Wednesday, July 30, 2008

Green Retailing Memo: July Big Month For Plastic Bag Ban and Fee Legislation in the U.S.; Seattle, Los Angeles Other Cities Pass New Laws

The city of Seattle, Washington this week passed legislation that will impose a 20-cent per-bag fee on consumers who request single-use plastic carrier bags at the city's supermarkets, drug stores and convenience stores.

The new law was passed by an overwhelming 6-1 vote by the Seattle City Council.

The new per-bag fee on single-use plastic carrier bags will go into effect in January, 2009.

In addition to passing the 20-cent plastic bag charge, the city council voted 7-0 to ban certain types of styrofoam food containers.

That new legislation will be implemented in two-parts: A ban on styrofoam food containers currently used at take-out restaurants will take effect in January, 2009, at the same time the bag fee at Seattle's supermarkets, drug and convenience stores is implemented.

Phase-two of the foam container ban eliminates the use by supermarkets and other food retailers of foam trays used for fresh, raw meats and seafood displayed for sale. It will go into effect in July, 2010. The Seattle City Council said it believed that would give food retailers enough time to find an alternative to the foam trays for meat and seafood merchandising.

The Seattle legislation imposing the 20-cent per-bag consumer fee on single-use plastic carrier bags at supermarkets, drug and convenience stores, combined with the ban on foam containers, is the most comprehensive legislation enacted at the same time we've observed to date in a U.S. city or county.

Retailers will still be permitted to use paper grocery sacks to packaged shoppers' purchases.

Bag ban and fee legislation picking up steam throughout U.S.

The Seattle plastic bag fee legislation also comes at a time when single-use plastic carrier bag ban and fee legislation is picking up steam in cities and counties throughout the U.S.

On July 1, the city of Manhattan Beach in Southern California enacted a total ban on the use of non-reusable plastic grocery bags for stores of all retail formats in the city.

Under the Manhattan Beach plastic grocery bag ban legislation, grocery stores, food vendors, pharmacies and city facilities have six months to phase out the use of single-use plastic carrier bags in their stores in the city.; all other retail establishments have a year to do the same.

The Manhattan Beach single-use plastic carrier bag law is the first we've found in the U.S. that bans retailers of all formats--ranging from supermarkets, drug and convenience stores, to discounters and department stores-from using the free, single-use carrier bags.

On July 22, the Los Angeles City Council passed legislation banning the use of single-use plastic carrier bags in grocery and other retail stores in the city by 2010--but only if the California State Assembly fails to pass pending legislation that would would impose a 25-cent per single-use plastic carrier bag fee on shoppers who request the bags in a California supermarket.

The Los Angeles plastic bag ban was proposed by Councilman Ed Reyes, who called plastic bags "the graffiti of the L.A. River," (his way of describing plastic bag litter) which passes through his district.

The Los Angeles plastic bag ban law is designed to encourage California legislators to vote for a proposed California State Assembly Bill, AB 2058, (currently being debated in the Appropriations Committee) that if passed would place 25-cent per-bag fee on all single-use plastic bags requested by consumers in all California supermarkets. The consumers would pay the 25-cent per-bag fee at the point-of-sale.

Commenting on the legislation, Los Angeles City Councilman Alarcon says the city council would eventually pass a law regulating plastic bags. But for now, the council's vote is designed to persuade state lawmakers to impose a fee on the bags

"If they (state of California) don't do [a fee], then we do a ban," said Alarcon, who represents the northeast San Fernando Valley. "So yes, at some point there would be an ordinance."

The city of Los Angeles estimates that Los Angeles consumers use 2.3 billion plastic bags each year. According to the state of California, only about 5% of plastic bags are recycled statewide.

In May, another Southern California city, the coastal community of Malibu, passed a law banning the use of single-use plastic carrier bags in the city known among other things as the home of numerous Hollywood celebrities.

The law applies to all retailers (just like the Manhattan Beach legislation), including grocery stores, restaurants, pharmacies and city facilities. These Malibu retailers have about six months (from May) to comply with the plastic bag ban law, or face a fine of up to $1,000. Smaller vendors will have up to a year, as is the case with the Manhattan Beach law.

In Northern California, The San Francisco Bay Area city of Palo Alto, home to Stanford University, passed a law earlier this year that places a per-bag fee on each single-use plastic carrier bag requested by shoppers in the city's supermarkets and pharmacies.

Palo Alto is the third San Francisco Bay Area city to enact either outright bag ban legislation or a per-bag fee law.

In June of last year, San Francisco became the first city in the U.S. to enact a ban on the use of the single-use plastic grocery bags in supermarkets and drug stores. The San Francisco law applies to stores that do $2 million or more in annual sales. It allows the city's convenience stores, numerous corner groceries and all other format retailers to continue using the single-use plastic carrier bags.

Nearby Oakland last year also passed a bag ban similar to San Francisco's law. However, a plastics industry trade group chose to challenge Oakland's law in court. Earlier this year a court ruled in the trade group's favor, preventing Oakland from enacting the legislation. The Oakland City Council is considering whether and how to rewrite a single-use plastic carrier bag law that will hold up in court.

The plastics industry, through a couple trade organizations, has said it plans to challenge the Manhattan Beach and Malibu bag bans as it did Oakland's No trade groups have yet challenged the San Francisco plastic bag ban law, which has been in effect for over a year now.

A few other U.S. cities have passed either bag ban of fee legislation since last year. Many more are currently debating and considering such legislation.

With the cities described above enacting bag bans or fees all in the last few months, we're seeing increased emphasis being put on the issue throughout the U.S. This is especially the case in California because the proposed 25-cent per single-use plastic carrier bag legislation currently being debated in the State Assembly's Appropriations Committee is creating more attention to the issue in cities and counties throughout the state.

Global bag ban and fee legislation

The fact that counties like Australia, China, Ireland, and many nations in Asia and Africa have either banned the bags outright or imposed a fee on them also is serving to galvanize attention to the issue in the U.S.

Additionally, the issue is super hot in Europe, where the European Union is discussing a nationwide ban or fee scheme, and where individual nation's like the United Kingdom have said unless that country's retailers drastically reduce the number of single-use plastic carrier bags they use by the end of this year, it will pass legislation early next year either banning the bags or imposing a fee on them.

Numerous European cities in countries like France and Germany also have either inacted bag bans or fee laws.

Individual retailers in the UK like Marks & Spencer and a couple others have already announced plans to charge customers for the single-use plastic carrier bags in their stores. The UK's Co-operative Group grocery chain says it's in the process of eliminating the single-use plastic carrier bags and is testing 100% compostable carrier bags in some of its stores as a possible alternative.

Whole Foods Market, Inc. stopped offering single-use plastic carrier bags completely in April in all of its stores in the U.S., Canada and the UK.

We expect to see single-use plastic carrier bag ban and fee legislation continue to pick up in the U.S., as it is in Europe and elsewhere, for the rest of this year. It's becoming the primary environmental focus in terms of retail impact among scores of city councils and county governmental bodies throughout the U.S. It's at these local levels in the U.S. where we expect to see most of the new bag ban and fee legislation being implmented, rather than on a statewide basis.

Tuesday, July 29, 2008

Retail Memo: U.S. Federal Appeals Court Panel Orders Lower Court to Review Last Year's Decision to Approve of Whole Foods' Acquisition of Wild Oats

Natural~Specialty Foods Memo has been writing extensively about the U.S. Federal Trade Commission's (FTC) ongoing determination since last year to get a U.S. federal appeals court to overturn a lower court's ruling that gave Whole Foods Market, Inc. the green light to acquire and integrate Wild Oats Markets into its corporate culture and operations.

The FTC appealed last year's lower-court ruling once before. The federal appeals court upheld the lower court's ruling at that time. However, the FTC filed a second appeal, arguing as it has all along that the acquisition-merger of Wild Oats gives Whole Foods a monopolistic position in the supernatural (especially organic products) food retailing segment.

Natural~Specialty Foods Memo has disagreed with the FTC's argument all along, and have sighted extensive examples in various stories and analysis of how growing natural foods retail chains like Sunflower Farmers Market, Sprouts Farmers Market, Trader Joe's and numerous others, along with national and regional supermarket chains like Safeway (Lifestyle format), Publix, Wegmans, H.E.B., United Supermarkets (Market Street format), Raleys, SuperValu, Inc. (Bristol Farms and other formats) and numerous others are providing serious competition to Whole Foods in the upscale natural, specialty and fresh foods retailing segment in the U.S. We could mention dozens more regional chains and multi-store independents that are doing the same.

Today, a three-judge federal appeals court panel voted 2-1 in favor of sending the ruling that allowed Whole Foods to acquire Wild Oats back to the lower court for further consideration, which is not completely what the FTC wanted, (they wanted the lower-court decision reversed) but allows the regulatory agency to once again argue its case against the merger.

The decision also doesn't require Whole Foods to stop the integration of Wild Oats' stores into its operations and corporate culture, nor is it an overturning of the deal.

