Retail Memo: Two Food Retailing Chains (Among the Growing Legions) Who Fear Not the Whole Foods Market, Inc.-Wild Oats Juggernaut

Sunflower Farmers Market founder and CEO Mike Gilliland in the produce department of one of his natural foods stores. The Sunflower Farmers Market stores are built around the produce department, which is generally located in the center of the store, and features conventional, organic and locally-grown fresh produce at prices considerably lower than Whole Foods Market, Inc. stores and most upscale supermarkets. With six stores coming to Texas and a new store in Boulder, Colorado, will Gilliland, already not a freind of John (Mackey), and his fast-growing Sunflower Farmers market chain become the new thorn in John Mackey and Whole Foods' side?

Claims by the U.S. Federal Trade Commission (FTC)--which continues to argue and appeal to the U.S. Federal Appeals Court in Washington D.C. that the Whole Foods Market, Inc.-Wild Oats Markets, Inc. merger has created a natural foods retailing monopoly and should be broken up--aside, two food retailers, among the many, are taking on the combined Whole Foods-Wild Oats juggernaut in two U.S. markets: Whole Foods' backyard home state of Texas, where it got its start and which it protects closely, and in Hawaii, where the supernatural retailer is launching four new stores as its entry for the first time into the multi-island-state market.

Natural~Specialty Foods Memo has argued that the FTC, along with retailers and suppliers who share its position vis-a-vis Whole Foods, are with all due respect plain wrong. In fact, we've been arguing and writing since last year when the acquisition-merger of Wild Oats by Whole Foods Market, Inc. was announced, that it would actually stimulate and increase natural foods category retailing rather than decrease competition.

Our argument is simple: Wild Oats was basically no longer an innovative (or for that matter very good) natural foods retailer. However, it's position as the number two supernatural foods retailer after Whole Foods tended to suppress innovation by other retailers to a certain extent because they viewed the category in many ways as a two retailer contest.

Certain retailers like Sunflower Farmers Market, Sprouts Farmers Market, Trader Joe's and some others were well on their way to competing in the category in their own unique ways. However, we've watched what in our analysis is a floodgate of players willing to take on Whole Foods Market, regardless of if they are natural foods retailers or supermarket companies, emerge since just late last year.

The joining of Wild Oats into Whole Foods provided some creative deconstruction in the retailing category. After the dust settled a bit, numerous retailers realized it wasn't such a mega-deal after all; that in fact there was plenty of competitive space available to them in the natural foods retailing space--be they natural foods format food retailers, hybrids or supermarket operators--to take on Whole Foods in regional markets throughout the U.S.

Sunflower Farmers Market: Texas bound by way of Boulder

One of the most aggressive post-merger competitors in the natural foods retailing space, albeit much smaller than Whole Foods, is Colorado-based Sunflower Farmers Market. Late last year the "fighting tiger" natural foods retailer, which operates natural foods supermarkets which range from 15,000 -to about 30,000 square feet with a focus on fresh produce and natural products for less (retail price), raised $30 million in new financing and announced it would more than triple the number of stores it has (currently 14) over the next three -to- four years. Plans call for having 21 stores open by the end of this year alone and 30 or more by the end of 2009.

Sunflower, which was founded and is headed by Mike Gilliland, the founder of Wild Oats, not only is expanding the number of stores it has in the Western U.S., but also is going right at Whole Foods with plans to open six stores in Texas, Whole Foods Market, Inc's home state, where it was founded and has its corporate headquarters.

Sunflower Farmers Market also plans to open its first store in Boulder, Colorado where it is headquartered. Boulder also is where Gilliland founded Wild Oats and has lived for decades. Boulder also is now Whole Foods' second hometown, having acquired Wild Oats which was based in Boulder, and the numerous stores it operated in the city. Gilliland left Wild Oats well before the acquisition-merger with Whole Foods Market, Inc.

Sunflower Farmers market founder and CEO Gilliland and John Mackey, Whole Foods Market founder and CEO, had a falling out many years ago, and to this day don't speak socially at industry events and other functions. Let's say Mike Gilliland isn't on the "friend's of John" email buddy list; nor is Mackey on Gilliland's Yahoo messenger "buddies" list in turn.

