Last month, WholeFoods Magazine published its largest-ever survey of independent U.S. retailers representing nearly one-million square feet and $665 million in natural products sales. Retailers large and small, from every part of the country, responded to the survey questionnaire, giving us a full and balanced view of natural food and supplement retailing in 2012.

The Food Retailing Universe
Immediately surrounding our world of natural products is the larger universe of food retailing. As of 2012, natural products were just over 9% of total food-store sales, or $53.7 billion of $584.4 billion, according to Retail Insights’ 2012 Retail Universe for Premium Natural, Organic Food, Supplement and Personal Care Sales, which is appended to the end of this year’s WholeFoods survey (December 2012, p. 25). Trends we feel as natural products retailers are likely to have their roots in this larger world of food. In fact, the most significant trend and force in food retailing today—shoppers’ desire for all things fresh—has been gaining momentum for the past 20 years.

The Fresh Trend
Behind this fresh trend is consumers’ strong and growing belief that fresh tastes better, creates a more interesting food experience and is more nutritious than anything in a box. As a result, for food retailers all across the spectrum—from dollar stores and mass merchants, to club-member stores and high-end specialty retailers, to conventional supermarkets and even drug store chains—fresh has become the dominant strategy to increase foot traffic and attract a larger percentage of households.

Conventional supermarkets carry 25–33% perishable foods. Think refrigerated and frozen cases, meats, poultry and fish, deli, bakery and cheese. In the 1990s, it was Austin, TX-based Whole Foods Markets that began to push the fresh envelope. Instead of offering 25–33% fresh foods, Whole Foods Markets more than doubled that percentage, with expansive produce departments, lavish bakeries and delis, and massive hot and cold salad, soup and entrée self-service tables, and, of course, in-store seating for customers to feed on all these offerings. Today, Whole Foods Markets generates about 70% of its sales from perishables, and this is largely what is driving the rest of the food retailing community to adjust their models to catch up.

Whole Foods Markets Driving the Trend
This is with good reason. For most of its history, Whole Foods Markets same-store sales have grown at several times the rate of conventional supermarkets, averaging 8–10% year-over-year compared to 2–3% for conventionals. With Whole Foods Markets’ powerful sales advantage and its plans for 1,000 U.S. stores, no conventional supermarket chain can take this threat for granted. And most have concluded, rightly I believe, the only viable way to compete is to expand fresh departments offering high-quality foods.

In every part of the country, conventional retailers have expanded their fresh foods offerings, from Safeway on the West Coast, to Kroger in the Midwest, to H.E.B. and its Central Market banner in the South, to Publix and its Greenwise banner in the Southeast, to Stop & Shop, Hannaford, and Wegmans in the Northeast, to name just a few. In addition, we’ve seen new fresh players enter and expand in the market. Greensboro, NC-based The Fresh Market, also with a high percentage of perishables as its model, made its successful public offering in 2010, and has over 100 stores. New York-based Fairway Market, another fresh-foods focused retailer, also plans its public offering shortly. Even drugstore chain Walgreens sees fresh foods as part of its future strategy. The 7,000-store chain bought the New York-based 257-store Duane Reade drugstore chain, which features fresh foods like sushi, a juice bar, sandwiches and salads, along with ample doors of cooler and freezer. Walgreens sees the drugstore as the convenience store of the future for women.

Cause and Effect
There’s a compelling business reason for increasing perishables offerings: as the percentage of fresh foods a retailer sells increases, so do customer counts. While raw store size—how big your store is—plays a role in how many customers you’ll see in a day, which departments you have inside your store matters more. As this year’s survey confirms, the percentage of fresh-perishable foods drives foot traffic. Independent natural products retail stores with the least sales from perishables (0–9%) saw 64–94 customers per day. At the other end of the spectrum, natural retailers offering 55% or more in fresh perishable foods saw 821 shoppers per day.

What Does it All Mean?
So, what should you do with this intelligence? Is there still a future for the small, supplement-oriented store? The answer is yes. The vast majority of supplements stores of up to 2,500 square feet on average reported growth for 2012 in the survey. Should you try to expand your store to sell more perishables foods? The answer is maybe.

And here is where the survey sounds a note of caution. Once stores reached 6,000 square feet or larger, and had a perishables percentage of at least 29% of sales, growth and profits were good. But, stores in the survey that averaged 4,500 square feet, and had perishables sales in the 10–20% range did not fare as well. Although nearly twice as large as the average supplements store, sales were just 45% higher. As a result, rent percentages were higher than either smaller vitamin stores or larger food stores. Cost-of-goods were also higher and gross profit margins lower than smaller or larger stores, as well. Sales-per-square foot also lagged all but the smallest vitamin stores, and average basket size was also lowest of any store type in the survey.

Another telltale sign, these middle-size stores appeared to be cash-starved, spending one-third less on marketing than any other store type in the survey. And while the 4,500-square-foot average was nearly double the size of the average supplement chain store in the survey, it was not large enough to drive significant sales from fresh produce or prepared foods, with these departments averaging less than 4% of sales combined. Perhaps most important, staffing levels were lower than other store types in the survey, indicating less customer service.

Bottom Line
WholeFoods Magazine’s 35th Annual Retail Survey found strong growth in both supplements-oriented stores of 2,500 square feet or less, and food-oriented stores of 6,000 square feet or more. But stores trying to add a moderate amount of fresh perishables foods, in the 10–20% range, in spaces averaging 4,500 square feet of gross lease area, struggled in every measurement category from gross sales to net profits. Meanwhile, the consumer-driven fresh-foods trend continues to motivate the larger food-retailing industry and in our view, will do so for the next generation and beyond.

To be a successful independent supplements-oriented retailer, you’re more likely to succeed by offering high service levels centered on a knowledgeable and caring sales staff that is empowered to engage the customer in a meaningful conversation about health, in comfortable, relaxing and uplifting surroundings. To succeed in the fresh-foods arena, you’ll need to start your vision at a minimum of 6,000 square feet, and be prepared for the steeper capital investment for fixtures and equipment, and for the higher ongoing expenses for labor. But if you do, you’ll also position yourself to ride the long-term tidal wave of demand for all things fresh, local and healthy. 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 35 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.
 

Correction: In the 2012 WholeFoods Retailer Survey (published December 2012, p. 20), there was an error on Chart A. The key should have indicated that GLA Square Foot was the bottom line and Retailing Square Foot was the top line. The data presented in Table 1 was correct. We apologize for any confusion.

Published in WholeFoods Magazine, January 2013