Below is a report (in italics) by the Associated Press on the federal appeals court panel's decision today to send the decision back to the lower court for review. Following the Associated Press report is an analysis of the appeal court panel's decision today, along with its ongoing category monopoly argument.

WASHINGTON (AP), July 29, 2008 -- Whole Foods' long-running effort to acquire its rival organic-supermarket chain Wild Oats isn't completely out of the legal woods yet.

A three-judge federal appeals court panel on Tuesday overturned a lower court ruling from last year that allowed Whole Foods Market Inc (WFMI, Fortune 500). to acquire Boulder, Colo.-based Wild Oats Markets Inc.

The 2-1 ruling sends the case back to the lower court for further consideration, but doesn't halt Austin, Texas-based Whole Foods' integration of the Wild Oats chain or require that the deal be undone.

However, if the district court ultimately rules in favor of the Federal Trade Commission (FTC), which sought last year to block the deal, it could disrupt efforts to combine the companies.

Whole Foods spokeswoman Kate Lowery said the company is disappointed with the decision and is "evaluating its legal options," which include asking all 10 judges on the appeals court to review the case.

Jeffrey Schmidt, director of the FTC's Bureau of Competition, said the agency was pleased by the ruling.

Competition conflict

The FTC argues that the transaction would stifle competition by combining the two leading organic-supermarket chains, which could result in higher prices.

Whole Foods contends that competition from conventional supermarkets such as Safeway Inc. (SWY, Fortune 500) and The Kroger Co. (KR, Fortune 500) - which are selling increasing amounts of organic food - would keep prices low.

The agency sought a preliminary injunction to temporarily block the deal so it could hold its own administrative proceedings to determine whether the transaction violated antitrust laws.

But Judge Paul Friedman of the U.S. District Court for the District of Columbia sided with Whole Foods in a ruling last August, and the companies then closed the acquisition.

FTC pushes its case

Regulators usually throw in the towel if they fail to secure a preliminary injunction, due to the difficulty of unwinding a deal once it's complete. What makes the Whole Foods case unusual is that the FTC has pressed its case, antitrust experts say.

FTC officials complain that the burden of proof imposed by Friedman was too high.

The appeals court ruled that the district court hadn't given enough weight to the FTC's evidence that conventional supermarkets aren't close competitors to the organic chains and therefore won't keep their prices low.

In order to secure the preliminary injunction, the FTC only needs to show that it likely would prove its case, the appeals court said.

The lower court "underestimated the FTC's likelihood of success," Judge Janice Rogers Brown wrote for the Court of Appeals for the D.C. Circuit.

Judge David Tatel, in a concurring opinion, said the case is "unique" because the lower court can no longer grant a preliminary injunction now that the two companies are combining operations.

Instead, the district court could halt further integration of the companies or take similar steps, Tatel wrote. But he and Rogers also wrote that the lower court should take into account that the acquisition has been closed.

Judge Brett Kavanaugh, in dissent, wrote that "the FTC's case is weak and seems a relic of a bygone era when antitrust law was divorced from basic economic principles."

Future transactions at stake

Veronica Kayne, a former FTC antitrust official and now an attorney at Haynes & Boone in Washington, said the appeals court's decision could make it easier for the government to obtain preliminary injunctions blocking future transactions.

Whole Foods, which operated 194 stores before the deal, purchased the 110-store Wild Oats for $565 million.

A lawyer for Whole Foods said in April that the company had already sold 35 of the Wild Oats stores and closed 12 more. Another third of the remaining Wild Oats stores have been converted to Whole Foods outlets.

Natural~Specialty Foods Memo Analysis

While today's 2-1 decision by the federal appeals court panel doesn't reverse the acquisition-merger nor do anything to stop the continued integration of the former Wild Oats stores into Whole Foods' corporate culture and operations, it does place somewhat of a legal cloud over the issue for Whole Foods.

On the one hand, the supernatural foods retailer might be hesitant to continue to spend significant sums of money and energy in its program of converting the remaining Wild Oats natural foods markets into the Whole Foods banner and merchandising program, knowing the possibility exists for the lower-court to ultimately reverse its original decision of approving the merger, although we doubt that will happen.

On the other hand, an argument can be made for Whole Foods to proceed even faster in integrating the Wild Oats stores and re-bannering them as Whole Foods since is our analysis the process has really already gone too far to make any reversal by the lower court either fair or practical.

Additionally, the more the integration process has moved forward by the time the lower court takes up the appeals court panel-ordered reconsideration, the more logical it will be for an argument that the integration has gone too far to reverse the previous decision to be made.

Today's decision is odd in that it prevents the lower court from completely reversing the merger. Howver it allows room for the court if it decides to to halt further integration of the Wild Oats stores into Whole Foods, which we assume if that is the decision means Whole Foods still owns Wild Oats but would have to sell the remaining non-integrated stores that exist at the time of that hypothetical court decision.

This would seem to argue for rapid integration of the remaining stores. Although, once could reasonably argue "all" the stores are already integrated since they are and have been operated by Whole Foods for sometime. After all, the current name on a store doesn't define "integrated." We don't expect the lower court to like what the appeals court panel has given it either way.

The appeals court panel has handed the lower court a can of all-natural worms in how it defined the case. We have a feeling the lower court may just decide to cut bait rather than take much court time to go fishing.

As we've argued all along, the FTC has no concept in our analysis of the current dynamic state of natural and organic products retailing in the U.S. If it did, it would drop its Whole Foods focus, which is a waste of money and valuable lawyer resources, unless of course it has other reasons for focusing on it so extensively, and get on with more important issues such as taking a look at the competitive nature of the oil and energy industries in the U.S.

It also might ask itself why if Whole Foods is in a monopolistic position thanks to its acquisition of Wild Oats, its stock price hasn't been doing so well of late?

The FTC also should ask itself if Whole Foods is such a dominant player now in natural and organic products retailing, why it recently had to come out with its "Real Deal" value pricing program?

We can answer that for the FTC. It's simple: not only isn't Whole Foods in a monopolistic position, it's actually struggling somewhat because of the poor U.S. economy, and struggling even more so in places like California where the economy is among the worse in the nation. Many consumers are trading down completely or buying organic products at discounters like Wal-Mart, Trader Joe's, Costco, Sprouts Farmers Market, Sunflower Farmers Market and others.

Does any reasonable and analytical-minded person really think Whole Foods Market, Inc. would be lowering prices--and its margins in some instances--if it were in a monopolistic position thanks to the Wild Oats deal? Doing so is the antithesis of what the FTC said Whole Foods would do in fact in its original argument. In that argument to the court the FTC said the acquisition of Wild oats would allow Whole Foods market, Inc. to raise prices bcause of its monopoly status.

Another observable fact of U.S. food retailing in 2008 that demonstrates the folly of the FTC's continued attempts to get the Whole Foods-Wild Oats deal overturned is the simple fact the "supernatural" food retailing category is today meaningless, even though we use it for illustrative purposes.

Major supermarket retailers like Safeway Stores, Inc., Kroger Co. and SuperValu, Inc .(the top three supermarket chains in the U.S.) have and continue to blur this category distinction by moving stronger and deeper into the sales of premium fresh, natural and organic products, which are Whole Foods' primary positions.

Add to these three Wal-Mart, Costco, Super Target, Trader Joe's and the many regional operators like H.E.B. (Texas) Wegmans (east cost), Raley's (California), Publix (Florida),, Fresh Market (southern U.S.) and numerous others (and don't forget the numerous multi and single- store independents), along with the emerging natural and organic foods category natural foods retailers Sprouts Farmers Market and Sunflower Farmers Market, and you get a picture of a highly competitive market in the natural and organic food and grocery categories in the U.S.

In fact, in some regional markets like Texas, California, Arizona, New York state, Pennsylvania and numerous others, Whole Foods is in danger of losing market share to major national and regional players like H.E.B, United Supermarkets (Market Street format) Sprouts, Sunflower Farmers Market in Texas; Wegmans and a number of others in New York and Pennsylvania; Publix in Florida (which now has its own organic foods format), Wal-Mart, Sprouts, Sunflower, Trader Joe's and Tesco's Fresh & Easy in Arizona; and retailers too numerous to mention in California.

We will be closely following today's decision by the federal appeals court panel to return the decision back to the lower court. Our analysis is that we would be very surprised if the lower court changes it original decision. However, courts often do surprise.

The fact is however that it's now been a year since Whole Foods and Wild Oats merged. In that year we've seen nothing to indicate a monopoly position in natural and organic foods retailing for the combined Whole Foods-Wild Oats.

What we have seen in that year though is increasing competition from all types formats being put on Whole Foods.

This increased competition includes the bold moves by Sunflower Farmers Market and Sprouts Farmers Market of opening the first of what will be many for both chains of their respective natural foods stores in Whole Foods' home market of Texas, the continuation of H.E.B's opening of 100,000 square foot upscale supermarkets in Texas that rival what Whole Foods is doing in the natural and organics categories, Wegmans doing the same in New York, and similar developments by both supermarket chains and independents and natural foods retailers throughout most U.S. markets.