The Austin-American Statesman, based in Whole Foods' Texas hometown of Austin, has a recent (June 3, 2008) piece about Sunflower Farmers Market's decision to move into Texas with an initial six stores, including a 30,000 square feet natural foods supermarket in Austin, which Gilliland says will beat Whole Foods Market retail prices by 15% or more everyday in all categories, and even more in fresh produce.

Of course, Natural~Specialty Foods Memo is certain Whole Foods will fight back against that price undercutting on its home turf. Despite that, Sunflower is a serious competitor despite being so much smaller. It's good at what it does, and fears not Whole Foods Market post the Wild Oats' acquisition.

Hawaii: Defending the home turf with a new format and chain

Hawaii is a state in which Whole Foods Market is making a major new store opening effort in an attempt to become a major player in food retailing on the islands. Whole Foods has never had a store in Hawaii. But its changing that by having four stores in development at the same time: two in Honolulu (a huge 67,000 square foot unit and a smaller 27,000 square foot store); a store on the island of Maui (26,366 square feet), and a 40,000 square foot Whole Foods superstore on the island of Kailua. There also are future plans for even more Whole Foods stores in Hawaii.

Most Hawaii food retailers, especially those with upscale and natural foods offerings, have been extremely concerned and worried about the competitive impact Whole Foods Market's arrival on the islands will have on their businesses and the market, and fear a significant loss of business from the successful every place it goes natural foods grocery chain.

However, that's not the case with all of Hawaii's food retailers. Hawaii-based The Sullivan Family of Companies, which operates the Foodland, Sack-N-Save and Food Pantry chains, which are conventional supermarkets and discount supermarkets, has created a brand new format designed to compete in the natural and specialty foods space with Whole Foods Market on the islands.

The new chain or banner, called Lahaina Farms, gets its start next Wednesday when the first small-format (14,000 square feet) Lehaina Farms natural foods supermarket opens in the Lahaina Gateway Lifestyle Center in Lahaina, which is on the island of Maui, where one of the four Whole Foods stores will open possibly as soon as later this year.

The first Lehaina Farms store (not all of the new natural-specialty format stores will necessarily be called Lehaina Farms by the way, according to the company) is a combination natural, organic, specialty and fresh foods store with an upscale but price-conscious focus.

The Maui News, the Island's main newspaper, has a feature article in today's issue about the venture by the company best known in Hawaii for its Foodland chain, which is a longtime fixture on the islands.

Although the retailer's experience is primarily with conventional and discount supermarkets, it apparently hasn't heard about the Whole Foods monopoly as it's creating a natural foods chain of its own at a time in which Whole Foods Market, Inc. is making a major play in the Hawaii food and grocery retailing market.

The cup runith over: Lots of competition for Whole Foods

These two food retailers are just the tip of the iceberg in terms of grocers who don't buy the now tired argument by the FTC and some retailers and vendors that Whole Foods has achieved monopoly status by virtue of its acquisition of Wild Oats. In fact, one wonders if it had it all to do over again if Whole Foods Market, Inc. would have even bothered doing the deal, since it's caused lots of distraction for the retailer. But yes, they would do it again no doubt.

Additionally, although the retailer isn't talking about it, Whole Foods has found many of the former Wild Oats stores to be lacking in many ways, both physically in size and in condition, as well as the poor locations of many of the stores.

While John Mackey recently said the integration and conversion of the Wild Oats stores to the Whole Foods banner and system is going well, we've talked to a number of Whole Foods employees who've told us numerous aspects of the process have been a pain in the portion of the hog that sells for the cheapest price per pound. Chief among these pains being the condition of many of the former Wild Oats stores, as we mentioned above, along with some of the poor locations.

We've written about numerous other retailers that are putting a competitive challenge to Whole Foods in the natural products retailing category. These include smaller natural foods retailers like Sunflower Farmers Market and Sprouts Farmers Markets, Trader Joe's, and numerous independent natural foods retailers.

