Are Organics a Fad?

Written By:
Jay Jacobowitz
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A Brief History
In June of 2002, H.J. Heinz Co. introduced the first organic ketchup by a mainstream, mass market food producer. Up until that time, only then-niche organic brands such as Muir Glen, Walnut Acres and the private label line of supernatural retailer, Austin, TX-based Whole Foods Markets, had risked venturing into the small but fast-growing branded organic foods segment. Around this time, conventional supermarkets were in various stages of toe-dipping into the natural and organic waters, expanding and then shrinking shelf space for the products depending on their stomach for risk. By 2003, the U.S. had entered a recession—mild by comparison to the Great Recession of 2007–2009—which caused a slowdown in sales of natural and organic foods within these traditional supermarkets.

As a natural products industry consultant, I occasionally field calls from journalists of business- and general-interest newspapers, magazines and other media outlets looking for the inside poop on the industry. So, during the 2003 recession, several rather high-profile conventional supermarkets had cut back their natural and organic offerings, and the phone started ringing. Reporters wanted to know, “Is organic a fad?” “Are natural products a flash in the pan?”

As someone who grew up in the natural products industry, who all through college in the ‘70s survived on whole wheat bread slathered with raw butter and raw honey, and chased with raw milk, I smiled to myself as I confidently explained that, no, this was not a fad, but rather the leading edge of a generational shift to all things natural and organic.

The 2014 Retail Landscape
And today, I’m still smiling. No longer are media organs questioning the viability of natural and organic. Instead, they now trumpet the latest “total health and wellness” efforts of conventional supermarkets, remark on the rapidly increasing consumer awareness of, and appetite for, all things fresh, natural, organic, local and sustainable, and look on in semi-amazement at the fairly disruptive explosion of new-style food retailers selling these products.

So, with all this food retailing innovation, I thought it a good time to provide you with a summary of several of the most dynamic of these new-style retailers. Although diverse in their product mixes, physical footprints and come-to-market strategies, these aggressive retailers all have one thing in common: high-quality natural ingredient standards. This single overarching value is the point of the spear driving massive change within the 100-year-old U.S. food retailing universe.

Sprouts Farmers Market
With its July 2013 initial public offering (IPO), the stock of Phoenix, AZ-based Sprouts Farmers Market more than doubled in price on its opening day. As of the company’s November 2013 quarterly conference call, the chain boasted 167 stores in eight Western states, averaging 27,500 square feet gross lease area, with signed leases for 30 more, 30% of which are in new markets. Annual sales are tracking at about $2.4 billion.

Sprouts’ come-to-market idea is “Healthy Eating for Less,” which the company says resides at the intersection of two major trends: health and value; that is, everyday consumers’ desire for healthier food at affordable prices.

The company achieves its goal by offering fresh, high-quality produce at prices it claims are significantly below the competition. About one-third of the retail floor space is dedicated to this department, which allows the company to make a big impression on a wide range of consumers. Once these mainstream, everyday shoppers are inside the store, Sprouts takes the opportunity to showcase its extensive assortment of—and not unintentionally higher-margin, higher price-point—natural and organic foods, premium meats, wines, artisan breads, cheeses, packaged groceries and Sprouts private label, all wrapped up in high-profile, knowledgeable customer-service that is markedly different from conventional competitors.

Sprouts pointedly avoids describing its fresh produce offerings as “organic.” That would send the wrong value signal to would-be “everyday” food shoppers. The company talks about attracting “transitional lifestyles customers;” those who wish to eat better but, before now, did not feel they could afford to do so. Once these lifestyle-aspiring shoppers realize that eating better is affordable, Sprouts has what it describes as a “loyal lifestyle” customer.

