Retail Memo: Sprouts Farmers Market Store Number Eight Sprouts in Texas; Deep in the Heart of Whole Foods Market Country

Fast-growing, Arizona USA-based natural products retailing chain Sprouts Farmers Market opened its newest store in Whole Foods Market, Inc.'s home state of Texas on Friday (October 24) in a new 570,000 square foot shopping complex, Murphy Marketplace, in Murphy, Texas. Murphy is a suburb of Dallas.

The new Murphy Marketplace Sprouts is the natural grocer's eighth Texas store. It has additional natural markets set to open in the Lone Star State, where supernatural foods retailer Whole Foods was founded and is headquartered, in Austin. The national and international natural grocery chain currently operates 15 stores in its home state of Texas. Sprouts Farmers Market currently has stores in Arizona, California, Colorado and Texas.

The new Murphy, Texas Sprouts Farmers Market unit opened on Friday. But a big grand opening celebration by the grocer and the developer of the shopping center is planned for this Wednesday, October 29.

The $90-million Murphy Marketplace shopping and lifestyle destination center of which the new Sprouts natural market is a part is owed and was developed by Langford Property Company. The center is located at the intersection of FM 544 and Murphy Road in Murphy, which is in East Collin County. The Sprouts' store is the first natural-specialty market in the county, according to Eric Langford, president of the development company.

Langford says the joint Sprouts-Murphy Marketplace grand opening event will kick off with a ribbon-cutting ceremony at 10:30am at the Sprouts natural market. In conjunction with the ribbon-cutting ceremony, Langford says the center will dedicate a special clock tower, which was donated for the shopping center by the area Chamber of Commerce. The tower cost $10,000 and adds a historic flair to the lifestyle shopping center, Langford says.

The new Sprouts' store will hold all sorts of grand opening activities on Wednesday, including food tastings, special promotions and events tied-in with the clock tower dedication ceremony.

Like its other natural products markets, the new Murphy Marketplace Sprouts Farmers Market store specializes in farm fresh produce, purchased from local growers when possible. Sprouts also offers a large selection of vitamins and supplements, all natural meats, fresh seafood, bins full of bulk foods, an extensive selection of natural, organic and specialty grocery items, imported cheeses, deli meats, prepared foods and more.

Sprouts Farmers Market stores average about 15,000 square feet.

The Sprouts' natural market is the retail food anchor of the new Murphy Marketplace center which covers about 76 acres. Among the center's other retail tenants include: a Lowe's big box home improvement store, 24-Hour Fitness, Wachovia Bank, Saxby's, Massage Envy, Monarch Dental, Red Brick Pizza, Smoothie Factory, Planet Tan, Mattress Giant, Azura Nail Spa, Firehouse Subs, Cristina's Fine Mexican Restaurant, T-Mobile, Whataburger and more, according to the developer.

Being the only natural-specialty grocer in the county gives Sprouts a competitive advantage in this fast-growing and changing part of Texas. In fact, Sprouts has been locating a number of its Texas stores in regions in the state where no natural-specialty markets exist but where the emerging demographics and growth patterns offer good current and near term opportunity.

For example, According to the City of Murphy, the median household income for the city is $111,000-plus. Nearly 90 percent of the city's residents are college-educated. College-education is one of the key demographic variables that correlates to prime natural foods consumers. In fact, education-level is the top criteria Whole Foods Market uses in terms of locating one of its stores in a city or neighborhood.

Murphy's population has more than quadrupled since 2000, from 3,000 residents to more than 14,000 in early 2006. East Collin County, where the city is located, also is one of the fastest-growing counties in Texas. The new shopping center is regional in its scope, so the Sprouts' natural market is expected to draw from a much larger population base than just Murphy's 14,000 residents.

According to research conducted by the city, county and the developer of the new shopping center, FM 544 (the highway where the center is located) supports traffic of nearly 40,000 vehicles per day. In other words, at least 40,000 vehicles drive past the Murphy Marketplace daily.

The city of Murphy was established in the late 1800s during the time the railroad was extended into the area. It quickly became a shipping hub for the local farming and ranching families. As it did for other Texas towns, the railroad gave Murphy residents the opportunity to import building materials that were not locally available. Bricks that were mass-produced in Bedfordshire, United Kingdom and slates from North Wales were incorporated into the construction of new buildings.

