Retail Memo: Whole Foods Market to Dramatically Expand in the United Kingdom; Will Open Up To 30 New Stores in the U.S. in Fiscal 2009

Austin, Texas-based supernatural and lifestyle grocer Whole Foods Market, Inc. plans to expand from its current one store in London, England under the Whole Foods' banner, to additional stores in the London Metropolitan region and elsewhere in the United Kingdom.

In addition to its current 75,000 square foot Whole Foods Kensington High Street flagship store in London, Whole Foods Market, Inc. owns the small natural and organic foods' chain Fresh & Wild, which it acquired from its British owners about four years ago. The Fresh & Wild natural and organic foods' markets are located in and around London.

At the time of the Fresh & Wild acquisition, Whole Foods' CEO John Mackey said the grocer was buying the British-born natural foods chain in part as a stalking horse, in that it would provide a base of business in the UK so that Whole Foods could eventually start opening larger stores under its Whole Foods banner. Mackey also said then, and repeated recently, that most if not all of the grocer's new stores in the UK would be under the Whole Foods banner rather than Fresh & Wild.

The grocer started doing just that almost a year ago when it opened its first Texas-sized (75-k square foot) Whole Foods Market in London. The London flagship store got off to a bit of a slow start. However, business has picked up dramatically over the last couple months.

We've now learned Whole Foods has hired a two commercial retail agencies in London to search for new store sites in the London Metropolitan area and beyond in other parts of the UK.

Those two agencies, Green & Partners and Gilbert, have been given marching orders from the grocer's Austin, Texas corporate headquarters to look for potential store sites of between 20,000 square feet -to 75,000 square feet within an hour or so drive from central London as the top priority, and elsewhere in the UK as the secondary priority. Twenty thousand square feet is considered a very decent-sized supermarket in London. Seventy five thousand square feet--the size of the grocer's flagship store in London--is considered a massive supermarket in the region.

Whole Foods has taken a further step, which demonstrates the grocer is serious about its UK expansion. That step is the hiring of Nina Shores, who is the former retail property director for British retailer Bank Fashion, to head up the supernatural grocer's UK expansion program.

Additionally, during a recent trip to the store in London, numerous store-level employees mentioned to us they were aware that Whole Foods' is looking for sites throughout the UK. One store team member said he was thinking about quiting because of a lack of advancement opportunities at the single store. However, he said he was told by a higher up not to worry because the grocer was going to be opening many stores in the next few years, and that there would be multiple opportunities soon.

Whole Foods' target customer in the UK is similar to its target shopper at home in the U.S. College educated, and post undergraduate degree-holders, are key. Upper income is a key demographic as well. Additionally, ethical consumers, "greens" and health conscious shoppers round out Whole Foods' key variables when looking for neighborhoods to locate it new United Kingdom stores in.

There are plenty such neighborhoods within a one hour's drive of central London. And many more throughout the United Kingdom. Further, London is arguably the current global capital of ethical and green or sustainable consumerism, which fits Whole Foods' retailing and merchandising philosophy extremely well.

UK upscale supermarket chains Waitrose and the Co-op (and Sainsbury's in part) are currently the primary grocers of choice for London Metro region consumers who fit the Whole Foods' demographic profile.

And, of course, there are the Whole Foods'-owned Fresh & Wild stores already in the area. Those stores are much smaller than a typical Whole Foods' banner store, and as a result carry a much smaller selection of natural and organic products. They also don't have the extensive in-store prepared foods venues and other special lifestyle features that a 45,000 -to- 80,000 square foot Whole Foods' banner store does. They do have a nickname similar to Whole Foods' "Whole Paycheck" in the U.S. though. The British wags call the stores "Fresh & Wildly Expensive."

Our UK industry sources have told us a number of sites in Metro London and elsewhere in the UK have been rumoured to be high on the short list of possible locations for new Whole Foods' banner stores. These potential sites include: numerous locations in the city of London, the dockland banking district's Canary Wharf, Manchester, Bristol and Edinburgh.

We, nor do our UK sources, know the number of Whole Foods' banner stores the grocer wants to open in the United Kingdom. What we do know though is Whole Foods Market, Inc. knows it needs a critical mass of stores in the region in order to do its brand of merchandising and promotion. As such, we believe the supernatural retailer will embark on a multi-year new store development program in the UK--beginning first with opening new stores and filling out in the London Metropolitan region.

Along with that strategy, we see the grocer opening stores at the same time--but at just a slightly slower pace--in key parts of the UK that fit its education, income, environmental and ethical consumer demographic variables best. In other words, the UK is no longer a mere retail test for Whole Foods Market, Inc.. Rather, it is along with Canada becoming nearly as important corporately as the grocer's U.S. expansion plans are.

Whole Foods' to open up to 30 new stores in U.S. in 2009

Speaking of those U.S. expansion plans. Whole Foods' announced today in a filing with the U.S. Securities and Exchange Commission that it plans to build and open between 25 -to- 30 new stores in the U.S. next year. That's a new store opening somewhere in the U.S. at a rate higher than one every other week.

The 29-30 new stores will all likely be no smaller than 45,000 square feet (except in special cases like urban neighborhoods where there are geographical limitations of course) and as big as 80,000 square feet. The new stores also will be located both in regions like Texas and the west and east coasts, where Whole Foods' already has a substantial number of stores, and in new areas of the U.S. where the grocer has little or no current retail presence.

Whole Foods also is set to open its Whole Foods Express small-format, convenience-oriented prototype store in a renovated former Wild Oats market building in Boulder, Colorado later this year. If that test--and format--proves successful, we could see the supernatural grocer join the growing small-format grocery store revolution in the U.S. with additional Express stores in other parts of the country perhaps even beginning next year.

From what we've been able to learn thus far, the Whole Foods Express format will be about 15,000 square feet -to- 20,000 square feet in size. It will feature a limited selection of natural and organic grocery products, fresh produce and meats and other perishables.

A key feature of the Express store will be an extensive selection of natural, organic, healthy and tasty ready-to-eat and ready-to heat prepared foods. We also expect to see some sort of an in store cafe in the Express store, as well as a small version of a Whole Foods-style in-store Bistro food service venue.

Retail Memo: The 'Whole Analysis' - Whole Foods Market Inc's First Quarter Financials, FTC v. Whole Foods...The Natural Grocer At Home and Abroad

Whole Foods Market's flagship store and corporate headquarters in Austin, Texas. [Photo Credit: Whole Foods Market, Inc.]