Natural Grocers by Vitamin Cottage
Also in a July 2013 IPO, shares of stock rose significantly above the initial offering price for Lakewood, CO-based Natural Grocers by Vitamin Cottage. As of its November 2013 quarterly conference call announcing results for the 2013 fiscal year-end, Natural Grocers operated 72 stores in 13 states, mostly west of the Mississippi River, and plans to open 15 more in 2014. Although historically smaller, new stores now range between 15,000 and 20,000 square feet gross lease area. Sales for the year were just over $430 million.

Discussing its come-to-market strategy, Natural Grocers touts its five founding principles: nutrition education, quality ingredient standards, community outreach, employee support and everyday affordable pricing. An important focal point of the shopping experience is a nutritional health coach, one in every store, which the company claims is fully booked all the time for free nutritional consulting appointments with customers.

The product mix is weighted heavily towards supplements, but as their store footprint increases, this allows the company to sell more groceries, both perishable and dry. Each new store has a demo kitchen with cooking demonstrations, and a community room, in service of its commitment to community outreach. The company makes a point of saying it offers only organic fresh produce. At the same time, management also says the stores tend to be the “price leader on most items” compared to competitors in its trade areas.

With its rapid expansion pre-IPO, the company had a mix of smaller stores, some 5,000 square feet, some 10,000 square feet. The trade areas the company selected did not always produce consistent operating results. Post-IPO, Natural Grocers has adopted a more disciplined approach to selecting its real estate, and appears to have settled on the larger, 15,000–20,000-square-foot size as the best for presenting an expanded food offering.

Whole Foods Market
In relative terms, Austin, TX-based Whole Foods Market is the natural and organic granddaddy of them all. Clearly the first-mover in the industry, Whole Foods went public in January of 1992. As of the company’s fiscal year-end in September 2013, Whole Foods Market had 367 stores in 40 states and three countries, with 94 leases for new stores signed, averaging 36,000 square feet in gross lease area. The new store pipeline includes stores that will be located in 10 new markets not currently served by the company. Sales approached $13 billion for the year.

John Mackey, co-CEO, points out that in 2005, the company had six stores that averaged $1 million per week (you read that right). Today, Whole Foods Market has 50 stores averaging $1 million weekly, and seven million customers shop at a Whole Foods Markets store somewhere on the planet during that time.

Whole Foods Market is nothing if not adaptive. In November 2008, at the height of the world economic crisis, the company sold an approximately 17% equity stake to Leonard Green & Partners, L.P., for $425 million. That the company would make this shocking move was neither apparent nor required. The company was doing well and growing rapidly. But not knowing the depths of the potential fallout from the financial crisis, management wisely decided to hedge its bets and bolster the balance sheet to weather any storms that might materialize in the unprecedented economic uncertainty of the times.

Today, debt-free, Whole Foods Market proudly asserts it is able to fund its near-100-store expansion plans entirely from internally generated cash flows. It’s difficult to think of any other large public company turnaround effort so successful or so complete.

Likewise, to shed its historical nickname, “Whole Paycheck,” the company has choreographed a remarkable turnaround in its price-value image. From the aggressive “Whole Deal” periodic sales flyers, to unpublished “team member double discount days,” to strategic price matching, the company says it has now significantly closed the price gap against its major competitor, and has a highly competitive price position on “known-value-items” (KVI) in all its trade areas.

More to Come
There’s lots more excitement in natural products retailing, including aggressive chain stores that focus on supplements, gourmet retailers crossing over to focus more on organics, conventional supermarkets expanding their natural and organic private label offerings, and even convenience store chains jumping into the game of fresh and healthy.

It’s no wonder my phone has stopped ringing with questions from reporters looking to sign the death warrant for the natural and organic foods movement. I continue to be amazed at the vast world of opportunities for creatively expanding natural and organic to the masses. All you need is an idea and the drive to make it happen. Good luck! WF

Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive marketing service designed especially for independent natural products retailers. With 36 years of wholesale and retail industry experience, Jay has assisted in developing over 1,000 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of WholeFoods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. He can be reached at (800)328-0855 or via e-mail at jay@retailinsights.com.

Published in WholeFoods Magazine, January 2014