In fact, rather than being in a position to solidify some mythic category monopolistic position, it's our analysis Whole Foods finds itself in a position of having to defend it current position as the leading natural and organic foods retailer nationally in the U.S.

That's a far cry from the FTC's argument. It's also far more accurate.

Friday, July 25, 2008

Retail Field Report Memo: Specialty Retailer Cost Plus World Market Is At A Serious Crossroads: We Offer Analysis and Suggestions For Moving Forward

On June 9, the import housewares and gift retail chain Pier 1 Imports made an offer to acquire specialty foods, wine and imported housewares, furniture and gift retailer Cost Plus World Market in an all-stock acquisition deal, offering Cost Plus' board of directors $4 per-share of Pier 1 Imports' stock for the company.

Under the terms of the proposal, Pier 1 Imports, Inc. would have issued 0.6000 shares of its common stock for each share of Cost Plus common stock. Pier 1 Imports currently operates 1,034 stores in the U.S.

Based on the closing stock share prices of Pier 1 Imports and Cost Plus on June 6, 2008, three days before the offer was made, the proposed exchange ratio of the deal implied a value of $4.00 for each share of Cost Plus World Market common stock. The offer represented a premium of approximately 31% over the Cost Plus closing stock share price on June 6, 2008, and a premium of approximately 34% over the average closing price of Cost Plus shares for the last 30 trading days.

The total all-stock acquisition price of the Pier 1 Imports proposal for Cost Plus was about $88 million.

Here's what Pier 1 Imports' CEO Alex W. Smith said on June 9 when making the offer:

"We believe that the combination of Pier 1 Imports and Cost Plus is extremely compelling and would create significant value for the stakeholders of both companies.

"Given our similar customer bases and broadly similar business models, but distinct market positions, we believe Cost Plus is an excellent fit with Pier 1 Imports. We are confident that combining our two companies would create a stronger and more competitive company that is better positioned for future growth.

"Furthermore, we believe the combination will result in improvements in Cost Plus' operating margins and significant synergies, anticipated to come from organizational efficiencies in the supply chain management, shared services, store operations and other general administrative costs. Cost Plus shareholders will enjoy significant benefits from the combination, including improved operational liquidity of the combined company as well as a more active trading market for their shares."

Sounds good so far.

About a week after Pier 1 Imports sent a letter to the retail chain's board of directors offering to acquire Cost Plus in the all stock $88 million buy, Cost Plus World Market told Pier 1 Imports it wasn't interested in its offer, saying essentially not only was the offer too low (not to mention there being zero cash involved) but that it made very little business sense for Cost Plus and its shareholders to allow Pier 1 to acquire the retail chain.

Can't blame Cost Plus for saying no thanks; it was a desperation offer by Pier 1 Imports, which was searching for a way to jump start its sales and expand its offering by being able to get into the food and beverage categories by virtue of that fact both categories contribute the most in sales overall to Cost Plus' sales top line and profits bottom line. Of course, right now Cost Plus World Market is a desperation stock. Therefore we can't fault Pier 1 Imports for making the offer it did.

Pier 1 Imports apparently agreed with our analysis. Just a little over a week after the Cost Plus Board of Directors rejected the offer, on June 25, Pier 1 withdrew its all-stock $88 million acquisition offer saying in a prepared statement that the change of plans was due to an inability to acquire a majority interest in Cost Plus at a price that would make sense for its shareholders.

The primary reason for Pier 1 doing so though was that after it announced it intention to acquire Cost Plus it's own fledgling stock drop even further, thereby making the cost of even the original $88 million acquisition offer prohibitive. Pier 1 Imports also announced a substantial sales loss about that same time, which combined with its sinking stock put it in no position to acquire Cost Plus or any other retailer for that matter.

Both Pier 1 Imports, which sells only durable goods, and Cost Plus, which sells consumables like domestic and imported specialty and natural foods and beverages, wines and craft beers, confections and premium coffees, along with durables like furniture, housewares and gift items, are performing poorly, reporting losses in their respective most recent quarters.

We agree with Cost Plus World Market's decision not to be acquired by Pier 1. Why? Although Cost Plus is performing poorly, its due primarily by the durable goods side of the business, which is about 50% of the retailer's total sales, consumables making about approximately the other half.

On the other hand, Pier 1 Imports sells only durable goods such as furniture, household items, gifts and other similar items, the majority of which are imported.

The poor state of the U.S. economy has consumers cutting way back on purchases of durable goods like those Pier 1 sells (100%) and Cost Plus (about 50% of inventory) sells, which is the primary reason sales and profits are down so much for both retailers.

In addition, the sad state of the U.S. dollar is making the imported goods both retailers buy to sell in there stores far more expensive, which combined with the consumer retreat on durable goods purchasing is a perfect store of bad sales news for both Pier 1 Imports and Cost Plus.

However, the silver lining for Cost Plus is that because specialty-natural foods, beverages, wines and craft beers, items consumers will still by in a down economy even though in reduced amounts, comprise about 50% of its revenues, along with being its top sales category, it has the potential to adjust its merchandising practices---devoting more store square feet to consumables and taking away some square feet say from furniture for example--as a way to increase sales and potentially profits.

On the other hand, since Pier 1 has no current system or supply chain for food and beverage merchandising--distribution centers, buying staff and the like--it's pretty much stuck in the durable goods-only retailing business, which means in our analysis it faces a far greater chance of filing for bankruptcy if its sales and stock share price continues to drop, than does Cost Plus, which has the flexibility to focus more on consumables as a way to ride out the poor U.S. economy.

It is important to note though that unless Cost Plus makes some serious changes that improve its sales and cash-flow, it will likely face a serious liquidity crunch, as its sales and profits continue to drop along with its stock share price. Our analysis is that Cost-Plus World Market is in a better position (if it makes changes) than Pier 1 Imports in the short and medium run because of its consumables category to improve its position considerably. However, the fact is thus far it has failed to do so.

Conversely, Pier 1 is currently in a better liquidity position than Cost Plus. However, with its sole focus on durable goods, our analysis is that the retailer, unlike Cost Plus, is all things being equal, in a worse short -to- medium range position due to its merchandising reliance on only the durables. (Note: Pier 1 Imports announced last week it will close about 30 -to- 40 of its most underperforming stores, out of the 1,034 stores it operates in the U.S.)

In fact, it's our analysis Cost Plus should be putting a far greater focus on consumables in its stores right now than it is doing. This should include taking some of the space devoted to merchandising furniture and gifts in its nearly 300 stores across the U.S. and giving that space over to more consumables like discounted natural and specialty foods and related products.

The retailer already has been growing its World Market store brand of natural and gourmet foods, and has started to promote those items, along with branded specialty food and beverage items, more aggressively in its weekly ad circulars and in-store. Even in down economies consumers will buy affordable indulgences like natural and gourmet foods, especially if priced right and merchandised well.

What Cost Plus calls the "gourmet" category--its offerings of natural, specialty and related foods--has historically been a good one for the retailer. Cost Plus generally takes about a 43% gross margin on all the branded specialty and natural foods items it sells in its stores and takes a gross margin of about 50% on its store brand items.

Of course, it takes less margin on some items, but those tend to be the highest volume products such as the Knorr brand of specialty foods items and similar well-known brands. The same with its store brands--fast moving skus can be priced to return a lower than 50% gross margin.

Cost-Plus also has historically been very aggressive in getting deals from suppliers. In fact, branded specialty food and beverage suppliers that sell to Cost-Plus tell Natural~Specialty Foods Memo that Cost-Plus buyers have been negotiating for even deeper deals with vendors because they know sales by specialty foods companies are down significantly in the current poor U.S. economy.

In our analysis, it only makes sense for Cost-Plus to expand the percentage of square feet it devotes to specialty-natural foods, beverages and wines in its stores, at least for the next couple years, until their is improvement in the U.S. economy.

Additionally, with its buying power in the categories, we suggest the retailer look at coming up with some creative value-based specialty food and beverage marketing and merchandising schemes designed to position it as the "value leader" in specialty foods retailing, which ironically was a reputation the retailer had many years ago before numerous new retailers selling specialty foods came on the scene.

Natural~Specialty Foods Memo recently asked a team member, who has 20 years food and grocery retailing and category management and merchandising experience, to visit a Cost-Plus World Market store and do a field analysis of the consumables category--specialty-natural foods and beverages, wines, craft beers and related items--and offer an analysis of what the field researcher found, also including suggestions regarding the category in the stores.

The store where the field report was conducted in one of the retailer's newest, and thus has one of the larger consumables sections, stores located in the Southern California city of El Segundo.

Below (in italics) is the Cost Plus store field report by the member of the Natural~Specialty Foods Memo team:

Cost Plus World Market "One World. One Store."

El Segundo, California store: Open about 1 year.

Overall the store is very difficult to maneuver. The layouts and planograms seem odd and the aisles feel cluttered. There isn't a straight line to anything. You pretty much have to zig-zag around the store.