It also includes mega-supermarket chains like Safeway Stores, Inc. with it's upscale Lifestyle format supermarkets, the newer versions of which keep looking more and more like a Whole Foods store, but with the added benefit of selling basic groceries as well.

Additionally, in Texas there's HEB, which continues to build mega-upscale stores that rival Whole Foods in look and product selection. There's also Market Street in Texas, which is building and opening some of the most interesting upscale supermarkets full of natural and organic products in the U.S.

On the east coast there's Wegman's, which of late has been opening 100,000 square foot supermarkets that combine basic groceries, specialty and organic products, fresh, prepared foods and non-foods items in a format that losing nothing to a Whole Foods superstore.

Southern California alone has Sprouts Farmers Markets, Henry's (which Whole Foods sold as part of the Wild Oats acquisition) SuperValu-owned Bristol Farms, upscale Gelson's, Trader Joe's, Vons' upscale Pavilions stores, numerous independents, and now Tesco's Fresh & Easy Neighborhood Market, which sells lots of organic foods at discount prices, all as key competitors to Whole Foods in that market in the natural products' niche

There are many more; we could use another four thousand words and still just be getting warmed up. But we will same that for next time; as we plan on featuring these and many more retail players in the days and weeks to come here on Natural~Specialty Foods Memo.

Meanwhile, we suggest the FTC move on. Might there be some monopolistic or price-fixing issues in the oil industry that could warrant a closer look. After all, the top three U.S. oil companies' senior executives have bigger combined expense accounts than Whole Foods Market, Inc. has annual sales. Well, almost as much.

Retail Memo: News & Analysis: Bakersfield, California Next New Region in the Golden State For Tesco Fresh & Easy Neighborhood Market Stores

Bakersfield, California, best known as once being one of the top oil-producing regions in the United States, along with being the boyhood home of famous country western singers Buck Owens and Merle Haggard, will be the next new region in California that Tesco's Fresh & Easy Neighborhood Market marches into, when it opens at least six of its small-format, convenience-oriented grocery stores in the region either at the end of this year or in early 2009.

Tesco, the world's third-largest retailer, plans to open three Fresh & Easy grocery markets in Bakersfield--two in the northwest portion of the city and one in the southwest side of town. The retailer also plans two open two stores in the nearby Bakersfield suburbs of Delano and Wasco. Bakersfield, Delano and Wasco are located in Kern County. [Kern County is shaded in light green in the map above. See San Joaquin Valley on the map key.]

These six stores are only the initially units Tesco has planned for the region. Our commercial real estate sources, along with a source in the local community, tell us the grocer is looking for additional sites in the area for its grocery stores, which merchandise a limited-assortment of Fresh & Easy store brand and national brand everyday groceries, along with specialty and natural foods, fresh produce and meats, an extensive selection of prepared foods, wines and craft beers, fresh flowers, and some non-foods' products.

Fresh & Easy grocery stores average 10,000 -to- 13,000 square feet. There currently are 59 of the stores in Southern California, Arizona and the Metro Las Vegas, Nevada region. The retailer plans to open many more stores in these three states, especially in California and Arizona. Based on statements from Tesco, we believe the retailer wants to have as many as 200 stores opened by mid 2009.

Additionally, Tesco has signed leases for an initial 18 Fresh & Easy stores in Northern California's San Francisco Bay Area and is negotiating for more store sites in that region. Further, the grocer has inked leases on 19 sites for its small-format grocery markets in the Sacramento region in Northern California. Tesco also is negotiating leases for additional grocery store sites in the Sacramento area, as well as in the Northern San Joaquin Valley cities of Stockton, Tracy, Manteca and Modesto.

Fresno, which is between Bakersfield and the Stockton/Modesto region, also is on the retailer's radar screen for Fresh & Easy store locations. As reported here yesterday, Tesco will likely sign a lease for a Northern California distribution center on land in Stockton, California, which is about a 30 minute drive from Sacramento and an hour from San Francisco.

