Wednesday, May 21, 2008

Retail Memo: Whole Foods Getting Small (er) With Two New Stores in Northern California to Be Located in Vacant Supermarket Buildings

Santa Cruz's historic and famous Beach-Boardwalk turns the city of about 60,000 into a community many times that size from late spring to the end of summer when tourists from California and thorughout the U.S. flock to the seaside resort community to play, shop and eat.

Mega-supernatural foods retailer Whole Foods Market, Inc. is departing from its practice in recent years of building primarily big and super-big new stores in the 55,000 -to- 80,000 square foot range throughout the U.S.--and especially in California--in the coastal Northern California cities of Santa Cruz and Capitola, where it's currently developing smaller-footprint 32,000 square foot (Santa Cruz) and 23,800 square foot stores (Capitola).

The two stores also will be located in currently vacant, former supermarket buildings, something Whole Foods has done in the past but not often, as it prefers building stores from the ground up.

In fact, the Santa Cruz store site, which is going to be in an empty former Albertsons supermarket building at 911 Soquel Avenue in the Eastside shopping center, was only going to be 24,000 square feet, about the same size as the one in nearby Capitola.. This week however Whole Foods was able to acquire two buildings next to the empty supermarket, allowing it to expand what will be the city's future Whole Foods store by 8,000 square feet for a total of 32,000 square feet.

Locating the two new stores in the vacant buildings makes good sense because vacant land is near impossible to find in the two coastal cities, and when it's available the cost is out of this world. Additionally, the two buildings--one a former Albertsons store as mentioned in Santa Cruz and the Capitola site a former Ralph's supermarket--have been vacant for sometime, therefore Whole Foods likely acquired them for a reasonable cost. Reasonable for the region that is.

The Santa Cruz and Capitola units will be full Whole Foods Market stores rather than versions of its new Whole Foods Express format, according to a Whole Foods executive in Northern California who asked we not name them.

The first Whole Foods Express store is set to open in a former Wild Oats store in Boulder, Colorado soon. The Whole Foods Express format is about 15,000 -to- 20,000 square feet, will feature a wide-variety of fresh, prepared foods, and a limited assortment of natural, organic and specialty foods and products.

At under 24,000 square feet, the Capitola Whole Foods store will be even smaller than the Santa Cruz store. That planned Whole Foods' store is located on 41rst Avenue in the coastal city, which is just a few miles from Santa Cruz.

Smaller stores aren't a new thing for Whole Foods, just a departure from its practice over the last 5 -to- 10 years of primarily building stores from the ground up in the 55,000 up to 80,000 square foot range.

Locating stores in empty retail buildings also is the exception rather than the norm for Whole Foods Market, Inc. The retailer generally likes to built brand new stores, but has renovated empty buildings before, especially in places like Northern California where vacant land can be hard to find and premium-priced.

For example, last year Whole Foods opened its European Market Hall-style store in downtown Oakland in Northern California's San Francisco Bay Area. That store is in a former automobile dealership which the grocer completely demolished and renovated into the store which is designed similar to a European food hall.

Whole Foods also has a number of smaller stores in Northern California, the majority of which were built and opened prior to the last few years however. Those stores include it's first and currently only store in the University city of Berkeley (a second, bigger store is planned for Berkeley as well), it's Los Gatos store near Santa Cruz, and its sales per-square-foot-busting store in the Marin County city of Mill Valley, along with a few others.

The Mill Valley Whole Foods store, which is where the grocer's co-president Walter Robb started with the supernatural foods retailer as a store manager in the early 1990's when he helped design it and opened it, has only 15,000 square feet of selling space but averages in the neighborhood of $600,000 a week in gross sales.

Crews from Northern California's John Sutti & Associates, a retail design and building firm which has built and renovated most of Whole Foods' stores in Northern California over the years, are currently demolishing the Santa Cruz store site in the former Albertsons' building and preparing it for renovation, according to our Whole Foods' source in Northern California.

The Santa Cruz and Capitola stores will be the first Whole Foods markets in both cities. The grocer has a fairly new store in Monterey, but that city is about a 45-minute drive from Santa Cruz and Capitola. It also has another store in Los Gatos, which is about 30 minutes away depending on traffic.

Both cities have prime natural foods retail consumer demographics--higher than average post high school educational levels, higher than average income, a large "foodie" and health/organic foods'-eating population, a large counter culture population--and Santa Cruz has a number of independent natural foods stores that all do very well.

For example, Santa Cruz-based multi-store New Leaf Community Markets currently has two stores in Santa Cruz and is in the process of building a brand new 17,800 square foot natural foods store on the city's westside. New Leaf has to a large degree "owned" natural foods' and products' retailing in the city of Santa Cruz for the three decades or so it's had it's stores in the city of about 60,000.