Whole Foods Market, Inc. reported its first quarter fiscal year sales and profits on Wednesday afternoon (February 18), after the financial markets closed. [You can view Whole Foods' detailed financial release at the link here: Whole Foods Market Reports First Quarter Results.]

The good news

Whole Foods' beat stock analysts estimates in terms of its Q1 profits, despite the fact the natural foods grocery chain's profit dropped by 17% during its first quarter, to $32.3 million, compared to $39.1 million for the same quarter last year. Overall Q1 revenue increased by $2.5 billion over last year's first quarter revenue.

As a result of beating analysts estimates, Whole Foods Market, Inc's stock soared by a whopping 34% in trading on Thursday and Friday, following Wednesday's report. That's a much needed boost for Whole Foods' stock since its per-share value had dropped by about 75% (from its 52-week high) prior to Wednesday.

The bad news

In addition to the 17% Q1 net income loss, Whole Foods Market, Inc. experienced for the first time in the company's history a quarterly drop in same-store sales. Sales at stores open for at least one year decreased by 4% in the first quarter. Same-store sales are an important industry indicator of a retailer's performance.

Whole Foods' senior management has found great pride, as it should, in the fact that same-store sales has increased every quarter, until now, for the natural foods grocery chain.

But in the current severe economic recession, it isn't a surprise to Natural~Specialty Foods Memo (NSFM), nor should it be to investors and industry observers, that Whole Foods Market, Inc. experienced the decrease in same-store sales in its first quarter. Having said that, this is something the natural grocer must reverse in the second quarter.

As we've previously reported, Whole Foods Market made a number of cost-cutting moves last summer, including laying off about 100 employees at its corporate headquarters in Austin, Texas, in hope that in the face of reduced sales it could stem its loses. It's likely that without those cost-reductions the natural and organic foods grocer would have shown poorer Q1 results.

During a conference call with analysts on Wednesday, Whole Foods said it has enacted a salary and hiring freeze going forward as a way to further cut costs.

In the conference call, Whole Foods' CEO John Mackey said the company is seeing early signs that increased sales, do largely to more aggressive pricing and promotions by the retailer, may be stemming the same-store sales decrease experienced in the first quarter. Of course, with the recession continuing to get deeper and worse, it's near-impossible what the next couple of months will bring for more upscale, specialty-oriented grocers like Whole Foods Market.

It's our analysis that Whole Foods still likely has some cutting to do because we believe, as do most experts and analysts, that the recession is going to get worse before it gets better, even with the $787 billion economic stimulus package signed by President Obama, and that the remainder of 2009 will see cash-strapped consumers continuing to trade-down in terms of shopping more at discount food retailers, along with spending less money overall on food and groceries because the plain just have less to spend.

We do see some positive signs, based on store visits and interviews and discussions with shoppers, that Whole Foods' new value emphasis, in which it has lowered some prices, is offering better promotions, including coupons, focusing more on basic items, along with featuring less expensive store brands more often, is beginning to bare some sales fruit at store-level.

FTC v. Whole Foods: The FTC-induced bad news

As Natural~Specialty Foods Memo (NSFM) has been reporting on writing about regularly, Whole Foods Market, Inc. continues to battle the U.S. Federal Trade Commission (FTC) over the natural grocery chain's friendly 2007 acquisition of Wild Oats Market, Inc. At present, Whole Foods and the FTC are in negotiations over a possible settlement to the long and protracted FTC legal case against the deal.

The FTC has a halt of further legal proceedings in place until March 6, while the two parties are negotiating a possible settlement.

Should a settlement not be reached by then, the FTC will go forward with its legal challenge to the merger. The regulatory body has an April 6, 2009 date set to begin an Administrative trial in which an FTC Administrative Law Judge will hear arguments from Whole Foods and the FTC on the deal and rule on its outcome, which could include an order to break-up the now nearly-100% merged grocery chains.

Whole Foods Market, Inc. reported Wednesday that it spent a whopping $11 million in the first quarter alone on legal costs related to fighting the FTC challenge to the merger. This $11 million is a significant contributor to the natural and organic grocer's 17% income loss in Q1.

Since it's our argument that the FTC is wrong in its argument and legal case that a combined Whole Foods-Wild Oats represents a monopoly in 29 U.S. markets, in what the regulator calls the "premium natural and organic retailing segment (PNOS),"we strongly suggest this $11 million expense was an unnecessary one for Whole Foods. In fact, were we an investor in Whole Foods Market, Inc., we would protest the FTC's continued legal challenge to the merger to the President and Congress, arguing that doing so by the FTC is a misuse of taxpayer funds.

Because of the serious challenges Whole Foods is facing due in large part to the the bad economy, along with increased competition from other natural foods class of trade retailers, supermarket chains moving increasingly into the natural and organic products space, and discounters like Wal-Mart, Costco, Target, Trader Joe's and others, it could have used that $11 million for promotional and other merchandising purposes rather than having to spend it on legal counsel.

After all, do Whole Foods' first quarter financials look to any reasonable person reading them like the sales and income numbers of a retailer that holds a monopoly in any so called segment of the U.S. food and grocery retailing industry?

We think not. And just because the company's stock soared by 34% on Thursday and Friday, that means very little in the medium-to-long run. Wall Street plays the expectations game. Whole Foods Market's Q1 numbers were much better than many analysts thought they would be. Therefore, the natural and organic grocer's having beat these estimates, the stock soared. Remember, what goes up, particularly in the stock market, also comes down -- and often times nearly as rapidly as it went up. Investors also were looking hard for companies to invest in last week, which helped fuel a flight of cash into Whole Foods' stock.

It's our analysis and opinion that the FTC case against Whole Foods Market, Inc. has actually become an economically punishing one for the company and its shareholders. This at a time when the federal government is spending hundreds of billions of dollars of taxpayer money to keep companies in other industries -- financial services, automobile manufacturing -- alive.

General Motors is now asking Congress and President Obama for another $21 million and Chrysler, which is majority-owned by the Cerebus private equity firm (about 80% ownership) is asking for an additional $5 billion.

Meanwhile, an agency of this very same government, the FTC, is prosecuting a legal battle against Whole Foods Market, Inc. that cost the retailer and its investors $11 million in the first quarter, millions more before that, and possibly million more in the next couple months unless a settlement is reached with the FTC.

