Tuesday Talking Points Memo: Memo to Whole Foods Market, Inc.

Wanted in Australia: An upscale, natural, organic and specialty grocer that not only merchandises products in these categories extensively, but also creates a varied, diverse and exciting shopping experience in it's stores. A grocer who has the financial means to build a national high-end food retailing chain in an English-speaking country that currently is without such a food retailer. It's a niche begging to be filled. We think Whole Foods Markets, Inc. is a "natural" to fill this high-end food retailing niche.

December 4, 2007

To: Whole Foods Markets, Inc.

Fm: Natural~Specialty Foods Memo

Re: Australia is the place you need to be

Dear Whole Foods:

First, congratulations on the six-month anniversary of the opening of your London store. It's a beauty. It's also much bigger than most British supermarkets. Texas-sized.

We know it's been a tough six months. Your first store outside North America and all. Winning over British shoppers isn't easy--especially for an American food retailer in a time in which Londoners aren't all that keen on such things as U.S. foreign and environmental policy. However, our friends across the pond say you're starting to win them over-slowly but surely.

Whole Foods' UK-flagship store is the retail anchor (bottom level) of the 348,000 square foot Barkers Centre mixed-use building (above( on Kensington High Street in London. The building's upper floors are leased to the Associated Newspapers Co. The lower floors contain retail shops.

In fact, they tell us a number of British celebs like pop starlet Natalie Appleton, comedian Ruby Wax, TV broadcaster Mariella Frostrup and others, have been spied shopping in the store on the Kensington High Street of late. A pretty upscale neighborhood that Kensington High Street is, isn't it?

We think this is a good sign for you. The Brits love their celebrities, and like to shop where they do. We're not saying it's a social class thing or anything like that of course.

Some other good news: British retail analyst Bryan Roberts, of the consulting firm Planet Retail, said the other day the store seems to be gaining momentum. He says he was a bit concerned a few weeks after the store opened because the aisles were empty. However, he says he's visited the store numerous times in the last month or so and can tell the store in gaining in popularity. Shopper numbers are up, and pre-holiday business has been brisk, Roberts reports. He's a fairly keen observer of the UK retail scene. Good going.

After all, if Tesco can come to the U.S. and open hundreds of little grocery markets called Fresh & Easy, an American grocer should be able to open a huge, upscale natural foods emporium in London and do at least $1 million dollars in sales a week after things shake out and the Brits realize its not a national offense to do their food shopping at an American retail icon's store. By the way, we do hope you're shooting for $1 million a week in the London store?

The produce department at Whole Foods' London flagship store on Kensington High Street.

But we digress. The main reason we're writing and sending you this memo is to suggest you look into Australia. Europe and the UK are great places for great food retailers. And Britain has a number of them--Tesco, Waitrose, J. Sainsbury and more. They will keep you on your toes--and you them.

But it's Australia we have our eyes on for you in terms of a more large-scale international expansion. Why? That's a fair question. And it's an easy one for us to answer.

You see, there's a huge gap in the food retailing spectrum in Australia. Woolworths and Coles, the nation's two leading supermarket retailers, dominate the middle market. However, at the upper-end there currently exists no national supermarket chain offering a full selection of natural and organic products, upscale, fresh prepared foods and the "lifestyle" grocery shopping experience Whole Foods' has become so good at providing.

The Australian flag. Note the colors: red, white and blue. Look familiar?

Just like shoppers in the other, wealthier western countries, Australians are looking not just for a national natural and organic foods retail leader, but also a grocer who will give them an improved and differentiated in-store experience. Food retailing as theatre. In-store restaurants, wine bars, mini spas, huge natural body care departments. All those things you offer, and shoppers are increasingly demanding, in the U.S. and Western Europe. As you know, what you do (natural foods' retailing with a lifestyle-orientation) is one of the key growth areas in the supermarket business worldwide.

But the poor Aussies, they have no such national natural products, lifestyle-oriented grocer. It's a huge opportunity for you. Bigger overall than the one in the UK because of the demand. We think Whole Foods is the best-suited grocer to make a success out of the niche. Australian food retailers (and retailers in general) are world-class as middle-market retailing, but aren't so good a mining the upper or lower, price-impact niches. More about that later.

In fact, Australia also is lacking a national grocer at the lower, price-impact end of the spectrum. But that situation about to change dramatically. German grocer Aldi, which as you know owns Trader Joe's in the states, is in the process of building the first of what will be many "no-frills," price-impact supermarkets in the land down under. The European retailer plans on creating a national chain with it's limited-assortment, low price-oriented stores.

