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GREENER GIANTS

How health food groceries became a billion-dollar business

By Edmund Mander

As retail trends go, they don’t get much healthier than the one sweeping the supermarket industry. Health food supermarket chains are not only opening in new markets but are spurring regular supermarkets to offer fare that is more natural.

“Across the U.S. almost every other supermarket is toying with carrying some form of organic and natural product,” said Yudi Bahl, a retail analyst with U.S. Bancorp Piper Jaffray. “There’s much more mainstream consumer interest in these products.”

Whole Foods Market and Wild Oats Markets, the country’s only two nationwide natural supermarket chains, can take much of the credit for the trend, as both continue an aggressive expansion into new markets.

“They’ve elevated the entire industry and educated consumers,” said Ed Aaron, an associate analyst at the Denver office of Tucker Anthony Sutro Capital Markets, a financial services firm.

Some of the credit for their success also goes to the corporations behind genetically altered produce, crop sprays and food additives, Bahl observed, all of which are increasingly scaring the heck out of consumers.

Not that long ago, customers seeking organic vegetables and other foods free of preservatives, colorings and other additives had to visit hole-in-the-wall stores, braving high prices and questionable expiration dates. Even when health food stores — as opposed to pills and potions shops — appeared in the late 1970s and early 1980s, they stuck gingerly to bohemian markets and kept their selections limited, so that even the most determined organic consumer was obliged to visit regular supermarkets for items like bottled water and kitchen supplies.

But that is changing fast, as companies such as Whole Foods Market, Austin, Texas, and Wild Oats Markets, Boulder, Colo., expand their stores, merchandise offerings and their reach. With stores as big as, in the case of some Whole Foods locations, 45,000 square feet offering a whole range of food and household merchandise, their customers need never step into a regular supermarket again. Enhancing their popular appeal even further, the natural supermarkets have been lowering their premium prices by, for instance, offering more mainstream merchandise from national suppliers alongside their gourmet items. Today, some of their produce, while it is free of additives, is not certified as organic.

Herein lies one potential pitfall, however: As regular supermarkets respond to customer demand by offering more merchandise that is unadulterated and untainted, and the natural food supermarkets introduce mainstream products, the latter will have to be careful not to compromise their distinct identities, Bahl warned.

But, so far at least, they continue to offer a very different shopping environment from mainstream supermarkets, with an emphasis on customer service and interaction. Shoppers in both chains can expect to be greeted with cooking demonstrations, free samples and a range of gourmet food preparations.

“Wild Oats and Whole foods both do a good job at marketing a lifestyle,” Aaron said.

Following is a more in-depth look at both chains.

Whole Foods Market
Customers in Manhattan could be forgiven for being a little taken aback when Whole Foods Market opened its first New York City store this year, on 7th Avenue and 24th Street. First of all, its aisles are wide enough to accommodate two or three shopping carts abreast, in a city where taking a cart through the average grocery store is akin to driving an 18-wheeler down a sidewalk.

Once Manhattan shoppers have gotten over the stores’ spaciousness, they’re in for another shock: When they ask for an item, store assistants all but take them by the hand to its location, a stark contrast to the treatment in some of the city’s other groceries, where staff prefer to ignore — and sometimes swear at — their customers.

Then there is the fare: Large colorful pyramids of fruit and vegetables greet customers inside the store’s entrance, along with rows of exotic mushrooms, herbs and signs identifying the origins and types of produce. The fish and meat counters don’t disappoint either, even in a city that boasts some of the finest butchers and seafood markets in the country.

Over the salad bar a sign reading “Please, no nibbling” hangs above tempting preparations of vegetables, pasta and soup. Toasted eggplant bisque was being offered one day recently, while around the store staff were handing out samples of salmon pâté, semi sun-dried tomatoes from Australia, chicken and basil sausages and even sugarless chocolates. Nearby they were roasting coffee — something you definitely wouldn’t see in a traditional health food market.

Next door to the Manhattan supermarket is Whole Body, a 3,000-square-foot Whole Foods Market-owned store selling health and beauty items.

Whole Foods Market began in 1980 with 19 employees in Austin, Texas, founded by three health food store owners — John Mackey, Craig Weller and Mark Skiles — who were intent on applying the supermarket model to natural food retail. Since then it has steadily grown, both by duplicating its supermarkets and through the acquisition of a dozen or so other companies. These include Whole Foods Co. (Louisiana), Bread & Circus (Massachusetts), Wellspring Grocery (North Carolina), Mrs. Gooch’s Natural Foods Market (California), Fresh Fields (Maryland), Bread of Life, (Florida), Merchant of Vino (Michigan), Nature’s Heartland (Massachusetts) and Food for Thought (California). Some of these — Whole Foods Market, Fresh Fields, Bread & Circus, Merchant of Vino and Wellspring Grocery — continue to operate under their own names, although ultimately Whole Foods plans to bring them under the single Whole Foods Market brand, according to the company spokeswoman.

At press time Whole Foods and its various subsidiaries were operating more than 120 stores in 22 states, generating sales that topped $1.8 billion last year — compared with $92.5 million in fiscal 1991. The company has stated its intention to double in size over the next five or six years, and is scheduled to open 15 stores this year, with a focus on larger footprints of up to 45,000 square feet, according to the spokeswoman. Whole Foods says it targets areas with educated consumers and likes to share shopping centers with the likes of Williams-Sonoma, Restoration Hardware and Gap.