This is just wrong. The FTC argument is folly, in our analysis. And at a time when the federal government is bailing out a host of companies, it is doubly-wrong that the FTC is pursuing a course of action that is significantly contributing to severe struggles by Whole Foods Market, Inc., as well as costing its investors money.

There is some indication our argument, and those of others, has sunk into the heads of some of the FTC Commissioners -- and we hope it has -- which could be one of the reasons they've decided to work towards a settlement agreement with Whole Foods.

The 'whole' conference call

There were a number of other announcements and points of information of interest during the analysts' conference call with Whole Foods on Wednesday. Below is a summary of those key points of interest as stated in the conference call by the company's senior executives:

~"Although transaction count and basket count are still down, the decline in transaction count has improved slightly. While it is obviously still too early to say our sales are stabilizing, we (Whole Foods) are encouraged by these trends."

~"Competition continues to be a factor as retailers fight over fewer food dollars being spent. Cannibalization also remains a factor, but to a lesser degree."

~"Whole Foods Market private label SKU count increased 11% year-over-year, accounting for 22% of our total grocery and Whole Body sales."

~"We (Whole Foods) plan to roll out a 5-Step Animal Welfare Rating system beginning in our United States stores later this year."

~"We (Whole Foods) reduced our planned new store openings by 50% for fiscal year 2009 to 15 from a prior range of 25 to 30. We terminated 11 leases in development, totaling approximately 570,000 sq ft, and down-sized nine leases by an average of 10,000 sq ft each."

~"We (Whole Foods) spent a lot of time in Q1 really focusing on values especially in produce, meat and seafood. And we've seen a lot of very good reaction to our promotions that we've done in those areas."

~"We (Whole Foods) believe the long-term growth and return potential in the United Kingdom is much greater than Canada, and we're taking some proactive steps to improve our operations there."

Whole Foods United Kingdom

This last point about Whole Foods Market's favoring the long-term growth and return potential in the United Kingdom over that in Canada (those are the only two international markets the company operates in outside the U.S.) is extremely interesting.

During the conference call Whole Foods' said it is breaking up its UK stores into separate geographical regions, similar to what it does in the U.S. That shouldn't be too hard a task at present since all of its UK stores are located in London, England.

Whole Foods Market, Inc. currently operates five stores in the UK, all in London, England, as mentioned above. Only one of the five stores, its nearly 80,000 square foot natural-organic and premium food emporium in the huge The Barkers Building on 63-97 Kensington High Street in London, has operated under the Whole Foods banner since it was opened, which was in 2007. The other four London stores have operated under the Fresh & Wild banner. Fresh & Wild was a small, UK-based natural products chain Whole Foods Market, Inc. acquired a few years ago.

Whole Foods is in the process of changing the name of the remaining Fresh & Wild banner stores to its Whole Foods banner, so that all of its UK (read just London for now) stores operate under the same banner -- Whole Foods. The rebranding is set to be completed by the end of this month. [You can view a list of Whole Foods' UK-London stores here.]

The nearly 80,000 square foot Kensington High Street Whole Foods banner store the retailer opened about two years ago has been a struggle for the natural grocery chain. During its first year of operation, 2007, the aisles of the huge market were almost always empty. However, beginning towards about the end of the first quarter in 2008, business started to pick up considerably at the market, after Whole Foods made a number of changes to the store, along with initiating more aggressive promotions and other merchandising and marketing initiatives.

But beginning in about October of last year, business dropped at the upscale store, as it began doing at most all of Britain's premium and natural foods-focused food stores because of the financial-credit crisis and deepening of the global economic recession. The struggle in the down UK economy continues for the Kensington High Street Whole Foods, as it does for other natural grocers and upscale UK supermarket chains like Waitrose and Marks & Spencer.

Like in the U.S. at present, British consumers are flocking to discount stores where they can save money on their food and grocery purchases. The fastest-growing food retailer in the UK in terms of sales and market share growth over the last year has been Aldi-UK, the British division of the global small-format, hard-discount Aldi International chain, which is based in Germany.

Aldi's U.S. division, Aldi USA, which operates almost 1,000 small-format, hard-discount stores in the U.S., also has seen a dramatic increase in business during the recession. It's growing fast and plans to open 100 new stores in the U.S. this year, including moving into the new markets of New York and Texas, where Whole Foods market is based. Aldi USA also moved into Florida for the first time in late 2008.

Aldi-UK is increasingly (more so than Aldi USA) offering natural, organic, specialty and premium food and grocery products in its UK stores, in most cases under one or more of its various store brands. These items sell for 15% -to- 30% less everyday than comparable items at UK natural foods stores and upscale supermarkets like Waitrose. As a result, Aldi-UK is taking some share away from these format stores in the natural and specialty categories just like it's taking share away from leading UK supermarket chain Tesco in the basic food and grocery segment.

During the Wednesday conference call, Whole Foods Market, Inc. CEO John Mackey said the natural foods chain has determined that the nearly 80,000 square-foot Kensington High Street Whole Foods store is just plain too big, which he said is the primary reason for its struggles in the UK. Mr. Mackey announced that going forward, any new Whole Foods stores opened in the UK would be in the 20,000 square foot range, which by UK standards is still a good-sized food store.

Natural~Specialty Foods Memo (NSFM) reported and detailed last year in this March 4, 2008 piece [Retail Memo: Whole Foods Market to Dramatically Expand in the United Kingdom; Will Open Up To 30 New Stores in the U.S. in Fiscal 2009] how at the time Whole Foods Market was aggressively looking for new store sites in the UK, particularly in and around London. Those store locations-sites were closer to the nearly-80,000 square-foot size rather than the 20,000 square foot model the natural grocer now says it will follow in the UK. (Note to the March, 2008 linked piece. As we've reported since, Whole Foods Market reduced the number of planned new stores to about 15 for this year. Another cost-cutting move.)

But Whole Foods' aggressive search for new store locations in the UK has cooled dramatically in the current recessionary climate. As far as we are aware, the natural-organic grocer has no new UK store openings planned for 2009.

Further, we aren't sure a UK growth strategy, even long-term, is a good one for Whole Foods. The UK, particularly Britain, and especially England, is a very retailer brand loyal market. For example, just four grocery chains -- Tesco, Wal-Mart-owned Asda, Sainsbury's and Morrisons -- control a whopping 73%-75% of the total food and grocery sales market share.

