additional challenge in keeping rent and labor costs low enough to make the "mini-me millennial" stores profitable, according to the note.

"Real estate and labor are both becoming scarcer, which could complicate this endeavor," the analysts write.

The new chain, which will start opening stores next year, will be led by 20-year Whole Foods veteran Jeff Turnas. Turnas was previously president of the company's North Atlantic region.

In a statement to LAist, Turnas said, "We think the Silver Lake area of Los Angeles is an ideal community to plant our first 365 store flag and bring a modern shopping experience that draws from the best innovations of Whole Foods Market stores and gives them a new expression."