Retail Memo:The Whole Foods Mrkt., Inc. as Monopolist Fallacy: How Sprouts Farmers Mrkts. and Others Are Growing Into the Heart of Whole Foods Country

Somebody--such as the U.S. Federal Trade Commission (FTC) and those folks who agree with its latest federal court appeal to stop Whole Foods Market, Inc. from continuing to integrate Wild Oats' stores into its operations--forgot to tell the Boney family that since Whole Foods Market acquired Wild Oats Markets, Inc. last September it has become a natural foods' retailing monopoly.

Further, the FTC and others apparently failed to send the Boney's--owners of Phoenix, Arizona-based Sprouts Farmers Markets and founders of the Boney's Marketplace and Henry's chains in Southern California--a memo explaining to them the combined Whole Foods'/Wild Oats' corporate operation and stores are such that they can control category retail prices and erect barriers to entry in key markets--like in the grocer's home state of Texas--against competitors.

Yes, indeed, not only did the Boney family fail to get that memo, apparently they also failed to read the numerous articles in the grocery trade and newspaper business publications which have suggested the Whole Foods'/Wild Oats' deal is going to kill retail competition. And, they certainly must have turned a deaf ear to the numerous industry suppliers, retailers and others who argue the same thing.

Why, you ask, do we suggest that Sprouts Farmers Markets just hasn't been listening to all the "anti-competitive" Whole Foods'/Wild Oats' natural and organic retail category monopolistic talk?

Well, if the 25-store natural foods' retailer was listening, Sprouts wouldn't be doing what it's doing: targeting Texas (where Whole Foods Market, Inc. has it's corporate headquarters and 16 stores, with four new mega-stores currently in development) and Colorado (where the formerly-independent Wild Oats' had its corporate headquarters, and where the now combined Whole Foods'/Wild Oats' has 18 stores, with two new stores currently in development) as the top-two new states in the Phoenix-based natural and organic grocer's strategy to become a national player in natural foods' retailing in the U.S.

However, that is just what Sprouts, which currently has stores in Arizona (15), Southern California (5) and Texas (5), is doing. The natural products' retailer has stores in Dallas, Flower Mound, Frisco, Plano and Southlake, Texas, with many more on the way.

Sprouts opened its first store in Texas in 2005 in the Dallas/Fort Worth (DFW) area. Two new stores which are currently in development will open later this year in the DFW region cities of Richardson and Murphy, Texas. However, that's just the start. Stan Boney, Sprouts' chief executive, says he sees the retailer opening as many as 15 stores in the next couple years in the DFW region, and many more in other parts of Texas.

Sprouts' stores are much smaller in size than Whole Foods Market stores, especially the 55,000 square foot -to- 80,000 square foot new generation stores the supernatural grocer is building these days. However, Sprouts' packs nearly as many in-store departments (on a smaller scale) as Whole Foods' does, in its smaller-format stores, which average 15,000 square feet -to- 35,000 square feet.

The stores' feature large fresh produce departments, which is a major drawing card for the natural foods' retailer. Additionally, Sprouts Farmers Market stores' have a large selection of natural and organic dry and perishable grocery items, expansive fresh meat and seafood departments, large vitamin and dietary supplement departments, and offer lots of fresh, prepared foods.

Many of the stores' also feature small in-store restaurants and cafes. Further, Sprouts' markets have in-store bakeries, in-store service delis, large bulk foods' departments, and specialty wine and beer departments, which feature lots of domestic and imported wines and craft beers at value-oriented prices, along with higher-end items in the two categories.

Sprouts' positioning puts a focus on selling natural and organic products across all departments for lower everyday price-points than Whole Foods' and most upscale supermarkets do. They aren't discount natural-products' stores by any means. However, price-point positioning plays a big part in the retailer's overall marketing approach.

Sprouts' also is using an interesting approach to locating its new stores in Texas, especially in the DFW region. In fact, this approach is in part a result of why the retailer enter the market initially in the first place.

In 2003-2004, Stan Boney and his team, who all have decades of experience in the industry (the Boney family founded the successful 10-store Boney's natural-products' stores and the Henry's chain, which later was acquired by Wild Oats Markets, in Southern California, and the current management team have all worked in senior positions for Wild Oats Markets), noticed the DFW market had many empty supermarkets, and many displaced workers.

In particular, Albertsons' and Rainbow Supermarkets had closed lots of stores in the market, and Boney and his team saw an opportunity to jump in with their Sprouts natural foods stores. The chance to get good leases on the empty supermarket buildings, combined with a large number of well-trained but out-of-work grocery store workers, pushed the retailer to open its first store in the region, something they had been considering but had yet to decide on until these two compelling factors came along.