Tesco's initial Bakersfield region Fresh & Easy grocery markets will be at the following locations:

• Olive Drive and Jewetta Avenue, Bakersfield
• Brimhall Road and Jewetta Avenue, Bakersfield
• Panama Lane and Stine Road, Bakersfield
• Cecil Avenue and High Street, Delano
• Highway 46 and Griffith Avenue, Wasco

The first of the initial six Bakersfield region Fresh & Easy grocery stores could open as early as the end of this year. However, it's more likely the stores will start opening in early 2009.

Most of these six stores will go into empty, existing commercial retail buildings in the region. This is a practice Tesco is employing for its Fresh & Easy stores. The retailer will locate a vacant (usually former supermarket or similar retail store) retail building, obtain a lease for it with generally favorable terms, and remodel the building to fit its 10,000 square foot -to- 13,000 square foot Fresh & Easy Neighborhood Market format. [Read a piece on this issue here.]

Not only does the grocer have a lower start-up cost by following this practice, versus building stores from the ground-up (although it is doing some of that), it also is able to go from lease to getting the store open and operating much faster, since the building shell and all its infrastructure is already in place, and Tesco has only to gut the interior, create a Fresh & Easy grocery store inside, and give the exterior a moderate remodel in order to create its Fresh & Easy store and retail brand.

Welcome to Bakersfield

Bakersfield is located in Kern County in the heart of California's Central Valley. It's about 110 miles from Los Angeles to the south and around 110 miles from Fresno to the north. The city's population is about 324,000, making it California's 11th most populous city. The Bakersfield Metropolitan region--which includes Delano and Wasco--has a population of about 780,000, which makes it the 65th largest metropolitan region in the United States.

The Bakersfield Metropolitan region has been fast-growing in the last few years. In fact, the city of Bakersfield is the 11th fastest-growing city in the U.S., according to data from the U.S. Census Bureau.

The city is actually more Midwestern USA than typical Californian in its culture, economy and political attitudes. The main sectors of the region's economy are: farming and agribusiness; the oil industry (petroleum extracting and refining); manufacturing, warehousing and trucking; and services, such as retail. Bakersfield also is home to a campus of the California State University system.

Bakersfield holds as a claim to its fame being the hometown of two famous country music legends, Merle Haggard and Buck Owens. both local country music stars made good have streets named after them in the city. And, Country Western is the music style of choice in Bakersfield. The city has dozens of country music venues (including a club owned by the family of the late Buck Owens), along with a number of professional recording studios. Bakersfield often is referred to as Nashville-West. The city also has a country music culture: you are more likely to see more people out at night wearing cowboy boots and hats than you are woman wearing stiletto high heels and men wearing suits and ties.

Politics in Bakersfield also is much more conservative than it is in the rest of California. The region has far more registered Republicans than it does Democrats. And, there are many more voters who describe themselves as conservative than in nearly every other part of California.

Politics is changing a bit in the region though. About 35% of the area's residents are Hispanic. Most of the region's Latino's are immigrants, thus immigration is a big issue for them. They tend to agree with Democrats more on the issue than they do with Republicans. As a result, the Democratic party is seeing an increase in party registration in the area, largely from Hispanics. African Americans comprise only about 5% of the area's population. Asian Americans are even less than that. Nearly 60% of Bakersfield population is white.

The region also is famous for its red-hot summers. It's not unusual for Bakersfield to have temperatures of 105 -to- 110 degrees for weeks at a time throughout the summer. Note to Fresh & Easy: You should make those Bakersfield region stores as energy efficient as possible. Also: look for higher than average air conditioning and other related bills from about May through September.

Analysis: Grocery retailing in Bakersfield

The Bakersfield grocery retailing market can best be described--like the region itself--as meat and potatoes. However, that doesn't suggest some of the region's key players--Safeway Stores, Inc-owned Von's, Modesto-based Save Mart, SuperValu-owned Albertsons and Save-A-Lot banner stores, Costco Wholesale, Kroger Co.-owned Food-4-Less and Foods Co., Smart and Final, Winco and Sam's Club--don't offer specialty, natural and organic groceries and produce, or prepared foods--because many of the them they do. There's also a Trader Joe's specialty grocery store in Bakersfield.