If you add in the Cooperative Group chain, which last year acquired the Somerfield supermarket chain, making the Co-op the UK's fifth-largest grocer after number four Morrisons (Tesco is number one, Asda number two, Sainsbury's number three), the five chains control about 82% of all grocery sales in the country. All also sell plenty of natural, organic and specialty-premium food products.

There is room for niche players, such as upscale Waitrose and Marks & Spencer, which combined control about 9% of the remaining 18% of share in the nation -- that leaves about 9% for everybody else, and about half of that 18% is controlled by the UK hard-discount grocers Aldi, Lidl, Iceland and Netto -- but it's a tiny niche. And, there are numerous UK-based natural products retailers, such as Boots and others, filling a big part of that tiny niche.

Whole Foods could make it in the UK -- but not without spending a considerable amount of money on marketing and advertising, in our analysis. And the retailer needs to do a much better job of adapting to the British style of food retailing to do so. However, in its quarterly financial report, Whole Foods said its UK operations were a major contributor to the company's overall income loss, which isn't a good sign going forward right now.

And even if Whole Foods can do well in the UK down the road, one has to ask at what level? In other words, can the UK really contribute a significant amount of sales and profits to Whole Foods Market, Inc. over the next five, or even ten years, to make it worth the effort? The jury of course is out on that -- but we think it is something worth looking at closely by Whole Foods in its strategic planning process.

Whole Foods Canada

Last month we heard a rumor that Whole Foods Market, Inc. could be considering selling its stores in Canada, assuming of course it could find a buyer in the current frozen credit market. We have been unable to substantiate such rumors to date.

The conference call comments by CEO John Mackey -- that the UK holds far more long term promise for the natural foods grocery chain than Canada does -- are interesting ones though in light of those rumors.

The reason this is interesting -- and it is based on deductive reasoning and not source information -- is because Whole Foods has historically been a growth-based retailer in all of its markets. Therefore if it believes Canada holds minimal long-term growth potential then selling the stores there might make good sense. The natural-organic grocer could then use the cash from such a sale to grow the business in the UK and for other purposes.

Whole Foods Market, Inc. currently operates six stores in Canada. Four of the stores are located in Vancouver, British Columbia. The other two stores are in Ontario; one in Toronto and the other in Oakville. [Click here for a list of the Canada stores.]

With only six stores in the entire country of Canada, and in only two market regions (Vancouver and Ontario) to boot, Whole Foods' really can't make much of an impact in the country at present. And, based on the conference call comments, it doesn't sound like any additional stores are planned in Canada in the near or even medium-to-long term. Therefore, selling the stores starts to make even better sense.

One likely candidate, should Whole Foods decide to sell its stores in Canada, would be Canadian natural products retailer Planet Organic, Inc. Planet Organic has been growing fiarly rapidly in Canada and even entered U.S. natural foods retailing in 2008 when it acquired the Mrs. Green's chain of 11 natural foods stores based in upstate New York.

However, Planet Organic had to back out of a deal to acquire Santa Cruz, California-based New Leaf Natural Markets last year because it couldn't raise the about $15 million needed to do the deal. Planet Organic had floated a new stock offering on the Vancouver stock exchange for about that amount, which it was planning to use to make the acquisition, but decided to pull the offer because of the financial-credit crisis and the related drying up of investment capital, after it determined there wasn't an investor appetite for the new offering by the company.

But, since the Whole Foods stores are right in Planet Organic's backyard -- it just might be better able to find the money should the Austin, Texas-based natural foods grocery chain decide to unload its stores in British Columbia and Ontario, Canada.

FTC v. Whole Foods settlement deal

Meanwhile, Whole Foods Market, Inc. needs to come to a settlement agreement with the FTC so that it can get back to focusing on what it does best, merchandising and selling natural, organic and premium food and grocery products, rather than fighting legal battles. It also needs to reach a settlement, assuming one that's not to devistating to its acquisition of Wild oats, so that it can stop burning cash paying for legal fees related to the legal case.

We say this, that a settlement deal needs to be reached between Whole Foods and the FTC, despite the fact we believe the FTC's case is pure folly.

At this point though, reaching a decent settlement deal is far better for Whole Foods Market, Inc. than continuing to have to fight the FTC in court, the end result of which could be a break-up of the now combined Whole Foods-Wild Oats, which at this point in Whole Foods Market, Inc.'s nearly 100% integration of Wild Oats could be a very costly process and end result.

Retail Analysis Memo: Growth and A Tale of Two Retailers-Tesco and Whole Foods Market: Is One Ripe For Acquisition and the Other Ripe For Acquiring?

Natural~Specialty Foods Memo Analysis and Opinion

Whole Foods Market, Inc. and Tesco's Fresh & Easy Neighborhood Market are two very different food retailers, but they do have at least one similarity.

That similarity is the fact for the last couple years both retail chains have been locking up new store site leases throughout Northern California at a breakneck pace.

Whole Foods, which these days tends to build primarily mega-natural foods supermarkets in the 45,000 -to- 75,000 square foot range, with some exceptions of course, currently has 13 new store locations in various degrees of development in Northern California. Eleven of the 13 locations have signed leases.

Fresh & Easy Neighborhood Market, which is the U.S. division of United Kingdom (UK)-based international retailer Tesco, the third largest retailer in the world, is engaged in its own leasing frenzy in Northern California. Thus far, Tesco has locked up leases on 43 sites for its small-format combination fresh foods and basic grocery stores in Northern California--21 locations in the San Francisco Bay Area, 20 in the Sacramento/Vacaville/Farfield region and one in Modesto, in the Northern San Joaquin Valley, and one in the south coastal city of Seaside near Monterey.

The 43 store locations are just those Tesco has either confirmed or we have identified independently. The retailer is in the process of securing many more new store site leases at present. The first of the 10,000 -to- 13,000 square foot Northern California Tesco Fresh & Easy Neighborhood Market grocery stores are scheduled to begin opening in early 2009. Just as its been the case since November, 2007 in its current Southern California, Nevada and Arizona markets, expect to see Tesco open a new Fresh & Easy store in Northern California about every 3 -to- 4 days beginning early next year.

Whole Foods Market, Inc. though, unlike Tesco's Fresh & Easy, is putting the brakes on its new store opening plans for at least the next year, including in Northern California, which strategically is one of the natural grocer's top new store development markets for the next few years.

Last week after reporting poor sales and profit numbers, Whole Foods announced it planned to scale back the number of new stores it plans to open in the U.S. next year from the 25 -to- 30 it had planned to open in 2009, to just 15. As mentioned above, 13 of those new store locations are in Northern California.

