Sunday, October 19, 2008

Retail Memo: First Two Sprouts Farmers Market Stores Sprout in Colorado; Another Challenge to What The FTC Says is Whole Foods' Category Hegemony

When Whole Foods Market, Inc. acquired rival Wild Oats in a friendly merger last year, the Austin, Texas-based supernatural foods retailer became a major player in Colorado, the state where Wild Oats' was founded, headquartered and had its highest per capita store count.

The Colorado market is in fact one example the U.S. Federal Trade Commission (FTC) sited in its arguments that post the Wild Oats' merger Whole Foods Market, Inc. is a monopolist in the natural foods retailing category. And despite every sign to the contrary -- Whole Foods' profits are down by 40%, its stock is at an historic low and it's been laying off headquarters employees just for starters -- the FTC continues to press its case, having set a hearing for February, 2009 to review the merger once again.

As we've argued, the FTC is not only wasting its resources and U.S. taxpayer money by persisting in this folly, it's demonstrating a total ignorance of one of the very industries it is supposed to regulate -- food and grocery retailing.

If the FTC wasn't ignorant of the market forces in the industry, it would drop its February, 2009 hearing immediately. Why? Because the facts are that rather than being in a monopolistic position vis-a-vis the retailing of natural and organic products, Whole Foods Market, Inc. is in reality fighting for its life. Of course, we've seen much ignorance, along with outright neglect, from U.S. Government regulatory agencies in the last eight years. The words "financial crisis" come top of mind.

Whole Foods, as we written about regularly, is being challenged on two retail format fronts throughout the U.S.

One the one front are the still small but fast-growing natural foods chains like Sunflower Farmers Market, Sprouts Farmers Market, Natural Grocers, Canada's Planet Organic (its Mrs. Green's Natural Market chain in the U.S.) and a couple others. These natural products retailers are rapidly opening new stores, including in Whole Foods Market's backyard market of Texas, where the grocer is headquartered.

The other format or sector front which Whole Foods is being attacked on is by the supermarket sector.

For example, mega-chains like Kroger with its Fresh Fare format and Safeway with its Lifestyle format are taking a bite out of Whole Foods' sales throughout the U.S. Both the Kroger Fresh Fare and Safeway Lifestyle formats put a major emphasis on offering expanded selections of natural, organic, specialty and gourmet food and grocery products, along with premium, in-store prepared foods offerings. These are Whole Foods' niches.

Along with the giants, regional supermarket chains such as H.E. Butt and United Supermarkets (its Market Street banner) in Texas, Publix in Florida, Wegmans in the east, Raley's in the west, as well as numerous others, all are stealing share from Whole Foods with their upscale supermarkets, which not only offer expanded assortments of natural, organic and fresh foods but sell basic groceries alongside them.

Instead of enjoying the luxury of a monopolistic position in the natural and organic products retailing sector post its Wild Oats' acquisition, Whole Foods finds itself challenged on multiple fronts. It's also being challenged by the sour U.S. economy in which even traditional natural foods choppers are trading down out of a need to do so rather than a choice.

In the case of the fast-growing natural products retailers mentioned earlier. Sunflower Farmers Market, which happens to be founded and run by Wild Oats' founder Mike Gilliland, as well as headquartered in Boulder, Colorado, is opening new stores throughout the Western U.S. Sunflower has thus far even opened two of its smaller-format discount natural products stores in Texas and plans to open more in the state where Whole Foods' is headquartered.

With its base in Boulder, Sunflower is becoming a natural foods retailing force in Colorado and the west; a force Whole Foods is having to take seriously. Sunflower Farmers Market currently has seven stores in the state. It opens Colorado store number 8 next week in the city of Arvada -- and more units are on the way.

Whole Foods market has 18 stores in Colorado. Four of those stores are in Boulder. The majority of the remaining 14 are in the Denver Metropolitan region.

Two of the four Boulder stores operate under the Whole Foods' banner. One operates under the Alfalfa's banner. The other goes under the Ideal Market name. Both of those stores are former Wild oats units, as is one of the two Boulder Whole Foods' banner stores.

Alfalfa's was a Boulder-based natural foods chain Wild Oats acquired. It kept that name on the one store, as has Whole Foods. Ideal Market was a popular independent store in Boulder that Wild Oats also acquired. It kept the historic name. Whole Foods plans to keep the name as well.