Whole Foods' opening a store in Santa Cruz is going to put serious competitive pressure on New Leaf, even though it's building its own new store and has two others in it's hometown city.

Additionally, New Leaf was supposed to be acquired by Canada's Planet Organic, Inc. However, a couple weeks ago Planet Organic backed out of the deal because it said it decided not to float a planned $15 million stock offering, part of which was to be used to buy New Leaf, because of poor market conditions. [You can read our May 5 piece on the Planet Organic aborted buyout of New Leaf Community Markets here.]

New Leaf had earlier indicated to Natural~Specialty Foods Memo and others it needed the cash from the acquisition/merger (New Leaf's owners were still going to run the operation post-acquisition) to finish building the new Santa Cruz store on the city's westside and to complete another new store its' currently building in nearby Half Moon Bay.

New Leaf's owners have said they are still well enough financed to complete and open the new stores, and to operate fully. However, since the grocer did say when it jointly-announced the deal with Planet Organic executives at a press conference in Santa Cruz the cash from the acquisition was needed for the new store expansion and other purposes, there is some skepticism as to whether or not New Leaf will be able to move forward completely without finding either new financing on its own or another suitor, which they likely should be able to do in our analysis.

Santa Cruz is the county seat of Santa Cruz county, which has about 300,000 residents. Capitola, an artsy and tourist-oriented city of about 15,000 located just a short drive from Santa Cruz, also is in Santa Cruz County.

The economies of both cities are heavily dependent on tourism. Santa Cruz and Capitola draw tens of thousands of visitors each week in the summer months, some for weekends, others for longer stays.

Santa Cruz is home to its historic and famous Beach-Boardwalk, a beachside playland featuring various rides, attractions, entertainment venues, food stalls and restaurants, and other attractions for kids and kids at heart. The Santa Cruz Beach-Boardwalk is one of California's top tourist destinations, drawing not only Californians but visitors from throughout the U.S.

The cities are only a short drive from the Bay Area's Silicon Valley region, and many people in San Jose and the surrounding cities have weekend homes in the Santa Cruz area, as do people from California's Central Valley where summer temperatures often top 100 degrees. For these folks, Santa Cruz is a place to get away to for cooler weather and relaxation on the weekends.

The fact Capitola is a major tourist destination and weekend home retreat should allow Whole Foods to have more than enough customers for it's new store even though the city's population is only about 15,000.

Santa Cruz also has a campus of the University of California, which is a major employer in the city and of people who live in Capitola and other nearby cities. County government also is a major employer in Santa Cruz since it's the county seat. Health care is a fast-growing industry in the town as well, especially since there are many small communities nearby without their own hospitals and major medical offices.

Lastly, food and wine industry and related businesses and industries plays a big part in the Santa Cruz and Capitola economies. Whole Foods fits in well in this regard. Both cities are home to many restaurants, ranging from cutting-edge California cuisine and organic foods-only operations, to ethnic eateries who's menus span the globe.

The area also is home to numerous organic farming and food production companies, as it's nearby America's prime growing region for fresh market vegetables, the Monterey and Salinas Valley region. The region's farmers are leaders in the U.S. organic foods industry as well.

There also are numerous specialty, natural/organic and artisan food producers in the region, which isn't surprising considering the organic farming industry and the "foodie" and wine culture which permeates the area, not to mention the prime soil inland from the coast.

The University of California at Santa Cruz also has a well-respected program in sustainable agriculture, which not only serves as an educational and research hub for the industries but also has resulted in many people staying in the area after graduating from the program because of it's coastal beauty and the numerous opportunities in sustainable farming and food production.

With the store in Santa and the one in Capitola both opening early next year, Whole Foods is going to make a major impact in the two cities and surrounding area.

With it's commitment to local foods selling, the two branches of the United State's number one natural foods' store retailer will open new market opportunities for many of the area's smaller organic and sustainable farmers and food producers.

The stores also will offer the respective communities' large base of natural and organic food shoppers more product variety compared to what's currently available to them in the area's natural foods stores and supermarkets.

Whole Foods is making a major push in Northern California, and the stores in Santa Cruz and Capitola are part of that new store growth initiative.

Whole Foods currently has 24 stores in Northern California. All but two--Sacramento and Fresno--of those stores are located in the Bay Area or the Coastal region near the Bay Area.

The supernatural food retailer currently has 20 new stores in various stages of development in California. Out of those 20 new stores in development, 13 are in Northern California. All of those 13 are set to be opened by the end of 2009.

Further, Whole Foods announced earlier this year it would double the number of stores in Northern California, from its current 24 to about 50 in the next four years. The region is not only one of the grocer's top revenue producing regions, it's one of it's top growth target markets as well.

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