I believe the store needs better aisle signs too. Other than just basic overhead signs for the different departments that says "Food", you really don't know what section you are in. Maybe this is their intention, forcing you to wander up and down each aisle but to me it's frustrating.

I also feel they can improve on the shelf price tags, there are so many different sku's on the shelf that it's very difficult to match the price to the product. This is especially true on the products that don't look like they have a permanent location. Sometimes they have priced the products individually, sometimes they have 1 small price tag shown on the outside of the displayable case, sometimes there is a sign reflecting the price but the worst is sometimes there is no price anywhere at all. When there is no price at all, that's when I believe most people just put the item down and pass on purchasing it all together, which is a lost sale.

I think Cost Plus could also benefit from doing some more cross merchandising. They do it well with wine by stacking it in other departments, and they also have wine bags in the wine department, but I think they could do it with a lot more categories...

Suggested Cross-Merchandising Examples:
Coffee and Tea (with mugs and tea cups)
Small food components (with gift basket, clear wrap, bows, etc)

I used to think of Cost Plus as a place to go to for unique imported items, from rugs from India to imported biscuits from the UK . Now, it appears they are going more mainstream because they have quite a bit of domestic products, such as Sourdough Pretzels and Chewy Caramels. But the message they are sending to the public is we are selling 'Gourmet Foods.' Even in their advertising flyer the say "Discover World Market Gourmet" and the tag line is : " When you see our name on any of our gourmet offerings you can count on three things, great taste, superior quality and incredible value."

I suppose that advertising lends itself to a even bigger discussion, and that's, "What's Gourmet" anymore?" I think the word "gourmet" may have been dumbed down or let's say has gone mainstream because anything and everything is called gourmet. I think all the food categories are being crossed these days, so who can really tell the difference between gourmet, speciality, natural, ethnic, etc.

I suppose I was confused because they did have everything from natural, imports, organic, and run of the mill products--and dare I say, they also had "gourmet." Even their own private label runs the gambit. Some of it was Natural (Tortilla Chips), Imported (Extra Virgin Olive Oil), Run of the Mill (Sourdough Pretzel Nuggets), and "Gourmet" (Legend BBQ Sauces and Brix chocolates for example).

Store Brands-Private Label

I really like their World Market store brand label and their packaging, but the range is a little odd. I feel they were heavy in certain categories but completely ignored others. For example..They have a nice range of snacks (i.e. nuts and chips but no salsa, in private label).

They also have huge amount of sku's in spices and Extra Virgin Olive Oil - Organic and regular (but no private label pasta). They also had a nice range of Chocolate Bars with some unique flavors such as pomegranate. Again, all their private label products were either natural and/or organic (most of the chips for example).

Pricing: The pricing on the store brand (World Market brand) pricing was all over the place. Some items seemed extremely expensive (a small little tub of private label M&M type candy for 6.99) but other items seemed very much in line (private label 3 oz candy bars 1.99 to 2.99). So there didn't seem to be any consistency.

There's that word ...consistency. There didn't seem to appear to be any consistency in the way they operating in the consumables categories. That goes from the way they are merchandising, pricing and ranging.

I think Cost Plus as it is currently is a great treasure hunt type store, but not a store where you go frequently because it's just not convenient or easy. If they want to do food and beverages better, I think they need to figure out a way to make it a destination point.

Cost Plus used to be a destination point for "imports" but I believe they have gotten somewhat away from that. There are just too many stores where you can buy the different types of product they are selling these days, and those stores specialize in those categories (whole Foods Market ) or beat them in price (Trader Joes), are two examples.

Why not online consumables sales: It's my analysis Cost Plus has an opportunity to sell their food products online. They have a very nice website but it looks like food is one of the only categories you can't order online. For now you just have to be satisfied looking at the pictures and reading that it's available only in the stores. The nice thing is they do list some of their food with their retail prices online.

After visiting and analyzing the El Segundo Cost Plus store, I just can't figure out where "in the world" they wanted to go. However, Cost Plus has the opportunity to better define its retailing world--and positioning with consumers--by making some basic changes, improvements and additions.

Mine is only the ethnographic field reporting and analysis of one person. However, many of the suggestions I make in this report come from years of working in and observing retail across all formats.

With better focus on the basics--simple things like store layout, shelving, shelf price tags--along with more precise merchandising, better and more consistent pricing, a little creativity like using more cross-merchandising and in-store displays, Cost Plus could improve its positioning--and probably its sales in the consumables category--significantly.

While the field report presented above is only that of one person, albeit and experienced one, Natural~Specialty Foods Memo suggests the key theme to take away from the ethnographic analysis is two-fold: that Cost Plus has the potential to improve its sales and profits by focusing more and better on its consumables category, and that the retailer has many areas of product, merchandising and pricing issues in which it can dramatically improve on.

There was a time, up until about the late 1980's, in which Cost Plus was arguably the "best" natural foods specialty foods retailing chain in the U.S. However, like the Natural~Specialty Foods Memo field reporter suggests in the analysis, since then numerous specialty players like Whole Foods Market and Trader Joe's--along with many others--have dramatically grown the number of stores they operate, along with greatly improving on their natural and specialty foods merchandising

Additionally, numerous new specialty and natural foods retailers, chain and independent alike, have come on the U.S. retailing scene in the last 20 years. Many of these newer retailers are cutting edge.

Further, numerous previously more mainstream conventional supermarket chains--Safeway Stores, Publix, even Kroger are a mere three examples of the many--have moved dramatically into the natural and specialty foods retailing space, including creating their own natural, organic and gourmet store brands.

Meanwhile, over the last 20 years Cost Plus has essentially remained static. The specialty food and beverage and specialty wines departments in the stores have changed little since the late 1980's. In fact, one could reasonably argue they've gone downhill since then.

In our analysis, part of the reason for this is that Cost Plus historically burns through category managers and buyers at its corporate offices in Oakland, California. It often seems that just when a Cost Plus buyer is just getting into his or her groove, they leave.

This lack of often not first finding good talent and of properly nurturing talented buyers and merchandisers when it has them, is in our analysis a key contributor to Cost Plus' lackluster performance in the consumables, as well as the durable goods, categories. In other words, it is a senior management issue and problem in the main.

The good news is that Cost Plus is in our analysis on to something with its current expansion of its World Market store brand, focusing on combining natural and organic ingredients with premium ones in many of the new items.

The retailer also has started to promote its World Market brands more, both in its weekly advertising circulars and in-store. It needs to do more of that.

We suggest a greater focus on both store brand and manufacturer brand specialty-natural foods items will help Cost Plus gain its footing back. The retailer, which once was the premiere seller of dicsounted specialty wines in the U.S., also needs to review and revamp it's wine departments.

There are currently opportunities we think the retailer is missing to generate increased sales in the category. How about more wine tasting events? Meet the winemakers events in the stores? Make some better buys; and offer some blowout deals that are heavily promoted as events in-store.

Cost Plus World Market needs to create some excitement around its specialty-natural foods and wine departments. Poor sales performance should be the mother of marketing and merchandising creativity. But that's yet to happen at Cost Plus in our analysis.

Perhaps its time to bring in some new creative merchandising and promotional blood, with a focus on the consumables category. After all, sometimes bringing in people who come from outside the box (the Cost Plus structure in this case) leads to thinking, ideas and programs that are outside the box (but good ones).

Right now, Cost Plus could benefit from some new, imaginative and creative marketing and merchandising thinking for its consumables category, regardless if that thinking comes from within the chain or outside of it.

The question is: Why isn't the retailer's top management realizing that fact? And, even more so: Why isn't the company's Board of Directors demanding it? If the Cost Plus board doesn't demand, along with becoming an active part of the solution, some changes and improvements, we suggest it might want to call Pier 1 Imports' CEO up and restart acquisition talks; if it isn't too late of course.

Monday, July 21, 2008

Supply-Side Memo: Kraft Foods, Inc. CEO Irene Rosenfeld is 'Rewiring' the Food Giant's Culture, Focusing on Organic Growth and Revitalizing Brands

Irene Rosenfeld is an unfortunate rarity in the food and grocery industry. No, she's not an industry rarity because of anything "exceptional" such as having a photographic memory or having been raised by wolves in the Australian outback until age 18--although her friends and associates say she is rather exceptional in many ways.

Rather, as the CEO of Kraft Foods, Inc., which is the world's second-largest food company in terms of total annual sales, Ms. Rosenfeld is one of the rare few woman at the top of a major global food company in an industry that across all segments--manufacturing, marketing, sales and retailing--is still headed by and large by men.

Ms. Rosenfeld also might be a rarity in that she is in the process of "rewiring" what many food and grocery industry analysts and observers (and Ms. Rosenfeld herself publicly admits) say has been a rather tired corporate culture and company of late--Kraft Foods, Inc.