Rather, it just means you won't find scores of upscale, gourmet and natural foods stores in Bakersfield--Whole Foods Market, Gelson's, Bristol Farms, Raleys, Sprouts Farmers Market and others--like you do find in abundance in Southern and Northern California.

In particular, Safeway's Vons', offers good selections of specialty, natural and organic foods and grocery products in its stores, especially in its newer or remodeled stores, which have or are being converted to Safeway's upscale Lifestyle format. And, of course, Costco Wholesale is a major merchandiser of specialty and natural grocery products at reasonable prices. Some of the newer Save Mart banner stores (Save Mart also has Food Maxx warehouse stores in the region) also have good offerings of specialty, natural and organic products.

What all the above mentioned food retailers really do bring to the Bakersfield region though is heavy competition, especially on basic, everyday grocery products offered at a low-price. Costco, Save Mart's Food Maxx, Kroger's Food-4-Less and Foods Co, Winco, Wal-Mart's Sam's Club, and SuperValu, Inc.'s Save-A Lot are all no frills' warehouse-style, discount grocery stores. Price is king at these outlets.

Safeway's Vons, Save Mart's Save Mart banner supermarkets, and SuperValu, Inc.'s Albertsons, banner all focus on the lowest possible prices in their stores as well in the market because of this price pressure (even though two of the three retailers own both warehouse stores and supermarket banners) exerted by the highly competitive warehouse format sector.

In fact, the market share differences between Save Mart, SuperValu, Kroger Co.'s Food-4-less and Foods Co. and Safeway Stores, Inc.'s Vons is so close as to make the numbers near meaningless. Costco isn't far behind either.

Since half of Tesco's Fresh & Easy small-format grocery stores' business comes from selling basic groceries at low prices, the retailer will find a very competitive environment in Bakersfield in the low-price positioning sector when it opens it first stores there at the end of this year or in 2009.

Fresh & Easy's other offerings--prepared foods, specialty, natural and organic groceries, wines and craft beers, might find a less competitive market. However, both Vons and Albertsons are kicking-up both their specialty, natural and organic grocery selections (fresh produce too) in their respective region stores, as is Save Mart in its Save Mart banner stores.

In fact, because these grocers' stores are so much bigger than a Fresh & Easy Neighborhood Market store--they average 40,000 square feet -to- 65,000 square feet, compared to Fresh & Easy's approximate 10,000 square feet--most already merchandise a greater selection of specialty, natural and organic foods (including produce) than a normal Fresh & Easy grocery market does in general.

Rather than in the city of Bakersfield itself, Tesco's biggest opportunity with its small-format Fresh & Easy stores, might be in the surrounding smaller communities, such as Delano and Wasco. Many of these cities have populations ranging from 15,000 -to- 40,000 but have few grocery stores in them, especially those offering both basic groceries and more upscale offerings like prepared foods. This strategy--locating more stores outside Bakersfield in these smaller cities rather than in the city--might prove more successful to Tesco in our analysis.

Bakersfield is growing, not just in population but in food sophistication as well. So the timing could be good for Tesco, especially in relation to the fresh, prepared foods and other specialty-oriented product selections sold in the Fresh & Easy stores.

Of course, this growth in the Bakersfield region hasn't only been noticed by Tesco. Our sources tell us Whole Foods Market, Inc. is considering locating a supernatural lifestyle store in the city, and that Trader Joe's is considering opening an additional specialty market in the area as well. Vons, Albertsons and Save Mart also are upgrading their supermarkets, and specialty product selections--including prepared foods--in Bakersfield.

In other words, Tesco's Fresh & Easy Neighborhood Market could take some share away from these established retailers in the region. But its impending arrival also could spur these grocers on to prepare a very competitive welcoming for the United Kingdom-based retailer's small-format, convenience-oriented Fresh & Easy grocery stores come early next year.