Along with these new materials came the "Victorian" architectural style. The Victorians invented a way to make big panes of glass, called "sheet glass." So Victorian houses had bigger windows. Victorians also loved to decorate their houses by embellishing these large windows and by adding bay windows, iron railings, Flemish bonding and other decorative brickwork patterns. Early Murphy residents were quick to adopt this affluent style into their new homes.

Murphy Marketplace has blended many of these local design elements into the architectural design of the retail center. The center's -- and the new Sprouts natural market's -- design features include the use of soft earth tone colors, simple building lines, colorful canopies, decorative lighting and extensive landscaping in keeping with the community's design theme. Walking paths, shade trees, water features and gathering areas also provide a place to stroll, play and visit with friends, creating a strong sense of place in the center.

Memo to FTC: Whole Foods' Hegemony is baloney

In this October 21 piece, "Retail Memo: Natural Grocers Joining Sunflower Farmers Market in Opening First Stores in Whole Foods Market's Home City of Austin, Texas USA," we wrote about how two other fast-growing natural foods retail chains, Sunflower Farmers Market and Natural Grocers, are joining Sprouts Farmers Market in opening stores deep in the heart of Whole Foods Market, Inc. country -- Texas.

That Sprouts already has opened and currently operates eight natural foods markets in Whole Foods' home headquarters state, with more new stores on the way -- a new Sprouts store is planned to open in McKinney Texas in the summer of 2009 and another in Coppell, Texas in late 2009, for example -- demonstrates the marketplace (and Sprouts) disagrees with the argument by the U.S. Federal Trade Commission (FTC) that Whole Foods Market, Inc. has a monopolistic or hegemonic position in the natural and organic products retailing space as a result of its merger with Wild Oats last year.

Do smaller competitors really open stores in an aggressive manner in the home state of a retailer that has a monopoly in the natural and organic products retailing segment? Of course not. They do so because they see a niche and an opportunity to compete, which means competition exists.

Add to Sprouts the fact Sunflower and Natural Grocers are both opening stores in Texas and the FTC's argument becomes even more silly.

Further add the significant competition in Texas from supermarket chains like H-E-B and United Supermarkets' Market Street banner, Safeway-owned Randall's, Costco, Wal-Mart and a few others in the state (all retailers deep into the natural and organic foods categories) and the FTC's argument looks like pure folly.

And Texas is far from an isolated example. It's the same all over the U.S. Whole Foods Market is faced with stiff (and getting stiffer) natural and organic category competition from regional natural foods chains like Sprouts, Sunflower, Natural Grocers and others, including independents and Co-operatives in some places, and national and regional supermarket chains (and local independent grocers), as we wrote about in this October 19 piece focusing on the Colorado market.

Also toss in the national mass merchandisers and club chains: Wal-Mart; Target; Costco; BJ's Wholesale; and Wal-Mart's Sam's Club. All are deep in the natural and organic products categories -- and getting deeper. Then there is Trader Joe's. And we are just getting started. Tip of the iceberg stuff. There is no lack of category competition at retail for Whole Foods Market.

This competitive fact is true in California, Oregon and Washington State, the Midwest, the South, and the eastern U.S. In all U.S. regions natural foods retailers and supermarkets -- national, regional and independent -- all are challenging Whole Foods in the natural and organic products retailing segment in various ways. We can't find one region in the U.S. where a person with real knowledge of natural products retailing could say Whole Foods has a real monopolistic position. Rather, the supernatural retailer is actually fighting for its life nationally.

Despite this market reality, the FTC plans to hold a new hearing in February, 2009 to discuss what it says is Whole Foods Market, Inc.'s monopolistic position in the natural and organic category retailing segment. This despite the fact every shred of empirical evidence shows it isn't the case. We even wonder how many of the current members of the FTC will be around in 2009 when a new President has taken office following next week's election?

Perhaps it's time to have a Boston Tea Party in front of the FTC offices in Washington, DC as a symbol of how this government agency continues to waste resources and U.S. taxpayer money in its non-marketplace reality-based pursuit of a natural and organic products category retailing monopoly that doesn't exist. We suggest organic tea of course.

There are real monopolies out there after all. Whole Foods Market, Inc. just isn't one of them.

[Editor's note: Natural~Specialty Foods Memo owns no stock in Whole Foods Market, Inc. Nor does it have any sort of business or professional relationship with the company.]