Lakewood, Colorado-based Natural Grocers by Vitamin Cottage also has become a serious player in the Colorado market, adding to Whole Foods' competition in the state. Natural Grocers now has 28 of its natural products stores in Colorado.

But another fast-growing natural products retailing force just hit Colorado as well. Arizona-based Sprouts Farmers Market opened its first two stores in the Rocky Mountain state on Friday of last week, in the Denver Metro region cities of Westminster and Parker. Sprouts says it plans to add at least eight more stores in the region by the end of 2010. It's next two units will be in Fort Collins and Aurora, Colorado.

Whole Foods Market has a store in Westminster which isn't located far from the new Sprouts Farmers market unit that opened Friday. Whole Foods also has a store in Fort Collins, which is where one of the next two Sprouts units will open. [Memo to the FTC: If Sprouts Farmers Market believed Whole Foods Market, Inc. was a monopolistic natural products retailer would it really be opening two of its first three Colorado stores in cities where Whole Foods Market has existing stores?]

Sprouts currently has 30 stores in Arizona, California, Texas and now Colorado. More Sprouts stores are planned in Texas, Whole Foods Market's base, as well. The retailer also says it will open additional stores in Southern California and Arizona (and of course in Colorado), along with perhaps entering additional states in the Western USA.

The two Sprouts stores that opened on Friday were jammed with opening day shoppers, according to the company's president and chief operating officer, Doug Sanders. Sanders said 6,000 opening day shoppers walked through the doors of the two new Colorado Sprouts Farmers Market stores during the first 6 hours they were open on Friday.

A Natural~Specialty Foods Memo reader who was at the Westminster store shortly after it opened on Friday says the aisles of the store were packed with shoppers looking to grab-up the numerous grand opening day bargains Sprouts' had advertised in advance for the two stores.

Among the bargains she says she picked up included some hot deals in the produce department: Bell Peppers at three-for-a $1.00; Cantaloupes for 88 cents each; and tomatoes for 69 cents a pound, along with numerous other grand opening specials in all store categories.

Like Sunflower Farmers Market, Sprouts operates on a discount price natural and organic category premise or philosophy. It claims overall prices across all food and grocery categories in its stores are at least 15% lower everyday than Whole Foods' prices, for example.

Sprouts also runs weekly ads in which it offers fresh produce, meats and natural and organic food and grocery products for deep discounts.

Sprouts like Sunflower also puts a major emphasis on offering an abundance of fresh produce items at affordable everyday prices.

Both Sprouts and Sunflower have been cutting into sales at Whole Foods stores in Arizona, Southern California, Colorado and elsewhere because of this price and value emphasis.

In fact, Whole Foods has been fighting back -- not just against the two fast-growing natural foods' chains but against all competitors -- by offering discounts and promotions under its "The Whole Deal" value program. For example, right now Whole Foods is offering an online coupon good for $5-off any total order of $25 or more in its stores. That's a 20% discount on a $25 purchase.

Additionally, Whole Foods has had to get much more price-competitive, as have all food retailers, because of the sour U.S. economy.

Sprouts Farmers Market is making a significant impact in the Metropolitan Phoenix, Arizona market and in Southern California where it has numerous stores. There's no reason to believe it won't do the same in Colorado.

Meanwhile, when you combine Sprouts, Sunflower Farmers Market and Natural Grocers on the natural foods format retailing end in Colorado, then add Safeway, Trader Joe's, Wal-Mart, Costco, Target and others -- supermarkets and mass merchandisers deep into the natural and organic foods category in the market -- not only isn't Whole Foods Market, Inc. in a monopolistic position, it's being squeezed in various ways from three sides -- by natural foods format grocers, supermarket chains and independents, and deep discounters like Wal-Mart, Target and Costco.

Perhaps the FTC should hold that February, 2009 hearing about the Whole Foods/Wild Oats merger after all. But instead of the topic being the commission's ongoing argument that Whole Foods' is a monopolistic category retailer since acquiring Wild Oats, it could change the topic to how since the natural grocery chain acquired Wild Oats a little over a year ago it has had its most difficult time in history.

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