Kraft, which is headquartered in Chicago, Illinois USA owns some of the most iconic food brands in the world, including its Kraft brand, which in addition serving as the company name also graces the packages of such globally iconic products as Kraft Macaroni & Cheese, Kraft Mayonnaise, Kraft Miracle Whip, Kraft Velveeta Cheese, Kraft Marshmallows and numerous others. The Kraft brand is a global billion dollar brand all by itself, according to the company.

Other global Kraft-owned brands include Nabisco (cookies and crackers), Philadelphia brand Cream Cheese, Oscar Mayer (meats), A1 Steak Sauce, Maxwell House (coffee), Kool Aid, Tang, Cool Whip, Post Cereals, Planters Peanuts, Capri Sun (drinks) and numerous others.

Kraft Foods, Inc. also is a major global player in the heath and wellness and specialty and premium foods segments.

Its premium and specialty brands include the LU brand line of European-style biscuits and cookies and the Cote d 'Or, Milka, Toblerone and Marabou premium confections brands, among many other brands in the categories.

Other specialty and premium category brands Kraft owns include California Pizza Kitchen (gourmet frozen pizza), DigGiorno Ultimate (pizza and Italian prepared foods) Tassimo premium coffee and others.

In the health and wellness segment, Kraft owns and is aggressively marketing its South Beach Living brand of food products, which are designed after the popular South Beach Diet, popularized in the best selling book of the same name.

Kraft also owns the popular Balance nutritional bar brand in the natural sports nutrition category, and has extended its Kraft brand onto dozens of products in the healthy snacks, cereal bar, cereal and meals categories, including its new Kraft Golden Harvest brand of snacks and related food items.

Health and wellness, including numerous natural foods product categories, along with the specialty and premium foods categories, are two chief global growth segments for Kraft, under the leadership of CEO Irene Rosenfeld, who told the Financial Times newspaper in an interview piece published in today's edition that her goal as a young girl wasn't to be the CEO of one of the world's largest companies, but rather to be President of the United States.

Ms. Rosenfeld is still young enough, and Hillary Clinton has put as she said lots of cracks on the Presidential male gender-bias glass ceiling by nearly being the first woman to be nominated by either political party in the U.S. as candidate for President this year, so we suggest the current Kraft Foods' CEO not give up on her childhood goal just yet. After all, presumptive Republican Party candidate for President John McCain turns 72-years old soon.

There can be life after Kraft. And if Ms. Rosenfeld were elected President, say nine years from now, not only would she be the first female President of the United States, she also would be the first food company CEO every elected to the highest office in the land.

But we digress.

It isn't thoughts of U.S. Presidential politics Kraft Foods' CEO Irene Rosenfeld is focusing on these days. Rather, it's what she calls "rewiring" the company's culture, which she says in the Financial Times interview requires first admitting past mistakes Kraft has made, then moving forward in three key ways: reworking some top management, promoting organic (growth from existing brands) growth, and tweaking, improving and extending on many existing brands.

Consumer Trends Memo: The 'Era of Cheap Food' May Be Over in the U.S.; But Good Cheap Eats Can Still Be's All About Value

New York magazine is just out with its annual "New York Best Cheap Eats" cover issue. The magazine scours the Big Apple every year for its "Best Cheap Eats" issue, which devotes dozens of pages to the restaurants and stores in New York City where consumers can find the best deals on foods ranging from the simple--a slice of pizza--to gourmet-quality meals across nearly every ethnic range.

The magazine's editors say this year's issue will likely be its most popular ever since the poor state of the U.S. economy, which includes soaring food inflation, is driving even many of New York's more affluent residents--not to mention the scores of business travelers, and tourists who flock to the Big Apple this time of year--to search out cheaper alternatives for their meals and food purchases.

The current economy is doing the same to most lower, middle and even many upper-income consumers in every big city, suburb and small town in America.

This year's edition covers what seems like every square inch if New York City's food landscape in terms of the editorial teams search for the cheapest eats in America's largest city.

Among the food categories the special New York magazine "Cheap Eats" issue features include:

The Cheap List
The best cheap eats of 2008.
Chef’s Choice
Top cooks’ favorite cheap eats.
Cheap Eats Consumer Price Index
How the rising cost of food trickles down to pizza and hamburgers.
The Cheapest Of the Cheap
The ten best new things to eat in New York for $5 or under.
Beggars Can Be Choosers
What can you get for a measly dollar these days?
The High-Low $20 Showdown
We asked two very different chefs to create a three-course meal for two using the same $20 budget.

New York magazine also asked two chefs to design a three-course meal, giving them just $20 to complete the task. You can read that story at the link directly above ("The High-Low $20 Showdown). One chef created a more basic meal with the $20, while the other went more high-end and gourmet with the $20 budget.

The more basic (not so basic to many eaters) but tasty looking $20 feast on the cheap is pictured directly below. Below it is the higher-end, gourmet quality menu on the cheap.

Twenty bucks can buy lots of good, cheap eats, as the graphic above shows, if one knows how and where to shop, along with being able to cook, or learning to do so. Click on the graphic for an enlarged view. [Graphic source: New York magazine.]

The chef put together this three-course gourmet dinner, plus wine and desert, for $20. That's value, considering the same meal would easily cost four to five times that amount at a white table cloth restaurant. Click on the graphic for an enlarged view. [Graphic source: New York magazine. Food retailers take note: value gourmet recipes are something consumers are looking for. A three-course gourmet meal promotion using the chef's concept above would be hot.

Consumers are searching out bargains today like food and grocery retailers and restaurant operators have not seen in decades.

At retail, store or private label brand sales are rapidly rising, as are items on promotion. Value is becoming the new black among American consumers, who are being pinched by a combination of soaring gasoline and home energy prices, rapidly-rising food costs, a credit crunch, increasing unemployment and job security, dramatically lowered housing values, and now what looks to be rising overall inflation overall as well.

Good cheap eats no longer are merely for lower-income American consumers. For example, Whole Foods Market, which up until now has been fairly immune from concerns about food prices from its consumer base, has launch what it is calling its "Real Deal" program. The supernatural foods grocer is lowering prices throughout its stores, offering more and deeper price promotions and has even created "value scouts" in-store, who help shoppers find deals and values being offered in the stores.

Mid-range casual dining restaurants like Applebee's for example in the U.S. also are drawing more diners, while higher-end restaurants are putting more basic, lower-priced items on their menus because even affluent consumers are feeling pinched in the down U.S. economy.

As is often the case during bad economic times, behaviors consumers acquire--such as being more price and value conscious when it comes to food shopping and eating out--often stick even once the economy improves.

If true this time around, value and cheap eats could not only become the new black, but also could prove to be the biggest challenge--and as a result a real deal for consumers--to food retailers and restaurant operators in the U.S.

The natural, organic and specialty foods industry also needs to look more closely at how important price and value is becoming to most American consumers. Shoppers are trading down to discount supermarkets. Many are even shopping at salvage grocery stores, which are reporting sales increases of up to 15% in the last year, along with rapidly increasing customer counts in those stores, which sell discontinued, overstock and food and grocery items with slight label flaws.

Further facts: Two U.S. food and grocery retailing chains, Safeway Stores, Inc., which operates nearly 1,800 supermarkets across the U.S., and upscale eastern USA regional chain Wegmans, reported last week sales of their respective store brand grocery items are currently outselling national brands in the stores, both retailers attributing the fact to the poor U.S. economy and consumers' search for greater value.

There's a tipping point at which even the most dedicated natural and specialty foods shopper will buy conventional over natural or organic, or specialty and gourmet. That tipping point in terms of price is unknown. Rather, its defined as "we know it when we observe it." In other words, as we see sales of natural, organic and specialty food and grocer items starting to remain static or even decline, which there currently are some signs of, we can assume price is the primary reason in this current poor U.S. economy.

Therefore, natural and specialty foods retailers and suppliers need to take value very seriously at present or they will lose market share which could take a decade or so to gain back.

We aren't ready to fully proclaim it yet, although we have proclaimed the "era of cheap food" in the U.S. is over...but Natural~Specialty Foods Memo is willing to go as far right now as to say we think the "era of good, cheap eats" may be just around the corner.

Saturday, July 19, 2008

Small-Format Food Retailing Special Report: Global Small-Format Food and Grocery Retailing News and Notes

The International Small-Format Food and Grocery Retailing Revolution Marches On

United Kingdom

On July 16, Britain's Co-operative Group and the Somerfield supermarket chain jointly announced they've entered into an agreement for the Co-operative Group to acquire the 900 store Somerfield chain for ~1.6 billion-p (British Pounds).

The Co-operative Group operates small-format food and grocery stores throughout the United Kingdom (UK), along with banks, insurance agencies, travel agencies and related businesses. As the name implies, the Co-operative Group is a cooperative-owned enterprise. In fact it's the largest multi-retail format Co-op in the world in terms of total annual sales in its food stores and other businesses.

The acquisition of Somerfield, which operates fairly small-format but conventional rather than convenience-oriented supermarkets, will transform the Co-operative group into the UK's fifth-largest food and grocery retailing chain, just behind number four Morrisons. Tesco is the nation's leading retailer, followed by Wal-Mart-owned Asda and Sainsbury's.