Retail Memo: Natural Grocers Joining Sunflower Farmers Market in Opening First Stores in Whole Foods Market's Home City of Austin, Texas USA

Fast-growing Lakewood, Colorado-based Natural Grocers by Vitamin College plans to open its first natural foods and products store in Austin, Texas USA, the city where Whole Foods Market, Inc. was founded, is headquartered, and operates numerous natural foods supermarkets. The store will be located at 39th and Guadalupe streets in the hip Texas city who's residents have a strong appetite for natural foods.

The Austin, Texas store, which Natural Grocers says is scheduled to open in January, 2009, will be the natural grocer's first Austin unit and its third store in Texas. Currently there is one Natural Grocers store in Dallas, at 7515 Campbell Road, which opened just last month. A second store is scheduled to open next month in Amarillo.

At about 11,000 square feet, the Austin Natural Grocers market is far smaller than the typical new Whole Foods Market store.

However, it's not much smaller than the small-format natural foods stores being opened by two other fast-growing chain's -- Sunflower Farmers Market and Sprouts Farmers Market. The stores of these two natural products retailers average about 15,000 -to- 20,000 square feet. The Dallas Natural Grocers store that opened last month is about 14,000 square feet.

Sunflower Farmers Market also plans to soon open a store in Whole Foods Market's home city of Austin, joining Natural Grocers in its backyard invasion of Whole Foods' home turf. In June of this year, as we reported, Sunflower Farmers Market announced plans to open its first store at 1901 W. William Cannon Drive near the intersection of Manchaca Road. We also reported Sunflower said at the time it plans at least three stores in the Austin area.

Natural Grocers also says it plans to open at least two more stores in Austin if the first store performs well. Those stores would be in the city's Arboretum area and in South Austin, according to Kemper Isley, who is the co-president of Natural Grocers by Vitamin Cottage.

Asked why the retailer is going to locate a store right in the heart of Whole Foods country, Isley says "Austin's demographics fit well with the company's model of a traditional natural foods store." He also says he's not concerned about going into the backyard of Austin-based Whole Foods Market, Inc.

The Austin Natural Grocers' store will be located across the street from Central Market, the upscale natural-specialty format banner of 310-store Texas-based food and grocery chain H.E. Butt (H-E-B). Central Market stores are popular in Texas. The markets feature lots of natural, organic, specialty, gourmet, international and fresh, prepared foods in an upscale setting.

"We've always considered ourselves synergistic with Whole Foods and I think we’ll be the same way with Central Market," says Isely.

In other words, Natural Grocers by Vitamin Cottage believes being located across the street from the Central Market and not to far away from a Whole Foods Market unit in Austin will actually help the store's sales rather than hurt them. At least the Colorado-based natural retailer is betting on that premise.

The Natural Grocers' stores are a bit more traditional or orthodox natural foods markets.

For example, the stores offer only organic produce items, no conventionally grown. Additionally, The company's product ingredient standards tend to be stricter than those of Whole Foods Market and other chain natural products retailers. The stores also put a heavy emphasis on selling natural supplements, devoting about 20% of the store's square footage to the category.

Natural Grocers' stores are modern though. In addition to selling natural and organic food, grocery and non-foods products, the stores also offer specialty and gourmet items as long as those products meet its standards, for example. The store design also is modernistic in look and approach.

Like Sunflower Farmers Market and Sprouts Farmers Market, Natural Grocers puts an emphasise on price, trying to offer everyday retail prices lower than those at Whole Foods' stores and other competitors.

Natural Grocers by Vitamin Cottage currently has 28 stores. All but three of the stores -- the current Texas store open in Dallas and stores in Santa Fe and Albuquerque, New Mexico, -- are in Colorado.

But like Sunflower Farmers Market and Sprouts Farmers Market, Natural Grocers is in a fast-growth mode. Company co-president Isely says the natural products retailer is looking at four locations in North Texas beyond its existing Dallas store and will look at other locations elsewhere around the state.

Additionally, he says the retailer is looking to potentially open stores in Utah, Wyoming, Arizona and Oklahoma. All four of these states would be brand new markets for Natural Grocers.

The retailer first ventured outside of its home base of Colorado in 2003, opening the two stores in nearby New Mexico. It wasn't until five years later that it opened its first store in a third state outside of Colorado, opening the Dallas last month. Now another store follows in Austin in January, 2009 -- and Natural Grocers' store count and new market growth appears to be in rapid-development gear.

