Retail Memo: Fast-Growing and Scrappy Sunflower Farmers Market Ventures Deep in the Heart of (Whole Foods Country) Texas

Sunflower Farmers Market founder and CEO Mike Gilliland in the produce department of the natural foods retailer's new store in Plano, Texas, its first natural market in the state. The store opened in late November. [Photo credit: Amy Gutierrez, American-Statesman.]

Earlier today we wrote and published this piece, "Fast-Growing Natural Foods Chain Sunflower Farmers Market Responds to Whole Foods Market, Inc. Subpoena For Sales, Financial and Related Information," about Boulder, Colorado-based Sunflower Farmers Market's responding to a subpoena it received, along with 95 other natural products retailers, from Whole Foods Market, Inc. for its sales, financial and related records. Whole Foods Market has issued the subpoenas to these retailers as part of its battle with the U.S. Federal Trade Commission (FTC) over last years' acquisition of Wild Oats Market, Inc.

In the piece, we mentioned that Sunflower Farmers Market, which was founded by Mike Gilliand, who is the company CEO and who also happens to be the founder and former CEO of Wild Oats, is going head-to-head against Whole Foods Market, Inc. in a number of markets, including in its home state and headquarters city of Austin, Texas.

Below is a recent story by Lily Rockwell, a staff writer for the American-Statesman newspaper based in Austin, Texas where Whole Foods Market, Inc. is headquartered. Ms. Rockwell covers the Texas food retailing scene closely and does so well. Below is the story:

Sunflower makes a bid for Austin's organic food shoppers
Colorado chain making inroads on low-cost premise

By Lilly Rockwell
American-Stateman Staff Writer
Sunday, November 23, 2008

Plano, Texas — At 6:30 a.m., the sun hasn't risen yet, and the streets in this Dallas suburb are deserted. But in a beige strip mall surrounded by newly built homes, hundreds of people are waiting in line, shuffling their feet in the cold air.

They are here for the grand opening of natural foods chain Sunflower Farmers Market's first store in Texas . With stores that are smaller than those of traditional grocers, Colorado-based Sunflower touts its rock-bottom prices, convenience and wide selection of produce.

Sunflower is expanding into Texas. In addition to the Plano store, which opened Nov. 12, the first of several planned Austin-area stores — at William Cannon Drive and Manchaca Road —is scheduled to open in January, followed by a second Dallas-area store later in the year.

Sunflower will be the first significant new grocery player to enter the Austin market in years, and it aims to be a major competitor among organic food stores such as Whole Foods Market, Central Market, Sun Harvest and Wheatsville Co-op.

Customers who had lined up for Sunflower's Plano opening said they were lured by advertisements offering grapefruit at 10 for $1 or natural lean ground beef for $1.57 a pound.

But the real attraction was the free bag of groceries the first 200 customers received, a popular draw for shoppers who said they are watching every penny as the economic downturn continues.

"We stayed up all night," said Angela Wendt, who arrived at 6:15 a.m. to check out the store. She said she normally shops at stores such as Wal-Mart, Kroger or Sprouts Farmers Market, another natural foods store in the Dallas area.

But what about Whole Foods, which has a 62,000-square-foot store little more than a mile away?

"I can't afford it," Wendt said. "They are too pricey."

Sunflower wants to lure customers who, like Wendt, are as concerned about price as about organic and natural foods. Sunflower offers a mix of organic and conventional foods, and hopes to undercut even Wal-Mart on its produce prices.

"They do have an excellent selection, really good pricing, and they've done extraordinarily well in the markets they have gone into — and they have gone into some competitive markets," said Mary Mulry, a food consultant who once worked for Central Market and Wild Oats Markets.

In Austin, Sunflower will go up against market leader H.E. Butt Grocery Co., which owns Central Market and stocks some organic and natural foods in its H-E-B stores, as do Wal-Mart and Randall's.

"There is definitely a depth in the market for organic similar to Boulder," said Steven Hoffman, the director of the Boulder, Colo.-based Organic Center. Whole Foods spokeswoman Libba Letton said about Sunflower: "More competition is healthy for the marketplace."

Sunflower was started by Mike Gilliland, who in 1987 co-founded Wild Oats Markets Inc., long considered one of Whole Foods' biggest rivals. He left Wild Oats in 2001.

Last year, Whole Foods purchased Wild Oats for $565 million, buying out its largest competitor. Although the sale was completed in August 2007, the Federal Trade Commission is still contesting the purchase on antitrust grounds.

Gilliland's inspiration for Sunflower came when he was chief executive for Wild Oats.

"Towards the end of my time, Whole Foods was just kicking our butt everywhere, and so we bought a chain of stores called Henry's Marketplace in the San Diego area. And they just seemed really, really different enough that they competed well against Whole Foods and against everyone, really," Gilliland said.