On Friday, David Lannon, president of Whole Foods' Northern California division said that as part of the grocer's 2009 new store opening reduction plan, all but two of the 13 planned new stores in Northern California are subject to not being opened next year as originally planned. He said the retailer is committed to eventually opening all 13 stores in Northern California, but that it's obvious in light of the fact Whole Foods will only open 15 new stores nationally in the U.S. next year, that most of those 13 stores won't open in 2009 as planned.

According to Lannon, the two Whole Foods stores that will open for sure in Northern California is a store in the south coastal city of Santa Cruz (set to open in the first quarter of 2009) and one in Roseville, which is a suburb of Sacramento. That store is scheduled to open in November, 2009. It will only be Whole Foods Markets' second store in the fast growing Sacramento Metropolitan region. The existing store is in Sacramento.

Lannon and a team from the Northern California division office plan to meet with landlords and developers of the 11 leased sites to determine the status of each project and discuss the future in light of Whole Foods corporate plans to reduce the number of new stores it will open next year by nearly half. Final decisions on moving forward and scaling back will be made at Whole Foods' corporate headquarters in Austin, Texas, Lannon says.

Meanwhile, Tesco's Fresh & Easy Neighborhood Market is moving full bore ahead, not only with its plans to open the 42 Northern California combination fresh foods and basic grocery markets next year, but also scouting out additional sites and signing additional leases for them throughout the region.

In addition to the Bay Area and Sacramento region, Tesco is looking for additional store sites (it already has the one in Modesto) in the Northern San Joaquin Valley cities of Stockton, Manteca and Tracy, additional locations in Modesto, and in other communities in the region.

Tesco also is looking for Fresh & Easy store sites in the Monterey/Salinas/Santa Cruz area where it recently inked a deal for a store site in Seaside, next door to Monterey.

Further, it's looking to lock up leases for additional Bay Area stores in all nine counties, along with more stores in the Sacramento/Vacaville/Farfield area.

The retailer's strategy is to have stores throughout the Bay Area, to Sacramento on the I-80 corridor, from Sacramento throughout the Central Valley, and out to the south coast. Five stores are set to open in the Bakersfield Metropolitan region next year, along with six in Metro Fresno. The retailer also is looking for a couple store sites in the Merced County region.

The net result will be to have Fresh & Easy Neighorhood Market grocery stores from Southern California, where there currently are about 37 of the markets (there are 71 stores total thus far in Southern California Metro Las Vegas, Nevada and in the Phoenix, Arizona Metropolitan area), through Bakersfield and Fresno, into the Northern San Joaquin Valley, out to Sacramento, into the San Francisco Bay Area, and over to the south coast, by the end of 2009.

This strategy will give Tesco the beginnings of a critical mass of food stores in California, which it plans to then add additional units to throughout 2009 and 2010, likely ending up with around 200 stores in California by the end of 2010.

One shouldn't attribute the fact Tesco is going forward so aggressively with its new store development program in Northern California, while Whole Foods Market, Inc. is putting the brakes on its, to Whole Foods' being the only one of the two food retailers having sales and profits problems.

Although it hasn't released any sales numbers yet, we know Tesco is losing millions with its start up Fresh & Easy. A big part of this loss is just that start ups lose money, especially very aggressive retail start ups like Fresh & Easy is.

But the start up explanation is only half of the equation. Thus far Tesco's Fresh & Easy stores have been underperforming to Tesco's internal target, which was weekly sales in the average 10,000 -to- 13,000 square foot stores of about $200,000 per-week. Our sources and research says on average the stores have been doing about half that sales number, although they've been picking up in the last couple months because Tesco has been launching some aggressive promotions, including distributing lots of coupons good for a whopping $5 off total grocery purchases of $20 or more in all its Fresh & Easy stores.

The fact is though, Fresh & Easy USA is a major initiative for Tesco, which is the world's third-largest retailer with annual sales of over $83 billion last year. The United Kingdom-based retailer plans to loose money on its Fresh & Easy U.S. venture for sometime--although it didn't initially count on losing as much as it has so far.

Compared to Tesco, Whole Foods Market is a tiny food retailing fish, with sales in the $6 -to- $7 billion dollar a year range. However, Whole Foods isn't much of an international retailer, with just a few stores in Canada and a handful of stores in the United Kingdom, the rest being in the United States. Therefore, that fact, combined with its focus on the natural and organic foods categories (it doesn't have the sales luxury of selling basic groceries in other words) makes Whole Foods a very impressive food retailer in scale and sales domestically. It's just not anywhere near the scale of a Tesco--or a Walmart, Inc., Kroger, Safeway, SuperValu and numerous others.

And in the case of going forward with new store opening plans rather than putting the brakes on such plans, being an $80-plus billion a year international retailer that has lots of cash on hand helps, compared to being a $7 billion a year retailer who's fate--unlike Tesco's which has operations all over the globe---lies 100% on its U.S. stores' performance, which thanks to the poor U.S. economy is taking a serious battering right now.

Nonetheless, Tesco would covet having a $6-plus billion a year U.S. division like Whole Foods Market, Inc., although it would likely prefer it to be under a more traditional food and grocery retailing format, rather than one focused on natural, organic, fresh and specialty foods categories. Or perhaps it wouldn't? The U.S. economy will boom once again, and upscale will be back in for many.

But, we also know that Tesco senior management has looked on Whole Foods in the U.S. in many ways with a keen eye, particularly admiring what its done in the organic fresh foods and grocery categories. And when Whole Foods opened its first store in London in the UK last year, Tesco watched closely. Unfortunately for Whole Foods Market, Inc., the retailer has lost $18 million to date on that London store, but business has picked up at the 70,000 square foot London food emporium, and it's drawing many more shoppers than it was just a year ago.

In the UK, Tesco is very deep in the natural and organic foods categories across all store categories, including dry grocery, fresh foods and even non-foods, particularly with its own store brands, which are the leading selling items in many categories throughout Britain.

Tesco is the UK's leading food and grocery retailer, controlling an impressive 31% share of the country's food and grocery sales market. Number two Wal-Mart-owned Asda has about a 17% share. Number three Sainsbury's about 15.5%. The remaining percentage is split among numerous food and grocery chains, including Morrisons (4th ranked) the Co-operative Group (now number 5 after just having acquired the Somerfield supermarket chain), Waitrose, Marks & Spencer, small-format German discount grocers Aldi and Lidl, and and a few others.