Related Stories from Natural~Specialty Foods Memo:

>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

>October 21, 2008: Retail Memo: H-E-B Set to Open 127,900 Square Foot Hybrid Mega-Store in Houston, Texas Suburb; Aisles of Organics and Premium Delights

>Click here to read a selection of past posts about the FTC/Whole Foods-Wild Oats acquisition issue.

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.

Retail Memo: 'Business Week' Discovers Sunflower Farmers Market, Just As Many Shoppers Are Doing Daily

From the Natural~Specialty Foods Memo Editor's Desk: As regular readers of Natural~Specialty Foods Memo (NSFM) are aware, we write often about fast-growing natural foods retail chain Sunflower Farmers Market, calling it one of the smaller-format, "fighting tiger" (the big tiger being Whole Foods Market, Inc.) natural grocers along with Sprouts Farmers Market. [Just type in Sunflower Farmers Market in the search box at the top of the blog and you can get a selection of those stories and posts.]

We first started writing about Sunflower Farmers Market, which was founded by former Wild Oats Market, Inc. founder Mike Gilliland (pictured above in a store produce department) who is the company's CEO or 'Head Sunflower,' last year (when NSFM was started) at a time when most publications devoted very little if any ink to the natural foods' grocer.

We've continued to regularly report on the retailer's developments and write about what we often call the natural foods retail space category-killer because of its discount prices on natural and organic products, especially fresh produce and shelf-stable food grocery items.

With the $30 million Sunflower Farmers Market raised early this year, it's embarked upon a fast-growth new store strategy, as we've written about. This growth strategy even includes opening stores in Whole Foods Market's home territory of Texas.

We often suggest that Sunflower and Sprouts Farmers Market combined offer much more of a competitive challenge today to Whole Foods Market, Inc. than Wild Oats did pre-acquisition. Of course, Sunflower and Sprouts don't have as many stores as Wild Oats had before merging with Whole Foods Market last year. (There were 110 Wild Oats-owned stores when Whole Foods acquired the chain last year.) However, both "fighting tiger" natural foods retailers are growing so fast it won't be too long until they reach that number between them.

Sunflower Farmers Market has started getting attention from both the mainstream supermarket industry trade press and the consumer business press in the last couple months. This is for two primary reasons: The natural grocer's raising of the $30 million in investment money earlier this year and its resulting rapid new store opening program, and because the editors and reporters for these publications now read blogs like Natural~Specialty Foods Memo and others regularly. We know this because we often get email communications from newspaper business section writers and others about stories we write about or news we break regarding the industry.

Business Week, arguably the mainstream media bible of business and industry in the United States, recently published a feature article on Sunflower Farmers Market and its founder Mike Gilliland--who by the way is no friend of John (Whole Foods' John Mackey that is). The two are the natural foods industry's version of the chemical reaction that results when you mix oil and water together if you've ever seen them in the same room together, even if that room is one of the two huge exhibit floors at the east or west coast Natural Foods Expo industry trade shows held annually.

We thought the Business Week article was pretty was well done and informative and therefore wanted to bring it to our readers in case you didn't see and read it in Business Week in late July. Plus, we are on vacation today--so we aren't writing an original piece or two like normal.

Sunflower Sprouts Fresh Stores and Consumers
Mike Gilliland, Wild Oats' founder, has big plans for his fast-growing Sunflower Farmers Market

by Jessie Scanlon

Page Morgan-Draper still shops at her local Albuquerque Whole Foods (WFMI). But, says the mother of two: "We're not made of money." That's one of the reasons she stops at a Sunflower Farmers Market on her way home from work three days a week. The fast-growing chain of grocery stores in five Western and Southwestern states specializes in produce, much of it organic, bought directly from farmers and sold at almost Wal-Mart (WMT) like prices—two pounds of organic broccoli for $3 and 99¢ for a pound of apples, to quote recent specials at Morgan-Draper's local store.

With its "Serious Food, Silly Prices" tag line, Sunflower targets consumers like Morgan-Draper who want to eat healthy, natural foods, but can't afford—or don't want to pay—gourmet prices. As Sunflower CEO and co-founder Mike Gilliland puts it: "We're a cost-conscious Whole Foods."

