Whole Foods is building a 'Nordstrom Rack' for groceries

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Whole Foods co-CEO John Mackey says the chain's new cheaper chain of stores will be to Whole Foods what Nordstrom Rack is to Nordstrom, the New York Times reports.

Nordstrom Rack is a deeply discounted department store with designer clothes and shoes roughly 70% off regular prices.

"It's not a revolutionary idea," Mackey told the Times.

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There has been a lot of buzz around Whole Foods' new chain, partly because the company hasn't revealed very many specifics about it.

Whole Foods, which reports earnings Wednesday, has said 365 will target millennials with a "modern, streamlined design, innovative technology, and a curated selection" of organic and natural foods. Beyond that description, the company hasn't provided many more details on what the stores will be like.

Analysts have expressed concern that if prices are too steeply discounted at 365, then Whole Foods risks alienating its loyal customer base.

"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," Deutsche Bank analysts wrote in a July research note.

Whole Foods is opening the cheaper chain amid criticism that its flagship stores are too expensive, earning the company the nickname "whole paycheck."

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The company's already negative price image took a beating this summer following a New York City government investigation that found Whole Foods was overcharging for some packaged food items by mislabeling the weight of the item.

Whole Foods' same-store sales growth was averaging 2.5% in the weeks before the results of the investigation were revealed, and it dropped to 0.4% in the two weeks after the announcement, according to the Times.

Mackey and co-CEO Walter Robb later published an apology video and committed to fixing the problem by hiring a third-party auditor to make sure items are labeled correctly. The executives also promised to retrain employees on packaging food.

But that hasn't restored investors' confidence in the brand.

The company's shares are down nearly 50% since the beginning of the year.

Mackey says Whole Foods might be stuck with its "whole paycheck" nickname forever.

"The Whole Foods Market brand may never shake that label," Mackey told the Times.

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