Last year when the U.S. Federal Trade Commission (FTC) made the first of its many legal challenges (which are still going on) against Whole Foods Market, Inc.'s acquisition-merger of Wild Oats Market, Inc., saying the deal would give Whole Foods' monopoly power in the supernatural food retailing category--an argument we've argued is wrong--we wrote that the FTC and others are forgetting Whole Foods Market, Inc. is a rather small fish in terms of overall food and grocery retailing in the U.S. (There are 21 retailers ranked above Whole Foods in terms of annual sales in the U.S. Further, the majority of these retailers are regional rather than national food retailers like Whole Foods is.)

As a result we wrote that Whole Foods Market, Inc. itself could become an acquisition target in the near-to-medium term, especially since major U.S. retailers like Safeway Stores, Inc., Kroger Co., SuperValu, Inc. and many others have moved into the natural and organic foods retailing space in a big way.

Thinking about how Whole Foods is having to scale back its plans to open about 30 stores in the U.S. next year to 15, while Tesco will likely open well over 100 new Fresh & Easy stores next year in California alone (granted the Fresh & Easy markets are much smaller than the average new Whole Foods store is), as well as is now moving into India and further growing its already impressive international business, our thoughts turn back to that Whole Foods as a potential acquisition target, as this month marks about a year since the Wild Oats acquisition.

While we believe based on source information Tesco eventually has bigger strategic plans in the U.S. than acquiring say a Whole Foods Market, Inc.--such as possibly acquiring something on the order of a Safeway or SuperValu, Inc. for example, along with growing Fresh & Easy into the Chicago Metro, Florida and New York markets--acquisitions are as much situational as they are long-term strategic opportunities.

A year ago, with its stock at an all time high, not even a Tesco or Wal-Mart, Inc. would likely consider acquiring the natural foods chain, even if they coveted doing so. But today, Whole Foods' stock is 70% below that all time high of just a year ago, and its being forced to cut back on its rapid new store growth program dramatically for the first time in two decades.

Additionally, Wall Street, which as recent as 6-7 months ago was super-bullish on Whole Foods Market, Inc.'s stock, is now bearish on the natural foods retailer. Whole Foods after all is a public company with numerous major institutional stockholders who must be satisfied. This is particularly the case since these investors are used to Whole Foods' stock going north rather than south in terms of value--at least until now.

This brings us to Tesco. If it wants to be a major player in food and grocery retailing in the U.S., it's going to have to eventually acquire a good-sized retailer or two at least. Although it's launched what is perhaps the most aggressive food retailing start up in modern history in the U.S. with Fresh & Easy, even if it opens 150 stores a year for the next five years (doable but tough to sustain and do well), it will still be a minor overall player with about 800 small-format stores. Nothing to sneeze at, but not in the big leagues either.

With Whole Foods' stock 70% below last year's high, along with the retailer having to scale back its new store opening plans for next year by nearly 50%--which means it doesn't have enough cash to go forward even while turning in poor sales and profit numbers in the short term--Whole Foods' is ripe to be acquired. The natural grocery chain also announced yesterday it will lay off about 43 employees at its Austin, Texas corporate headquarters.

If Tesco were to acquire Whole Foods, it could do many things for the international retailer. First, it would give it an immediate annual sales base of nearly $7 billion in the U.S., which is nothing to sneeze at, even for an $83-plus billion a year international retailer.

Second, it gives Tesco what arguably is the best upscale natural, organic and fresh foods format in the world. Imagine what a retailer the scale of Tesco could do with Whole Foods if it could do it right?

Third, it gives Tesco, which has the cash to expand Whole Foods internationally, an upscale natural, organic and green retailing format that it could expand throughout Europe, Australia, parts of Asia and even to the oil rich Arab countries where the UK's upscale Waitrose and the U.S. gourmet grocer Dean & Delucca are opening stores.

Lastly, at home in the UK, which on a per-capita basis has become the world's leading organic foods retail market, Whole Foods would give Tesco a banner which it could use to eventually dominate the natural foods' retailing space like its done in the grocery and general merchandise spaces with its various Tesco banner stores, ranging from hypermarkets to its small-format Tesco Express convenience-style grocery stores.

We believe Whole Foods CEO John Mackey and the company's board of directors would fight any acquisition, and likely would fight a deal offer from a British-based chain like Tesco even more so. However, if Whole Foods' performance doesn't improve dramatically in the next two quarters say, such a fight could be very difficult if such an acquisition were to come from Tesco or any other major retail chain. Nobody knows this better than John Mackey and the Whole Foods' board, since it was a fledgling, poor performing Wild Oats Market, Inc. it acquired about a year ago.

Is Tesco interested in acquiring Whole Foods Market, Inc.? We don't know. However, like we mentioned earlier in this piece, acquisitions are as much situational as they are long-term strategic. What we do know is that a couple U.S. supermarket chains are watching Whole Foods' performance closely, and that the A (acquisition) word has been tossed around by these chains, at least hypothetically.

What we do know is that Tesco has the cash to acquire Whole Foods without any trouble if it wants to. The possible political battle if it were to be a hostile acquisition, which would likely be the case at least right now, is another matter altogether. We doubt if Tesco is up for that just now.

However, when it comes to publicly-owned food retailing chains, circumstances change rapidly. Performance rules the day. For example, before investor Ron Burkle bought a major chunk of Wild Oats Market, Inc., became chairman of the board, and engineered the replacement of the company's CEO, both Wild Oats' board and key executives were adamant they would never sell to Whole Foods. That changed rather fast once Burkle got involved.

One could see a similar situation happening with Whole Foods. In fact, Burkle was a major player in brokering the Whole Foods-Wild Oats acquisition-merger. He's been rather low-key of late in the supermarket sector, but Whole Foods' current situation is one that brings out Ron Burkle and other investors like him who are adept at engineering just such acquisitions once they make a substantial investment in a company. Burkle still has stock in Whole Foods Market, Inc. from the Wild Oats acquisition, by the way.

Don't be shocked if in the not too distant future you see Whole Foods going from being charged by the FTC and others as a monopolist acquirer to being acquired itself.

Will it happen this year; next year? We have no idea. What we do know is that the chances of Whole Foods being acquired now are about 100% higher than they were just a year ago. That alone is worth paying attention to.