When Sprouts' opens its two new Texas stores later this year, it will have nearly half as many stores in the state as Whole Foods' does. And with its aggressive store development plans in the Longhorn (and now Granola as well) state, it might even catch up to the Austin, Texas-based supernatural retailer in terms of total store count in five years, although Sprouts' gross sales won't come close to matching Whole Foods Market, Inc's sales in Texas or nationally.

However, the mere fact Sprouts Farmers Market is willing to take its own particular brand of natural foods retailing to Texas, which is Whole Foods country--and put its pocketbook behind the growth plan--demonstrates the retailer doesn't believe the Whole Foods' acquisition of Wild Oats Markets, Inc. has created an anti-competitive environment, at least as far as Sprouts and its management is concerned.

If that's not enough empirical evidence, lets look to Colorado, where Whole Foods Market now operates 18 stores, and will soon open two new stores, making its total store count in the Rocky Mountain state 20.

In many ways, Colorado--especially the Boulder and Denver regions--is Whole Foods' second corporate home. Boulder, Colorado is where Wild Oats Markets was founded, and where its corporate headquarters was for over two decades, until the acquisition by Whole Foods Market, Inc. in late 2007. In fact, recognizing the importance of Boulder as its second corporate home, Whole Foods has made sure not to close any of the existing Wild Oats stores in that city (except one, and that's because a new, bigger and better Whole Foods was being built a couple blocks away before the merger), and to maintain what is a bigger than normal corporate presence in Colorado than it normally would based on the size of the market.

Despite these key competitive facts vis-a-vis Whole Foods Market, Inc., Colorado happens to be the second key new state Sprouts' is targeting to grow its U.S. retail presence. The natural-products' retailer is currently completing two stores in Colorado, one in the city of Westminster and the other in Parker. Westminster is a northwest suburb of Denver with a population of about 107,000 residents. Parker, Colorado also is part of the Denver metropolitan area. It's a city of about 43,000, and is one of the state's fastest-growing towns. Parker's population has nearly doubled in just eight years, from about 23,000 in 2000, to 43,000 today.

Whole Foods has a store in Westminster, and four stores in Denver. Additionally, the supernatural grocer has more stores in the surrounding area. It plans to open a new and fifth 58,000 square foot lifestyle-oriented natural foods' store in Denver later this year.

It seems to us, if Sprouts Farmers Markets believed post Wild Oats-acquisition Whole Foods Market was the monopolistic supernatural bully its being accused of being by the FTC and others, one of the last places (along with Texas) it would target for expansion into would be the Denver, Colorado metro area--where Whole Foods has a strong store-base, and where it has second corporate headquarters status by virtue of buying the home state Wild Oats Markets.

However, that's right where Sprouts is going--and the natural foods' retailer plans to open numerous new stores in the Denver metro region, and elsewhere in Colorado--in addition to those first two units which are set to open later this year.

Shoppers we've talked to seem to like this concept. They say they like the size of the Sprouts' stores--small and manageable yet full of natural and organic products--and like having a traditional supermarket located close to the stores' for their basic grocery buys.

The smaller store format also helps keeps overhead lower for Sprouts. There's less space to heat and cool, fewer employees are needed than in a superstore, and upfront costs are much lower for the natural foods' grocer. This last fact is especially true because most of Sprouts' new stores, especially in Texas and Colorado, are going into empty retail buildings, many of which are abandoned supermarkets. The grocer also builds new stores from the ground-up.

Since the building shell already exists, along with the plumbing and electrical wiring, the retailer just guts the buildings interior and creates a Sprouts Farmers' Market inside. It also remodels the exterior as needed, paints the building to its specifications and brand identity, and does some exterior landscaping around the grounds. This process not only is much cheaper than building a grocery store from the ground-up, it also takes about half the time. Further, because these buildings are empty--some which have been for some time--Sprouts often obtains rather favorable lease terms on them.

The Arizona natural food's retailer has plans to enter other states it's currently not in, along with Texas and Colorado. The market and store development focus for this year is on the new Texas and Colorado markets--along with opening new stores at home in Arizona and in Southern California.

Whole Foods Market, Inc. doesn't have a whole lot to worry about from a major competitive challenge standpoint from Sprouts'. Whole Foods' annual sales are currently around $6 billion, while Sprouts Farmers' Markets do about $300 million a year. However, the Sprouts' stores' in Southern California, Arizona and Texas already have converted a few Whole Foods' store shoppers to them, and because the natural foods' grocer is focusing on beating Whole Foods' everyday retail prices, its stores could continue to eat into sales in those areas where the two natural food's retailers have respective units near each other.