With the Somerfield acquisition, the small-format Co-op chain will have annual sales of about ~8 billion-P (British Pounds), with an 8% share of the nation's total food and grocery market. Number one Tesco has about a 31% share. Number two Asda has an approximately 16% markets share, followed by Sainsbury's with about 14.5%, and Morrisons with about 10%. The remaining market share is fought over by Marks & Spencer, Waitrose and a handful of other key players in the UK.

Two small-format discount grocers, German-based Aldi and Lidl, also are becoming major players in UK food and grocery retailing with their no frills, limited assortment little discount dynamo grocery stores.

While the Aldi and Lidl small-format stores are price-focused, as both Germany-based international retailers stores are throughout the world, small-format food retailing is a format explosion in terms of styles and offerings in the UK.

For example, Tesco's Tesco Express small-format stores (currently about 800 in the UK) are fairly middle-market food and grocery stores with an emphasis on convenience.

Sainsbury's Sainsbury's Local small-format stores are similar, but a bit more upscale and specialty-oriented than the Tesco Express stores.

At the higher-end, Marks & Spencer's small-format Simply Food stores are much higher-end and feature the retailer's popular specialty and gourmet store brand food and grocery items.

Waitrose is joining the higher-end small-format segment in two new ways: with its new 3,000 -to- 5,000 square foot Market Town food stores positioned for smaller cities and towns in the UK, and with its just recently announced new convenience food and grocery store operation, which will feature approximately 15,000 square foot food and grocery stores positioned in cities and suburbs.

The Co-operative Group's small-format stores offer basic groceries and lots of natural foods, including organic and locally-produced foods. The stores also are positioned as environmentally sustainable, selling lots of Fair Trade products, focusing on animal welfare issues and practicing green retailing as a way of doing business.

Eastern Europe: Romania

France's Carrefour, the second largest retail chain in the world after number one Wal-Mart, Inc., is growing its small-format Carrefour Express food and grocery store count in Eastern Europe, with a particular focus at present on Romania.

Carrefour will open two Carrefour Express grocery stores in the Romanian cities of Lugoj and Bistrita next week.

The launch of the two new Carrefour Express small-format grocery stores is part of the French retailer's plan to remodel the Artima supermarket chain, which the French retailer took over in October 2007. Artima's 21 stores acquired by Carrefour are being converted to the Carrefour Express format, which can range from stores as small as 3,000 square feet in urban regions to about 15,000 square feet. Thus far nine of the 21 Artima stores have been converted to Carrefour Express stores in Romania.

The two Carrefour Express grocery stores will reopen on July 23 and July 24 respectively, according to Carrefour, which means crossroads in French.

Carrefour paid 55 million euros for the 21-store Artima supermarket chain.

The France-based global retailer now operates two formats in Romania: large hypermarkets and the small-format Carrefour Express grocery stores. Carrefour currently operates 15 hypermarkets in Romania, along with the nine Carrefour Express stores, with 13 remaining Artima supermarkets set to be converted to Carrefour Express small-format grocery stores.


The India-based blog Twenty22--India On the Move, which stands for the year 2022 when independent India will be 75 years old, has a well-researched and written piece about food, grocery and other format retailing in the nation with world's second-fastest growing economy, after China.

A key focus of the piece is about India's Reliance, which is a huge, multi-format retailer. Among Reliance's fast-growing food, grocery, soft goods and hard goods retail formats, is its about 4,000 -to- 6,000 Reliance Fresh small-format food and grocery store chain.

The piece also talks about India's Tata Group, which is another multi-format retailer, including operating a small-format grocery chain, along with other companies in India's fast-growing retail sector. Click here to read the piece from Twenty-22.

United States

An Iowa mayor opens a small-format specialty food store on main street

The small-format food retailing revolution in America seems to be becoming so popular that it's even drawing politicians into the business. The mayor of the Midwestern USA city of McGregor, Iowa, Roger Knott, and his wife Lora, have opened a small-format specialty-focused grocery store on main street in the Iowa city he runs as mayor.

The new independent grocery store is named McGregor's Top Shelf. At about 5,000 square feet it features specialty, natural and gourmet food and grocery items, an upscale deli, specialty wines, spirits and craft beers, fresh produce and fresh, prepared foods, and high-quality fresh meats from a nearby purveyor, Edgewood Meat Locker, in Edgewood, Iowa.

According to his honor the mayor and the grocer, the main street building is brand new but is designed to look like an old fashion general store. Above the food store, the independent grocer/mayor and his wife Lora, build a small Bread & Breakfast Inn, which features a two-bedroom apartment, and balcony deck which is available for nightly or weekly rental. Bed & Breakfast tenants get fresh gourmet coffee and pastries from the small-format McGregor's Top Shelf grocery store as part of their rental of the two bedroom apartment.

McGregor's Top Shelf opening on the city's main street also is part of a growing trend in the U.S. in which grocers are opening smaller format stores in city neighborhoods and in downtown districts. This includes urban stores focusing on both basic groceries as well as on specialty foods and groceries.

A small-format gourmet rose for East Harlem, NYC

Speaking of urban America and small-format specialty foods-oriented stores, an Ottomanelli Brothers New York Grill will open soon at 1325 Fifth Ave. at 111th Street in New York City's East Harlem neighborhood, according to the owners of the family-owned, 100-year-old New York chain, best known for its prime cuts of meat, reports the New York Sun newspaper.

Known for its freshly ground meat, grass-fed beef, poultry, and game, Ottomanelli's operates five butcher shops and restaurants in the city. Nicolo Ottomanelli, who with his brother Joseph is chairman of the company, said his grandfather founded the business in 1900 with a pushcart on Delancey Street. Another Ottomanelli's store, on Bleecker Street, is owned by cousins, he said.

The new, 28,153-square-foot Ottomanelli's, situated on a tree-lined block not far from the Duke Ellington memorial, will feature a sidewalk café facing Central Park, the New York Sun reported last week.

East Harlem is going through a gentrification process in which the historically low-income neighborhood is becoming home to higher-income professionals who are flocking to the new residential developments being constructed in the neighborhood. In turn, these changing demographics are bringing in lots of higher-end retailers of all formats.

Will Tesco's Fresh & Easy feel the no-booze sales blues?

As we've written about before, Tesco's small-format Fresh & Easy Neighborhood Market grocery chain, which currently has 63 combination basic grocery and fresh foods markets in Southern California, Nevada and Arizona, has self-service checkout in all of its stores. Shoppers scan their own grocery purchases and the checkout lanes, then bag the groceries themselves. The stores only except debit and credit cards, and cash. But not paper personal checks. Nor do the small-format Fresh & Easy stores cash payroll or government checks like nearly every American supermarket does.

The stores also offer what the retailer calls "assisted checkout," which means that if a shopper wants help checking his or her order they can request help from a store clerk who will either assist the customer or do the checkout for them. However, the shopper has to ask. In other words, the default checkout system is self-service.

Tesco's Fresh & Easy grocery markets also sell wines and beers in their stores, including a selection of their own specially-blended wine varieties, similar to what Trader Joe's grocery stores offer.

If a California State Assemblyman from Southern California has his way however, stores like Fresh & Easy which offer only self-checkout lanes rather than a mix of full-service and self- checkout like other chains in California do, will not be able to sell alcoholic beverages in the stores unless they dedicate at least one checkout lane in each store to full-service, according to a report in the blog Fresh & Easy Buzz, which focuses on covering and writing about Tesco's Fresh & Easy Neighborhood Market USA. Customers buying alcoholic beverages in the store would have to use that lane.

Tesco's Fresh & Easy is the only food and grocery chain currently in California that has self-service-only checkout lanes. Obviously, should this proposed legislation pass, at best it would require Tesco to add a full-service checkout lane in each of its stores. The worse case scenario if it chose to not do so, would be that the stores could no longer sell wine and beer. We think they would choose the former rather than the latter, as the specially-blended wines are a significant part of the retailer's merchandising strategy.

If the legislative bill, AB 523, proposed by California Democratic Assemblyman Hector De La Torre advances in the Assembly it will be interesting to see if the California Grocers Association (CGA) takes a position for or against it.

The CGA is the state trade association for California's food and grocery retailing industry and counts among its members California's leading supermarket chains like Safeway Stores, Inc., Kroger Co.'s Ralphs, SuperValu's Albertsons, Save Mart, Raley's and most others, along with nearly every major independent grocer in the Golden State.

None of these member chains or independent offers self-service only checkout lanes in its stores. In fact, only a handful even have a mix of self-service and full-service checkout lanes in their stores. Those few that do, like some of the Ralphs new "Fresh" format supermarkets and Safeway's new small-format "the market by Vons" in Long Beach, California, have just a few self-service checkout lanes, compared to a higher number of full-service lanes per-store. Read the full story from Fresh & Easy Buzz here.

Hardball on and off the court

Fresh & Easy Buzz also has an interesting feature story about former NBA basketball all-star Kevin Johnson, who's running for Mayor of Sacramento in a highly contested runoff election with the city's current mayor this November.