Editor's note: Watch for an upcoming story and analysis of retailer's we think would benefit overall by acquiring Whole Foods Market, Inc. An 'America's top Whole Foods Market, Inc. acquisition parade' if you will.

Mid-Week Roundup

Research Roundup: Specialty and Premium Foods

Three New Studies Show a Consumer Flight to Premium Taste and Quality

Consumers are flocking to product lines like Safeway's private label O' Organics line, which combines premium quality and organic ingredients, to create a premium taste product with healthy attributes.

Three just-released studies show consumers are looking for quality when it comes to their food choices and are increasingly opting for premium specialty foods.

The first study, by market research firm Mintel, concludes that consumer demand for quality and taste, as well as an increased interest in international food traditions, are the key drivers for the specialty foods market in the U.S. Almost 73% of U.S. consumers currently report purchasing specialty foods. That's up from 64% just one year ago, according to the Mintel survey released this month. Mintel surveyed 1,092 consumers in July, 2007 for the survey. The results were just released this week.

For the survey, Mintel defines specialty foods as those products that are of premium quality such as "high-end" chocolates, coffee, oils and other premium goods. These foods are generally considered unique (hence specialty) and may be produced by small or local manufacturers, imported, or have exotic ethnic flavors. Other specialty products included in Mintel's definition are coffee and tea, specialty beverages, cheese and olive oils, among other premium products. The products in the categories that fit into Mintel's definition are referred to by the study as "premium," "fancy" and "gourmet." They also are often more expensive than there regular or basic counterparts (premium condiments, coffee, teas, chocolates and the like which are higher priced than basic grocery items in the respective categories).

According to the study, taste is the primary reason consumers buy specialty foods and beverages. Awhopping 88% of survey respondants reported taste as their number one motivation for buying the premium products. Two thirds of the respondents also sighted "personal indulagance" as a key reason for buying specialty food items. They said they buy the premium goods for the pleasure of giving themselves a treat.

Specialty Foods Consumer Characteristics and Demographics

In terms of specialty foods consumer demographics, the new study found the typical specialty foods shopper tends to be younger and more affluent than the average consumer. Further, they also are more likely to buy products that are natural, organic, kosher and halal, in part sighting a perception that these types of foods offer higher quality attributes. Again we see her what we call the Natural~Specialty foods convergence--the coming together of the specialty and natural and organic foods categories do to the similar consumer demands for cleaner and healthier foods combined with a desire for premium taste.

The specialty foods category also is heavily influenced by international travelers. These consumers visit many places in the world and develop new food traditions based on the foods the sample while visiting various contries in the world. When they return home to the U.S. they look for--and demand--these new foods and ingredients in their local food stores. This also introduces retailers to new ethnic foods which results in introducing customers to them once the retailer merchandises the new international products.

The ethnic diversity in the U.S. also is a key means of introducing new foods to consumers, according to the new Mintel study. Hispanics, Asians, Eastern Europeans and others all desire foods from their homeland when they migrate to the U.S. They not only introduce retailers to these foods by requesting them but have also spawned a huge ethnic retailing industry. These immigrants also introduce other U.S. consumers to their food traditions which creates an even bigger market for ethnic specialty foods.

Other Survey Findings

>Of the 1,092 consumers surveyed by Mintel in July, 2007, 61% reported buying Hispanic food products and 55% said they buy Asian products.

>Consumers said 46% of the specialty foods they buy are sourced locally and 29% of the foods are sourced internationally. Mintel doesn't provide a definition of what is "local," whether it means within a 100 mile radious of the shoppers home, produced in the same state they live in, or if "made in the USA" is considered local. As such we question the 46% figure somewhat. Saying specialty foods are produced locally also requires the consumers surveyed to have rather good knowledge of the origins of the specialty foods they buy. We aren't sure that is the case as the majority of products don't have origin information on them--and if they do we aren't fully convinced shoppers retain that information.

>Consumers said only 11% of the specialty foods they purchase are from artisanal producers. This doesn't suprise us in that artisinal-produced specialty foods is still a small niche market and various considerably by region in the U.S. For example in California and parts of the East Coast and New England, there are numerous artisanal food producers. However in other parts of the U.S. there a very few. Also, retailers--especially conventional supermarkets--aren't yet selling many artisanal foods. Generally it's stores like Whole Foods, Trader Joe's, upscale supermarkets, farmers markets and specialty stores that stock artisanal foods in any quantity. As such access to these specialty foods is a key driver we believe in the 11% figure.

Based on the survey results Mintel says the current hot button trends in the specialty foods market for manufacturers and retailers are: premium taste, organic, natural, single-sourced, handmade and artisanal. These attributes show no sign of losing popularity, Mintel says in its new survey report.

Hartman Group Study: Consumers Redefining Premium Quality

Another new study bby the Hartman Group concurs with the Mintel survey that premium taste and quality are currently driving the specialty foods market. The Hartman report also says it would be a mistake for food marketers to assume premium quality is only something more upscale and affluent consumers are seeking, or that it is about mere personal indulgence. Rather, the report says it's consumers themselves, not the specialty foods industry, that is redefining premium quality and driving the flight to such premium taste in the U.S.

In the report, "Premium Food Experiences: Understanding the Consumer Redefinition of Quality," the Hartman Group says premium quality from the consumers vantage point means five key things:

>Consumers are seeking distinct flavors

>Consumers are seeking more fresh and less processed foods

>Consumers have a keen interest in purchasing more locally produced foods

>Consumers are seeking artisanal and hand-crafted specialty foods

>Consumers have a willingness to pay more for premium taste and quality as long as it is reasonable

You can read a complete summary of the survey, including narratives from consumers interviewed, here The article is written by Blain Becker of the Hartman Group, who conducted the study along with others at the firm. much of what the Hartman research found mirrors the Mintel study. However, there also are some differences, and things not covered in the Mintel report. We recommend reading the article linked above by Hartman's Becker.

New Report: Flight to Premium Quality in Frozen Food Category

It's not just packaged and fresh specialty foods that are experiencing a flight to premium quality, according to a new study of U.S. consumers by the market research firm Research and Markets. A just-released research report from the firm, covering the frozen processed foods category--which includes ready-to eat dinners/meals, red meat and poultry products, fish/seafood, vegetables, frozen potato products, desserts, bakery products, pizza's and soup and noodles.