After all, we remember like it was yesterday (it was only about ten years ago in fact) when major supermarket chains like Safeway Stores, Inc. and Kroger said Whole Foods Market, Inc. was just a little niche natural foods retailer, and that they weren't concerned about what it was doing, or if its sales would ever affect there stores. Well, that's sure changed. Safeway's Lifestyle format is getting closer and closer to looking like a Whole Foods' store these days, and the grocer's fastest-growing store brand is its O' Organics organic products' brand, which did $300 million in gross sales in 2007.

And over at Kroger Co., it's CEO announced last year he planned to make the company's stores the number one seller of organic groceries to the American "masses" in the next few years. In that speech, he highlighted Whole Foods' Market, Inc. as having one of the strongest influences on shoppers in terms of the fast-growing demand for organic foods in the U.S. Many Kroger banner stores also are creeping closer to a "Whole Foods Market look," just like Safeway's Lifestyle format is.

So, today's Sprouts could very well grow into tomorrow's smaller format version of Whole Foods Market, just as it grew from a seedling to a healthy sprout in just the last 4-5 years. Meanwhile, Whole Foods' senior management should actually be glad Sprouts' is moving into the Texas and Colorado markets, building more stores in Arizona and Southern California, and plotting its next move towards its strategy of becoming a national natural foods' retailer in the U.S.

Sprouts' expansion is empirical proof to the argument Whole Foods' used to the U.S. Federal Court in challenging the FTC's contention that a Whole Foods'/Wild Oats merger would create a single company (Whole Foods) monopoly in the natural and organic foods retailing category.

Whole Foods' lawyers argued--and won even though at present the FTC is appealing the ruling for a third time--that not only would the natural and organic foods' retailing category remain competitive after the merger due to the fact new entrants like Sprouts and others will come along because they will see an opportunity as a result of the merger, but because food retailing has changed altogether (see Safeway and Kroger above), traditional supermarket operators will compete head-to-head with Whole Foods now and in the years to come.

We first made this anti-competitive as hogwash argument a few days after Whole Foods' and Wild Oats' announced the merger/acquisition in August, 2007. This was even before The FTC made its monopolistic, anti-competitive argument, and before Whole Foods' responded with its counter-argument.

What we knew then, and know now, is what Sprouts' senior management knows--along with what many of you reading this know--which is that the U.S. food and grocery retailing industry is so dynamic and segmented today not only will many natural products' retailers like Sprouts, Sunflower Farmers Market, also based in Arizona, and others jump into the competitive fray, but that supermarket operators like Safeway, H.E.B, Publix and dozens more have already entered into a form of retailing that competes with Whole Foods on many levels.

In fact, we go as far as saying that although not in the short run--but in the medium to long run--the Whole Foods/Wild Oats merger is actually going to create a more varied and stronger competitive natural and organic products retailing market than existed prior to the acquisition. In fact, it's already started to happen, just five months after Whole Foods began integrating Wild Oats into its operations.

For example, in addition to Sprouts' aggressive growth plan, Just last week, Canadian natural foods' chain Planet Organic acquired 5-store, Santa-Cruz, California-based New Leaf Community Markets, a popular small chain which has been in the Northern California coastal market for two decades.

Shortly before that, Planet Organic Health Corp., which is Canada's biggest natural products' retailer, purchased Mrs. Green's Natural Markets, the Scarsdale, New York-based natural foods' chain that operates 11 stores in New York, New Jersey and Connecticut. Look for Planet Organic to make additional, similar acquisitions in the U.S.--and sooner rather than later.

Further, the above-mentioned Sunflower Farmers Markets recently raised $30 million in investment capital and plans to grow the Arizona-based natural foods' chain by ten or more new stores a year for the next five years. The natural foods' retailer currently has 14 stores in Arizona, Colorado, New Mexico and Nevada. Seven new stores are set to open thus far this year, including the grocer's first two stores in Utah, which is a new market for Sunflower Farmers Market. The other five new stores announced thus far for this yearare all located in Colorado.

Meanwhile, unlike what we knew (and know) when we first wrote way back in August-September, 2007 that the Whole Foods'/Wild oats' deal would actually create more competition in the natural products' retailing category in the medium to longer term than stifle it.

And, unlike what Sprouts Farmers Market, Planet Organic Health Corp., Sunflower Farmers Markets and many other retailers know--based on their respective aggressive expansion plans--the FTC and many others in the industry still don't get. They continue to believe the Whole Foods' acquisition of Wild Oats Markets has created a monopolist that can erect barriers to entry and control retail pricing in the natural and organic products' retailing category.

They're wrong. Food retailing in the U.S. is far to dynamic, well-financed and niche-oriented to allow that to happen at this point in time. In fact, the competition is just heating up, despite the sluggish U.S. economy. Next time we will discuss the conventional supermarket chains that are creating competitive flames in natural and organic foods' retailing in the U.S.