Retail Memo: Analysis: Free of Wild Oats Markets, Inc.'s Ownership, Henry's Farmers Markets Seems to Be Starting to Get its Groove On

Nearly one year after its acquisition from Whole Foods Market, Inc. by an independent but wholly-owned subsidiary of Southern California-based Smart & Final Inc., 30-store Henry's Farmers Market, which also is based in Southern California, seems to be getting its groove on as an independent identity despite not having the luxury of having the clout and buying power it previously had as a banner of Wild Oats Markets, Inc.

In fact, that independence seems to be liberating both in a innovation sense, as well as in an observational one, as Natural~Specialty Foods Memo recently toured some Southern California Henry's stores which looked far better than in the past, were better merchandised than under Wild Oats' ownership, and during the times we visited the stores had much higher customer counts than we observed in the same stores in the Wild Oats' ownership days.

Whole Foods acquired the 30-store Henry's Farmers Market banner as part of its all-stock acquisition/merger with Wild Oats last year. Soon after completing the merger, the supernatural food retailer sold Henry's to the subsidiary of Smart & Final, an operator of club-type food and grocery stores, created to buy it.

The Henry's stores are sort of a hybrid natural foods/basic grocery/specialty foods store and didn't fit Whole Foods' merchandising philosophy or plans about how it would integrate the Wild Oats' banner stores--plus it was a nice infusion of cash--so the grocer sold the operation to the Smart & Final subsidiary.

One of the improved departments of the Henry's stores we observed is the produce department. Once the signature departments in the stores--hence the Farmers Market in the name--in recent years the departments had become fairly mediocre both in how they looked and in the variety and quality of the fresh produce in them.

That's changed considerably under the newly independent Henry's organization. For example, we observed much more organic produce, much more variety, better merchandising, and a much fresher look overall in the departments in the stores we visited.

We also noticed a major emphasis on "locally-grown" produce, designated by colorful signs. In fact, local and organic produce procurement and merchandising is now a major principle of the Henry's chain, according to Janet Little, the head nutritionist for Henry's

Little says under Wild Oats' ownership, Henry's Farmers Market had only a partial organic produce program. The retailer's local produce program was almost non-existent because Wild Oats focused on growers who could supply the chain nationally at the best price. Therefore, local growers were basically not in the game.

That's changed however. Little says Henry's is now in the process of building a full organic and locally-grown fresh produce program for its stores and will be putting a major marketing and merchandising push on the nutritional benefits of locally-grown organic produce.

Natural~Specialty Foods Memo noticed both the local and organic produce programs taking root in the stores we visited.

The local produce emphasis should be a good one for Henry's, as one of its strengths has always been a feeling by its customers that it was a local store. This goes back to Henry's founding by the Boney family, who were Southern California natives who always put a hometown emphasis into the stores. Members of the Boney family now own Sprouts Farmers Market, which has become a competitor of Henry's in many of the same Southern California markets. The family sold Henry's to Wild Oats Markets, Inc.

Wild Oats never really seemed to know what to do with the Henry's Farmers Market stores. Originally, when Wild Oats bought the chain from the Boney family, the stores were natural foods stores with an emphasis on produce, sort of like Sprouts today. However, Wild Oats toyed around with the format, at one time even making them more of a basic grocery store, selling Tide laundry detergent and Bounty paper towels alongside organic granola.

This type of merchandising can work with a big supermarket like Safeway's Lifestyle format, but is hard to do with a smaller format store like Henry's, especially when its history and past success was as a natural foods and specialty market.

Henry's is sourcing much of its local produce from the San Diego region, which has become a major growing region for organic produce despite its urbanization. According to San Diego County, there are currently about 320 local organic growers producing around 150 different crops--ranging from organic oranges and grapes to avocados.

Sourcing much of its local and organic local produce from the San Diego region allows Henry's, which has all of its 30 stores in Southern California, to be "super local." The local foods or Locavore movement defines a local food as one that comes from no farther than 200 miles from where a consumer lives. All of the Henry's stores are within a 100 mile or closer distance from San Diego.

Of course, not all of the grocer's produce--conventional or organic--comes from the San Diego region. Much of it comes from California's Central Valley, which isn't much more than 200 miles away, and elsewhere like Central America in the case of bananas of course. But the local area it's an increasing source for Henry's local produce program, according to nutritionist Little.

Look for Henry's Farmers Markets to play up its organic and local produce program demonstrably in the months to come, both in-store and in its weekly advertising flyer.

Nutritionist Little, who is currently in training for her first triathlon, also has started leading store tours for customers, in which she gives the groups of shoppers an aisle-by-aisle nutritional seminar as they walk together throughout the store, with a special focus on fresh organic and locally-grown fruits and vegetables and the importance of eating at least five servings a day of them. She also has a blog on the Henry's Farmers Markets website where she offers nutritional tips and other related information.

The retailer also is trying to keep the retail prices of its local, conventional and organic produce as low as possible, something the grocer was known for doing in its "salad days." That's more difficult to do without Wild Oats' buying power. But the retailer also is finding that with the high cost of diesel fuel and gasoline, locally-grown produce actually is becoming less expensive than much of the fresh produce grown much farther away is.

Meanwhile, based on what we observed during the store tours, Henry's new independence is playing well both in how the stores look and how the employees feel. We noticed more friendly, smiling store workers than in past visits under Wild Oats' ownership, for example.

There's still much to do to get the stores looking as good as they can and should look. For example, we think the fresh meat departments need some attention. Additionally, the overall dry grocery category mix needs some evaluating, with some deletions and additions made to create a better and stronger category mix.

However, there's been a marked improvement in what's been less than a year since the Smart & Final subsidiary acquired Henry's Farmers Markets from Whole Foods Market, Inc. Even more positive, there seems to be an overall plan being carried out, which was lacking under Wild Oats' ownership in our analysis. There also seems to be a renewed spirit of teamwork to improve the stores, which is essential in food retailing.

By selling Henry's, Whole Foods just might have created a new competitor for itself in the Southern California Market, in what is so far looking to be an improving Henry's in numerous ways. That's what's great about mergers and acquisitions in many cases--a little creative destruction can lead to fresh new roots being planted in the food retailing soil.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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