But Gilliland wants to do more than just pick off that high-end grocery's belt-tightening shoppers. His prices, and the weekly Sunflower sales advertised in the newspaper beside the local supermarket ads, are an attempt to lure consumers at the middle-to-low end of the market. The potential genius of Sunflower is its appeal to consumers at both ends of a market that's increasingly split between low-cost big-box stores and wholesale clubs on one end, and high-end retailers at the other.

Growing His Second Chain

It's an innovative strategy that's easier said than done. The relative newcomer is virtually surrounded by highly aggressive competitors, from Whole Foods to the increasingly organic Wal-Mart and its recent small-format spin-off, Wal-Mart Marketplace (NSFM Editor's note: it's Marketside not Marketplace), itself launched in response to British brand Tesco's U.S. effort, Fresh and Easy.

But higher food prices—up 5% nationally between April, 2007 and April, 2008, according to the most recent figures from the Bureau of Labor Statistics—could give Sunflower a boost, as even middle class consumers become more price-conscious. And Sunflower's emphasis on organic produce, much of it grown locally, should appeal to the consumers that spent a total of $1 billion at farmers markets in 2006. Buoyed by these trends—and by a $30 million investment by private equity firm PCG Capital Partners in December, 2007—Sunflower is in the midst of a rapid expansion, growing from its current 14 stores to some 21 locations by the end of 2008. Fifty stores are planned for five years from now.

Sunflower is almost a déjà vu for Gilliland, who founded Wild Oats with his wife, Libby Cook, in 1987. "Back then, most people couldn't spell 'tofu,'" says the natural-foods pioneer. Despite some missteps as a first-time entrepreneur, he built Wild Oats into a $2.2 billion company before stepping down as CEO in 2001. (The more successful Whole Foods bought Wild Oats in 2007 for $565 million.) He launched Sunflower in 2002.

Pricing, Pricing, Pricing

There's a reason Gilliland thinks Sunflower will do well against his longstanding rival. The company's farmers-market format is based on a California chain called Henry's Market, one of the many companies Gilliland had acquired when he was Wild Oats CEO. As his company and Whole Foods expanded, he increasingly found his stores under pressure. "A Whole Foods would open nearby and the typical Wild Oats would lose 30% to 40% of its business overnight," he says.

But stores based on the Henry's Market format competed well because they were less intimidating to the casual natural-foods shopper and appealed to the demographic that didn't want to pay for the glitz of a natural-foods superstore.

Pricing is key to Sunflower's strategy and its drive to undersell Wal-Mart. Gilliland claims that at least 80% of the store's produce beats the giant's prices. He and his team have been rethinking myriad aspects of their business, trying to "squeeze pennies out of everything," he says. Sunflower buys its produce by the truckload directly from farmers; local trucking is done by Sunflower staff, using company vehicles. Construction, too, is managed in-house by Gilliland's brother, who outsources some jobs to skilled workers. This allows Sunflower to build a new store for less than $2 million, or $70 a square foot, compared to the $150-per-square-foot industry average for a new supermarket.

In terms of design, the stores are no-frills. "They're nice stores, but not works of art," says Gilliland. "Whole Foods is like a museum!" Of course, it's "silly prices," not sleek design, that he's going for.

A natural surge?

At least in the short run, analysts aren't convinced that Sunflower's market-bridging strategy will succeed, especially when it comes to wooing low-end consumers. "Let's get real," says David Livingston of DJL Research. "[Sunflower] simply does not have the economies of scale in terms of labor, rent, and purchasing power [to beat Wal-Mart]." Apart from produce, Sunflower's prices are higher than the giant's, although they're competitive. While consumers who are tired of the big-box shopping experience may be willing to pay a bit more at a friendly, smaller-format store, it's far from certain they will.

Considering the other ends of the market, Paul Weitzel, a managing partner at Willard Bishop, says: "I don't think people who shop organic are as price sensitive as some." But with the economy tightening, more consumers are going to focus on value.

It's too early to call Sunflower a resounding success, but its strategy seems to be working. Same store year-over-year sales are up by double digits, according to Gilliland. Looking forward, the company will benefit from consumers' continued focus on fresh produce and on healthy foods. According to Progressive Grocer's 2008 Annual Report on the industry, retailers expect produce to be the most-shopped food category this year, followed by private-label products—double good news for Sunflower.

"We expect a surge over the next five years as naturals go from niche to mainstream," says Willard Bishop's Weitzel. "Sunflower will be well-positioned for that."

Jessie Scanlon is the senior writer for Innovation & Design on BusinessWeek.com.

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.