He recommended to the board that Wild Oats pursue the Henry's strategy of natural foods at low prices, he said, but they declined to pursue it.

"I essentially did it myself in 2002," Gilliland said, noting that the stores seek to appeal to a wider audience than a Wild Oats store.

"Instead of trying to concentrate on the top 5 or 10 percent of the market in terms of income or education, we are trying to grab that 60 percent of customers that are somewhat interested in natural foods but are price-sensitive or ... are almost part-time natural foods folks," Gilliland said.

Sunflower has emerged in a different era than Wild Oats did, Gilliland said.

"Twenty-five years ago, if you had the product and you were a big natural foods store, it was a big deal," Gilliland said. "All you had to do was open the door and people would pay whatever."

Now, Gilliland said, "it's more of a precision business than it used to be in terms of we don't work on a lot of margin, so we have had to adopt a lot of big-grocery-store practices in terms of ... just really watching the pennies."

Mulry said Gilliland is renowned for his frugality, making sure to buy the least expensive furnishings in a new store. "It doesn't cost him as much to open a store as, say, the equivalent size would be if it were a Whole Foods," Mulry said.

Although Sunflower's first store was in Albuquerque, N.M., it is based in Boulder, where Gilliland lives.

In 2007, Sunflower received a $30 million investment from PCG Capital Partners and began rapidly expanding into Arizona, Colorado, Utah, Nevada, New Mexico and Texas.

Gilliland said Sunflower has no plans to expand beyond those states and instead will focus on more stores in the states it already serves.

"It's a concept that really fits a large, unmet demand," said Tim Kelleher, a partner with PCG. "They offer tremendous value, fresh and natural foods in a farmer's market setting. While Whole Foods has done a great job over the last 10 years, it is not a store that everyone can shop because of the high prices."

Sunflower's motto is "Serious food. Silly prices," and through its own distribution and delivery system and local food sources, it aims to have the lowest-priced produce of any grocery competitor.

Industry experts say Sunflower is smart to position itself around the low-price theme.

"Sunflower is very appealing for a number of reasons," said Mulry. "The produce is very, very competitive, and they do have a good selection of organics. They will compete with Whole Foods, Central Market and H-E-B. It's a smaller store, and this is something that has been overlooked."

Sunflower's first big test came when it opened a store in Boulder this year.
Boulder has a large variety of organic food stores, including several Whole Foods locations, and Safeway's Lifestyle stores, which are similar to Central Markets.

"I know that here in Boulder, the Whole Foods store has a big bulletin board where they compare prices to show it is a good place to shop where you are being cost-conscious," Hoffman said. "Sunflower will try to come in at a niche where you can get healthy fare at lower costs. That is their marketing strategy, but it needs to play out in terms of whether that is true or not."

Gilliland said Whole Foods might struggle to convince customers that it is price-competitive.

"They are very intelligent pricers; they are smart guys," Gilliland said. "I don't know how you overcome the glitz image. At the end of the day, people impulse-shop. They have great prices on macaroni and cheese and canned soup and the commodity stuff, but people still go in and grab the $8 loaf of bread and the $15 cheese."

Whole Foods, which historically has performed well during recessions, is now watching its store sales growth slow and its profits fall. To shore up sales, Whole Foods began a national "Whole Deal" price promotion, which has included coupons and frequent-shopper cards.

Whole Foods and Wild Oats had a notoriously competitive relationship. Whole Foods CEO John Mackey once sent Gilliland a copy of the board game "Risk" with the note "Forewarned is forearmed" when Whole Foods was going to open a store in Boulder, which was Wild Oats' home base. Gilliland replied with the board game "Twister" and this note: " We are going to twist around you by being nimble."

Gilliland called their rivalry fun, but said he and Mackey no longer talk.

"In the old days, everybody was friends and knew each other and helped each other out. And then we became public companies and ... had investors, and everybody has to play it closer to the vest," Gilliland said. There are no hard feelings over the purchase of Wild Oats, Gilliland said, calling it a "logical outcome."

"When it becomes a public company, you don't have that ownership or the emotional investment that you had in the early days," Gilliland said.

When Whole Foods opened a store near Wild Oats in the past, the Wild Oats store would lose 40 to 50 percent of its business, Gilliland said.

In contrast, at Sunflower "that doesn't seem to be the case," he said. "In Colorado, they've come (within) a couple square miles of us, and it might get a little effect the first week, and then a week later it is back to normal."

[Natural~Specialty Foods Memo Editor's Note: Sunflower Farmers Market will open its first Texas store in Austin, where Whole Foods is headquartered, early next year. Click on the link to Watch video from the opening of the Sunflower Farmers Market in Plano, Texas.]