“They’re opening some blockbuster locations,” Bahl said, noting Whole Foods entry into major urban markets like New York City.

Whole Foods is calling its 30,000-square-foot Manhattan location its flagship, but while the store is larger than the average 26,000-square-foot footprint across the chain, there is nothing out of the ordinary about the way it is treating its Manhattan customers — even if it does seem mighty unusual to the customers themselves. The company operates a customer-service desk at the center of each store, and prides itself on employing knowledgeable and helpful staff. To promote customer-staff interaction, employees stock shelves during the daytime.

Individual stores also organize community events. In February a Whole Foods supermarket in Plantation, Fla., played host to a singles party. A Fresh Fields store in Annapolis, Md., recently provided space for a meeting to promote “co-housing communities” — developments consisting of small dwellings and a larger common house with kitchen, dining and laundry facilities — sponsored by the Chesapeake Co-housing Group.

Each store also posts bulletins on environmental and organic food issues. And while not all the produce is organic — large, color-coded signs help customers distinguish between organic and “traditional” fare — it is free of chemicals and additives, store officials say. The average store contains about 20,000 SKUs. The inclusion of nonorganic produce from national suppliers — in 1997 it introduced its “365” everyday value line of products — is part of the company’s effort to bring its prices into line with those charged at regular supermarkets.

The store continues to sell about 12% of its products under its own Whole Foods label, produced by “artisan” and “small batch production” companies. And among the companies Whole Foods has bought is Allegro Coffee Co., which had been supplying its organic coffee. The opening of the Manhattan location could be a huge “branding event” for Whole Foods, Bahl said.

Wild Oats Market
Last year Wild Oats took some medicine that, while bitter, is expected to benefit the long-term health of the natural food supermarket.

Acknowledging that natural food supermarkets need to attract mainstream customers with large-format stores offering a wide range of merchandise, the chain announced it was expanding the size of its existing and future properties and closing some of its smaller locations.

This expensive, ongoing, remodeling program has come on top of an aggressive series of store acquisitions that has turned Wild Oats into a national retailer. Consequently, the company reported a $12.7 million loss for the fourth quarter, which included a $13.6 million restructuring charge, and its shares took a hit. But, as analysts point out, there is no gain without pain.

“They were way too small,” and their locations were not ideal, said Piper Jaffray’s Bahl. “It’s a good strategic move, but it’s not an easy move.”

Wild Oats, the nation’s second-largest natural food chain, got a later start than Whole Foods, starting out as a vegetarian health food store launched by Mike Gilliland and his wife, Libby Cook, in Boulder in 1986. Since then it has been working hard to catch up. The company went public in 1996 — trading on the Nasdaq under OATS — and has opened new stores as well as engaging in a buying spree of other chains.

In March of this year, the company hired a new president and CEO, Perry D. Odak, who formerly headed Ben & Jerry’s, the gourmet ice cream producer. Today the company owns 111 stores in 23 states. Besides its nationwide Wild Oats chain, the company owns Alfalfa’s Markets (Colorado and New Mexico), Ideal Market (Colorado), Henry’s Marketplace (California), Nature’s Northwest/Nature’s Fresh (Oregon and Washington), Oasis Fine Foods (Oregon), People’s Market (Illinois), Sun Harvest Farms (Texas), Sunshine Grocery (Tennessee) and Vitamin Expo (Texas).

Wt also has a presence in Manhattan, albeit a much more humble one than Whole Foods’ new store, where it owns a store called Uptown Whole Foods. Wild Oats also owns a small Canadian chain, Caper’s Community Market, with stores in Vancouver and Victoria.

For future expansion, “We are looking just about everywhere,” said COO James W. Lee.

Like Whole Foods, Wild Oats works hard on ambiance. People entering either store, for instance, will be hard put to spot a cash register; those are only near the exits.

“What happens if there’s a problem analogous to the utility clause in a lease? Privacy also could be a problem,” if a hacker breaks into a landlord-provided system, Borsuk warns. “You have to think about how it could happen and protect yourself.”

“We like people to enter into a produce or a floral area or into the food service or deli section, to have a warm entry into the store, rather than face a cold bank of registers,” said Ron Feldman, the company’s vice president of real estate.

Slowly but steadily the No. 2 natural food chain is drawing itself into line with its rival.

“They’re moving towards a similar platform as Whole Foods,” said Aaron, the Tucker Anthony Sutro Capital Markets analyst, explaining that the store is seeking to attract customers from conventional supermarkets. “They’ve been a competitor for quite some time.”

Like Whole Foods, the company also is trying to promote community involvement and, for instance, compensates staff for up to 52 hours of volunteer work a year performed with local, nonprofit organizations.

Wild Oats’ smaller format means their sales are considerably lower than Whole Foods’, Aaron pointed out. The company’s sales for fiscal year ended Dec. 30 were $838.1 million; Whole Foods reported sales of $1.84 billion at the end of its most recent fiscal year.

The expansion and revamping of its stores is paying off. In March Salomon Smith Barney upgraded its investment rating of the company to a “buy,” and raised its earning estimates.

“Wild Oats has made significant progress with its turnaround initiatives, which are not reflected in current [Wall] Street earnings and comp-store sales growth forecasts,” said a research note issued by Salomon. “We have also learned that the company’s new larger store format has been having encouraging results, which should be viewed positively by investors.”

Salomon raised its 12-month price target for Wild Oats to $12 from $7.50.

The bitter medicine is working.

 

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