Another niche that's lacking down under is the Warehouse Club format on a national (and quality) scale. Guess what? Costco is preparing to go after the warehouse club store niche in Australia. Costco was supposed to enter the country last year but put it off. However, they're working on it and should have an announcement some time soon. So, if you do enter Australia in the higher-end niche, you'll have some company at least from another American retailer mining it's own retail niche.

So, as you can see, there's a high-end retail food market niche just waiting in Australia for a grocer like Whole Foods. We don't need to tell you this, but Australian's have much in common with Americans. Some smart people even think Americans and Aussie's are more similar than the British and Americans are. And, like with Britain, the U.S. has a very long history of positive relations (hiccup here and there of course) with the Aussies. Imagine how well a beer room like the one you have in NYC would do in Australia.

The high-rise towers in downtown Melbourne, Australia beckon a supernatural, lifestyle-oriented grocer like Whole Foods Markets to build a national, high-end chain in the country.

Please though, don't just take our word for it. Take a close look at the Australian food retailing landscape. Talk to some retail experts and analysts there. Ask them about what's going on in the country in terms of the pent-up consumer desire in all sectors, not just food, for more and better high-end retailers.

It's happening in the woman's clothing market, for example. Upscale Luluman, from Canada, is doing great with its high-end woman's activewear, and plans on building a bunch of stores over the next couple years in the nation.

The same is happening with woman's shoes and intimate apparel. Upscale shops are opening and doing great. Australian woman are demanding more and better quality. Believe it or not, it's even going on with men's clothes. Did you know there's only one quality, national department store chain in the country that sells higher-end men's clothes. That situation is likely to end soon. Guess what? It's the Brits who are looking to create another one. Yes, Marks & Spencer is one UK retailer looking at the land down under in a big way. Perhaps even for upscale food offerings as well as clothing and other department store product offerings

There's also a flight to quality in terms of upscale restaurants going on down under. U.S. chain restaurants like Cheesecake factory, Brio Tuscan Grill and PF Chang's China Bistro are being courted by shopping center developers, while these same builders are often saying no to fast food operators like McDonalds and Burger King. We know these aren't white table cloth restaurants (those are becoming super-popular as well). However, the point is that lower-end restaurant chains are being pushed aside in favor of higher-end ones.

We encourage you to use our memo as a mere guide for further investigation and research. In addition to talking with food retailing analysts in Australia, visit numerous stores in person. (Maybe you have already?). You'll see we are onto something in terms of a lack of focus in the natural, organic and upscale lifestyle niche.

Sydney, Australia (above) is regularly ranked as one of the world's "best" cities to live in, based on its natural and built beauty, vibrant economy, progressive nature, and many other positive attributes. Great cities and great countries, like Australia, deserve great food retailers at the upper-end of the spectrum as well as in the middle-range.

As we mentioned earlier, Australian retailers are world class at creating and operating middle-market retail food chains. However, they've never been great at niche creation and building. Of course, that's do in large part to the fact that historically there's really been only two metropolitan regions in the country, Sydney and Melbourne. However, much has changed. Not only have these regions grown dramatically, but many of the outlying areas have grown as well--in both numbers and culinary and health-oriented sophistication. Aussie food retailers just haven't caught up with these developments and changes yet.

You can be sure though that either they will catch up soon--and launch a national, upscale food retail chain. If not, a grocer like Britain's Waitrose or another similar European retailer will. For example, Waitrose announced last week that it plans on doubling it's store count and sales over the next 7-10 years. The grocer said much of that growth will come from stores outside the UK. We wouldn't be surprised if Waitrose's self-named "Chubby Grocer" Mark Price isn't looking at Australia as we write this sentence.

In closing, congratulations again on the six-month anniversary of your London store, the chain's first one in Europe and outside North America. (By the way, we hear you're looking for a location for a second store in London or nearby. Good move. Having just one store in a country is expensive.)

We do hope the positive trends our friends in London tell us are happening at the store blossom even brighter. However, do take a look at Australia. The country provides an opportunity for an upscale, lifestyle-oriented grocer, who's deep into natural and organic foods, to open a number of stores in a fairly rapid period of time and create the nation's first national, high-end grocery chain of note. We know you guys like building lots of big, interesting stores fast. And, Australians, like Texans, love big things. As such, we do hope you look into the opportunity in a "big" way.

Sincerely, Natural~Specialty Foods Memo

Note: The writer currently owns no stock in Whole Foods Market, Inc. He does, however, enjoy finding retail market niches and matching retail grocery chains with those niches.