Johnson, who is a native of Sacramento, moved back to the city after retiring from the NBA. He then launched a career as a developer, along with founding and running a successful non-profit community development organization called HOPE.

As we reported in Natural~Specialty Foods Memo earlier this year, Johnson the developer is bringing a Tesco Fresh & Easy Neighborhood Market to Sacramento's historically low-income Oak Park neighborhood, the very same Sacramento neighborhood he was raised in.

Fresh & Easy Buzz reports that Johnson, the driving force behind bringing the Fresh & Easy grocery store to the Oak Park neighborhood, which is underserved by supermarkets, is being attacked on multiple fronts in an aggressive campaign by a local labor union, which supports incumbant Sacramento mayor Healther Fargo, who Kevin Johnson is challenging. Tesco appears to be somewhat in the middle of the current mayors' race, and the attack campaign, by virtue of the fact its Oak Park neighborhood store is going on land owned by Johnson.

Tesco's Fresh & Easy also has union problems of its own, as the United Food & Commercial Workers union is waging an aggressive campaign against the chain in order to get Tesco executives to sit down with union leaders and discuss the potential unionization of Fresh & Easy store-level employees. Read the Fresh & Easy Buzz feature story: "Fresh Feature: A Former NBA All-Star Who Wants to Become Mayor, A Trade Union, And A Future Tesco Fresh & Easy Grocery Store In Sacramento, California ."

Small-format innovation: Dillions and Kwik Shop to create combination small-format grocery and convenience store in Greensburg, Kansas

From the Dodge City, Kansas Daily Globe: July 18, 2008

By Cherise Forno
Dodge City Daily Globe
Jul 18, 2008

Greensburg leaders, government officials and Kwik Shop and Dillons’ representatives gathered on Thursday to break ground for the new grocery store in Greensburg.

The new Dillons will be built next to the existing Kwik Shop to create a combination convenience and grocery store. This expansion will increase the Kwik Shop to 8,000 square feet, which is three times its current size.

"It is encouraging to see progress and growth as Greensburg rebuilds, and we are humbled to be a part of the journey," said Dillons President John Bays. "Greensburg and Kiowa County residents have supported Dillons and Kwik Shop for over 70 years, and we are pleased to continue this relationship."

Lt. Gov. Mark Parkinson said he was inspired by the city's progress over the last year.

"What I see here is amazing," he said.

The Kwik Shop, located at 203 W. Kansas Ave., has been providing Greensburg residents with fresh produce, meat, dairy products, fuel and household items since a Level F5 tornado devastated the city in May 2007.

The addition of a Dillon’s grocery store will double the selection of fresh produce available and provide more selections for all grocery items.

The store will also feature a deli department with an assortment of home-style hot foods. The Kwik Shop will continue to meet the city's daily needs for items such as fuel, fresh-brewed coffee, newspapers and Kansas lottery tickets.

This grocery and convenience store, expected to be completed in early 2009, will be the first of its kind.

The Dillons store will be built in accordance with the city's dedication to the environment and sustainability, said Jeff Parker, president of Kwik Shop.

Some of the "green" features of the building include a white-reflective Thermoplastic-Polyoflefin roof with extra insulation; skylight coverage of the roof to provide natural daytime lighting; low-water demand landscaping; and highly efficient systems for cooling, heating and refrigeration equipment.

"This is an opportunity for the world to see Dillons through Greensburg's eyes," Mayor Bob Dixson said.

Dillons' decision to build the store in an eco-friendly manner is one of many ways in which the city is fulfilling its commitment to improving the environment.

"We want to educate people about going green," said Levi Smith, a Kwik Shop employee and member of the Green Club. "It's not a radical change. We want to teach people how easy it is."

Smith and other Greensburg High School students established the Green Club to make the process of "going green" easier for the community.

Last holiday season, the students went through the neighborhood collecting Christmas trees to recycle. More than 50 trees were turned into mulch for Greensburg's trees and plants instead of being dumped in the trash.

The club also participates in a lightbulb program, in which club members provide residents with energy-efficient compact fluorescent lightbulbs in exchange for their old bulbs.

End Piece: Trader Joe's says 'no' to Palm Springs despite petition drive

It appears that 6,000 signatures on a petition to bring a Trader Joe's small-format specialty grocery store to the Southern California desert region city of Palm Springs just isn't enough for the Southern California-based chain, which is owned by members of the same German family that own no frills, small-format discount grocery chain Aldi International.

This despite the fact after all that Palm Springs was good enough for the likes of Frank Sinatra, Dean Martin and Sammy Davis Jr., collectively known in the 1950's and 1960's as the "Rat Pack," along with such former residents as the late eccentric billionaire Howard Hughes and the girlfriend to two Kennedy's, President John F. Kennedy and his brother Robert, Marilyn Monroe.

For well over a year members of a community coalition of Palm Springs residents have been meeting and organizing in an atempt to lure a Trader Joe'stores to their city, which is a popular upscale resort mecca, as well as having a considerably fast-growing year-round resident population.

ButTrader Joe's which has stores in three nearby cities--next door Palm Desert, Cathedral City and La Quinta--has just told the good citizens of Palm Springs it won't be bringing one of its quirky small-format grocery stores to the city anytime soon; although it appreciated the petition drive which resulted in 6,000 signatures.

Meanwhile, Tesco's Fresh & Easy, which also has stores in the three cities mentioned above, will soon open one of its small-format combination basic grocery and fresh foods stores in Palam Springs. The Fresh & Easy and Trader Joe's stores have many similarities, although Fresh & Easy sells an assortment of basic grocery products while Trader Joe's focuses on specialty and natural food and groceries items.

If we were running Tesco Fresh & Easy's marketing department, the first thing we would do is get a copy of that petition to bring a Trader Joe's to the city, and mail each of the 6,000 names and addresses on the petition an invitation to the Palm Springs' Fresh & Easy grocery store grand opening, along with a couple of the retailer's $5 -off (on any order of $20 or more) coupons.

In other words, make TJ's loss Fresh & Easy's gain, as well as making the 6,000 residents who wanted a Trader Joe's feel welcome at the new Fresh & Easy store, perhaps converting them to Fresh & Easy shoppers. You can read a report here from the local Desert Sun newspaper.

Monday, July 14, 2008

Small-Format Food Retailing Special Report: Waitrose to Create its Second Brand New Small-Format Chain This Year With Convenience-Oriented Format

Upscale British supermarket chain Waitrose says it plans to enter the lucrative and highly competitive small-format, convenience-oriented grocery store segment in the United Kingdom (UK) opening its first small-format grocery shop early next year.

With the launch of its new grocery-convenience store format, Waitrose will take on three of the UK's leading retailers: Tesco (Tesco Express format), Sainsbury's (Sainsbury's Local format) and Marks & Spencer (Simply Food format), all of which operate small-format grocery shops in the nation.

Tesco is the leading food and grocery retailer in the UK. Sainsbury's is number three, after Wal-Mart-owned Asda. Marks & Spencer (M&S) and Waitrose are the UK's two leading upscale food and grocery chains, with M&S holding a higher share currently than Waitrose.

Waitrose, which is owned by the John Lewis Partnership, which also operates department stores in the UK as well as opening its first upscale food halls last year, wants a piece of the small-format, convenience-oriented grocery retailing segment, what is a ~27.4 billion-p (British Pounds) market in the UK and fast-growing.

According to Waitrose, its convenience grocery shops will average about 3,000 -to- 4,000 square feet in size.

Although Waitrose didn't go into any detail in terms of describing the stores, based on Waitrose's upscale brand, and conversations Natural~Specialty Foods Memo has had with two UK industry observers, we think the Waitrose small-format, convenience-oriented food stores will be more similar to, as well as primarily target competitively, Marks & Spencers' Simply Food shops, which are smaller upscale food stores of a more upmarket nature and format than those of Tesco and Sainsbury's.

By contrast, Tesco's Tesco Express and Sainsbury's Sainsbury's Local convenience -style grocery stores are more middle-market in terms of design and merchandising.

Waitrose's new convenience grocery stores will be located primarily in urban and suburban cities in the UK.

The UK's Co-operative Group chain also operates numerous small-format, convenience-oriented grocery stores throughout the nation. The Co-op stores put an emphasis on natural and organic foods, as well as sustainability, but sell selections of basic groceries as well. The non-profit Co-op, already a significant retail force in the country, is preparing to become an even bigger player in UK food and grocery retailing with its pending acquisition of the Somerfield supermarket chain, which could come later this week. Somerfield has 900 stores.

Waitrose's new 3,000 -to- 4,000 square foot convenience grocery chain comes right on the heels of its recent creation of it's small-format "Market Town" chain, which is designed specifically for smaller towns and villages in the UK. We reported on the "Market Town" development in this piece on June 10. Thus far Waitrose has opened two small-format "Market Town" village grocery stores, with many more to come. The "Market Town" stores average about 13,000 square feet in size.

It's not surprising Waitrose wants to enter the convenience grocery store sector. According to UK retail market research firm IGD, overall sales in the small-format convenience grocery retailing sector grew by about 5.1% in 2007, which is about 30% more than in the larger supermarket sector.

Entering the convenience-oriented, small-format food and grocery retailing segment also gives Waitrose more options. Along with its Waitrose supermarkets, which average 20,000 -to- 35,000 square feet, its new "Market Town" small-format village grocery stores, and now its 3,000 -to- 4,000 square foot convenience grocery stores, Waitrose will likely be better able to compete against its competitors, who all have multi-retail format strategies.

The development also is a part of Waitrose CEO Mark Price's aggressive plans to make Waitrose a bigger player in UK food and grocery retailing. Price wants not only more formats and many more stores across all formats, he also wants to reach a larger segment of British consumers, rather than the generally upper income shoppers and food lovers who comprise its customer base.

To this end, Waitrose has been lowering everyday prices as a way to be more competitive with less wealthy UK consumers. They two new small-format chains also are part of Price's design to reach more consumers--both urban, suburban and rural residents--in the UK.

Waitrose also is the primary owner of Ocado, which is the UK's leading internet-based, home grocery delivery company. Waitrose and Tesco are currently going head-to-head in an Internet-based grocery store/home delivery price war, battling for the home delivery shoppers dollars.

A Waitrose spokesperson told Natural~Specialty Foods Memo that the food retailer could have its first of the convenience grocery store opened in the UK in just six months, and that it would be no later than nine months before the first store opens.

Small-Format Food Retailing Special Report: No Frills, Small-Format Discount Grocer Aldi USA Preparing For Florida USA Store Launch

Aldi USA, the Batavia, Illinios-based U.S. division of International food and grocery retailer Aldi International, based in Germany, has grown to become the 25th-largest grocery retailer in the U.S., with 900 stores and about $5.8 billion in annual sales (2008 estimate), according to the supermarket industry trade publication Supermarket News and Thompson's Grocery Register.

Aldi USA has achieved this goal despite the fact (or perhaps because of it) its stores, which average about 15,000 square feet, are nearly one-third smaller on average than the typical new supermarket opened in the U.S today.

The operator of small-format, no frills discount grocery stores in the Midwest, Mid-Atlantic and eastern USA regions is currently on a rapid new store growth program, with plans to open about 100 new stores per year in the U.S. over the next four -to- five years.

Aldi also is entering new regions in the U.S. as a part of this rapid expansion plan. One of those new market regions is the heavily populated and lucrative state of Florida, which is the fourth-largest state in the U.S.

The discount grocer is currently gearing up to open a number of its small-format grocery stores, along with a distribution facility, in Florida.

As part of its major initiative to enter the Florida market for the first time, Aldi USA has launched a new job recruitment website,, where it is advertising for retail, management and distribution center jobs for its Florida launch.

One the website, Aldi lists an initial 24 stores, located in eastern, western and central Florida, which will begin opening in September, along with a warehouse facility that will open in Haines City, Florida soon. Many more Florida Aldi stores are set to be built after the first batch of 24 open.

The 24 new stores in Florida listed on the website are in the following cities:

Orlando (four stores),Tampa (two), Pinellas Park (two), and one each in Brandon, Clearwater, Daytona, Lady Lake, Lakeland, Largo, Merritt Island, Ocala, Palm Bay, Plant City, Rockledge, Sanford, St. Petersburg, St. Cloud, Titusville and Winter Park.

According to the website, Aldi will be holding job fairs at each of the Florida stores starting this week.

Aldi trys to run each of its approximately 15,000 square foot stores with no more than 15 employees, although the amount per-store varies depending on the region and store neighborhood.

The state of Florida is the third-largest retail food and grocery market in the United States, with annual sales of over $30 billion. That's a very lucrative new market for a discount grocery chain like Aldi.

Florida-based Publix is the state's leading supermarket chain, with about 40% of the food and grocery sales market share, which is a dominant share any way you look at it.

However, mega-retailer Wal-Mart has been gaining on Publix, as it continues to open new Supercenters in the state. Wal-Mart's food and grocery sales market share is currently estimated at about 21% in Florida. The Winn-Dixie chain comes in at number three with an approximately 16% share.

Super-competitive discounter Aldi will likely take share away from all three of these retail chains. However, since Publix is more of an upscale retailer than Wal-Mart and Winn-Dixie, along with being the hometown grocer, it could be less hurt by Aldi, although the jury is obviously still out on that, especially in the currently depressed U.S. national economy.

We expect Aldi's entrance into Florida with its no frills, small-format discount grocery stores to create downward price pressure in the market as well. In other words, since Aldi is a price leader in every market it enters, expect Wal-Mart especially--but also Winn-Dixie, Publix and the state's other grocery chains and independents--to lower their respective everyday retail prices, offer stronger price promotions, and create new value programs.

This phenomenon won't likely happen at first. But once Aldi begins to open a critical mass of stores--for example it's opening four all nearly at the same time in Orlando--you'll see the price competition in the respective Florida markets heat up as the state's established grocers find they are losing business to Aldi stores. There's been what we call "an Aldi (price) effect" in every market the small-format discount grocer has entered in the U.S.

Small-Format Food Retailing Special Report: SuperValue's No Frills, Discount Sav-A-Lot Chain Looking For Big Growth in Two Eastern U.S. States

SuperValu, Inc.'s no frills, small-format discount Sav-A-Lot grocery chain plans to expand its store count significantly in Connecticut and Rhode Island in the eastern United States, Natural~Specialty Foods Memo (NSFM) has learned.

Commercial retail real estate expert Anne O' Neal tells NSFM that SuperValue's Sav-A-Lot is looking for multiple new store sites in both states.

The small-format Sav-A-Lot stores, which average about 13,500 -to- 18,000 square feet, are no frills, limited assortment deep discount stores. The SuperValu, Inc. Sav-A-Lot division currently operates about 1,180 of the small-format discount grocery stores nationwide in the U.S.

Some of the Sav-A-Lot discount grocery stores are operated corporately by SuperValu, Inc., while others are franchised to independent operator groups. SuperValu supplies those independent operator groups from its wholesale division, as well as providing marketing and retail merchandising support through its various corporate divisions. Most recently SuperValu, Inc. has been making a major push in the U.S. to open new, corporately-owned and operated no frills Sav-A-Lot discount grocery stores.

Three new Sav-A-Lot stores will open in the two states this year, with more on the way. According to Ms. O'Neal, Sav-A-Lot is looking for new store location sites in value shopping centers in Connecticut and Rhode Island. The grocery chain is represented in the region by Oxford Real Estate.

Sav-A-Lot likes to locate its small-format, no frills discount grocery stores next to other format discount stores in the shopping centers it selects.

Additionally, the discount food retailer looks for locations that have a population of about 35,000 within a three mile area, with an average household income of about $45,000.

SuperValu, Inc.'s major competitor in small-format discount retailing currently is Aldi USA, the U.S. division of Germany-based international discount grocer Aldi International.

Like Sav-A-Lot, small-format Aldi, which operates no frills, discount stores of about 15,000 square feet, is growing fast. Aldi plans to open 100 new stores in the U.S. this year--far more than Sav-A-Lot will open--including moving into the lucrative and highly populated state of Florida this year.

Aldi currently operates about 900 of its small-format discount grocery stores in the U.S.--in the Midwest, Mid Atlantic and eastern USA regions. In addition to Florida, Aldi USA is moving heavily into other southern U.S. states, with future plans to enter other new regions in the country with its stores.

While SuperValu's Sav-A-Lot currently has a store count lead of nearly 300 stores on Aldi USA, that is changing. In addition to opening 100 new stores this year, Aldi USA plans to open nearly 100 new stores a year for the next four to five years in the U.S.

The current poor U.S. economy, with both soaring gasoline prices and fast-rising food prices, is driving more consumers to small-format, no frills discount grocery stores like Sav-A-Lot and Aldi. As a result, these retailers are capitalizing on this trend, growing their respective store counts significantly in the U.S., along with entering new regional markets.

Of course, the small-format grocers also face heavy competition from discounters like Wal-Mart, with its Supercenters and Sam's Club stores, Costco Wholesale, warehouse grocery chains, and numerous other price-impact food and grocery retailers.

However, the no frills smaller-format stores, which require far less monthly rent, have far lower energy costs than the big box discount stores, and require fewer-employees to operate, could be at a competitive advantage because this reduced overhead allows the grocers to sell product for less without hurting margins as much as it does many of the bigger-format discount grocers for the above reasons, along with a few others.

Low fixed operating costs and labor are in part what's allowing these small-format discounters to thrive and grow currently in the U.S.

As we've said, there's a small-format food retailing revolution going on globally, particular in the developed west where the big supermarket and big big box discount store formats have dominated food and grocery retailing for decades. Sav-A-Lot and Aldi are just two of the many retailers that are creating and growing the U.S. version of this revolution in food retailing. Does (store) size matter? It appears it does. But in this case, small can be as powerful as big.