The report says there is a move in the U.S. towards high quality premium foods. It sights what it calls the "Starbucks factor," and says the success and expansion of the coffee king's coffee shops demonstrates the trading up in the coffee category of U.S. consumers, who just a few years ago were fine with drinking low-quality coffee. The same is happening across all food categories, including frozen foods, the report says.

Other key inflencers in this trend towards consumers trading up to premium quality include the success and expansion of Whole Foods Market, Inc., Food shows (and their popularity) on the Food Network, PBS, Bravo and other networks, and the overall celebrity chef phenomenon, which has created "a nation of foodies; consumers who seek out the best," according to the new study.

The just released report also says healthier, more convenient and indulgent frozen specialty foods will see significant growth now and in the years to come. Additionally, the report says artisanal-produced specialty frozen foods are a key growing market for manufacturers and retailers.

Another sign of the flight to premium taste and quality in the U.S. is the fact that those retailers who have introduced premium, natural and organic private label or store-branded product lines are doing the best in terms of private label sales among all retailers, according to the report. Research and Markets sights the huge success of Safeway Stores O Organics specialty foods line as an example of creating a product line which hits on both the flight to quality and natural trends among U.S. consumers today. The report also points to the huge success of specialty retailer Trader Joe's private label premium, natural and organic store brands as an example of the premium and healthy trend in the U.S.

With these examples above, we again are seeing the convergence between natural and specialty foods products (and the industries). Retailers like Safeway and Trader Joe's are combining premium taste attributes with natural and organic ones to create private label product lines that appeal to the growing number of U.S. consumers who want these combined attributes in the products they buy. You can read more about the specialty frozen foods market study here.

We also aren't surprised the flight to premium quality foods extends from fresh and dry packaged goods products to frozen as well. In fact, if it didn't we likely would not be looking at an overall trend--which we believe it is--but rather only a category-specific one. We are seeing the combination of a flight to premium quality and desire for such foods that also are healthier and more natural.

Unlike in the recent past, U.S. consumers no longer want to trade off taste for health. They want their organic cereal and cookies to have the taste of gourmet cereal and cookies. They also want premium specialty foods that offer unique taste experiences. Much of this has been influenced by fusion restaurants, where ethnic cuisines like Asian and Cuban are combined, and where traditional Hispanic foods are given added taste with a "California Cuisine" flair, for example. Sushi bars have introduced U.S consumers to premium, fresh fish, and once exotic tastes like wasabi. Farmers' markets across the country have shown consumers what "real" fruit and vegetables can taste like and they want that same premium taste available to them in their local supermarket.

The flight to premium taste and quality demonstrated in these three surveys offers a myriad of opportunity to specialty and natural foods manufacturers, marketers and retailers. Combining such attributes as premium taste with natural or organic is a hot button for many consumers. Artisanal produced foods and locally grown also offer great sales opportunities. Natural and specialty foods consumers are converging more and more in the U.S. Understanding that will be key for food marketers looking to succeed in today's and tomorrow's competitive market.

Natural~Specialty Foods Memo's Product Marketing Roundup

A Woman's Place is At the Top: Specialty Food manufacturer and market Glory Foods has named its first female president. Her name is Jacqueline Neal. Glory foods is well-known in the specialty foods industry for its home-cooked, Southern-style canned vegetables and side dishes, frozen entrees, side dishes and bagged vegetables. Ms. Neal has extensive experience in the food industry, including stints with Heinz, Quaker Oats, Nabisco, Kraft Foods and others. She not only should add much to Glory Foods with her extensive experience at major packaged goods companies, but having a woman's touch in the top spot at the specialty foods company should also provide additional insight since woman still make up the majority of food shoppers.

A New Definition of a "Hot" Presidential Candidate: San Francisco, California-based Dave's Gourmet has launched a new line of hot sauces with labels featuring caricatures of the 2008 candidates for United States president. There's Rudy, Hillary, Barack and others, all looking out at you from the hot sauce label. Dave, owner of the specialty foods company, is even getting in on the act himself. He has a caricature of his own face on one of the labels, describing himself as a "write in" candidate for President in 2008.

To spice things up a bit Dave's is holding its own "Presidential" competition via its website here. Here's how it works: Each bottle of Presidential hot sauce that's purchased counts as a vote for that candidate. If you buy one Hillary Clinton caricature bottle and three Barack Obama bottles that means you gave Barack three votes and Hillary one. Dave says he encourages "ballot stuffing" as well. The more you buy the more you vote.

Currently the company's website has Hillary Clinton in the lead with 13% of the hot sauce vote, followed by Obama with 11%, none of the above with 10%, And Rudy Giuliani with 9%. The top four is pretty close, although Hillary seems to have a fairly solid lead. There is a five-way tie for fifth place however between Fred Thompson, Mitt Romney, Al Gore (is he running?), John McCain and hot sauce Dave himself. John Edwards isn't doing so hot--he brings in the rear at 7%, second to last to Newt Gingrich (6%), who even though he hasn't announced he is running has his own hot sauce and the honor of placing last in the voting. Dave's is giving the profits from the sales of the Presidential candidate hot sauces to charities involved in cancer research. Now, that's hot.

Tea for Two: U.S. immigrant Ahmed Rahim used to manage two tea houses in Prague in the Czech Republic. Shortly after he came to the U.S. he and his sister Reem started a tiny specialty tea company called Numi Tea in his Oakland, California apartment. Today, just eight years later, Numi Tea is one of the fastest growing specialty, natural and organic tea companies in the world. It sells its teas not only in the U.S. but throughout the world, including in China, a country where consumers know their teas. Rahim is going back to his tea house roots a bit. Numi is moving into a new facility in Oakland and the brother and sister team decided to include a public tea house in the facility. You can read about the Rahim's, Numi and the new tea house and facility here. It may sound cliche but it has to be said: There's is a true American success story.

Beer and Clamato: For ages many Hispanic (and other) consumers have combined beer with tomato or Clamato juice to make a beer cocktail. Until now they had to buy the beer and tomato or Calamato juice separately and mix their own cocktail. Not any more. Anheuser-Bush is currently testing a beverage called Chelada, which is a combination of Budweiser beer and Clamato Juice, which is a tomato juice and clam juice product that's been on the market for decades. The folks at Bud know this combination is big with many Latinos and are betting the ready-to-drink combination will be a big hit with what is currently the fastest growing ethnic group in the U.S. Bud also plans to sell the beverage in Latin and Central America and perhaps elsewhere. Read more here.

Tanka Bars and Bites: Seldom in the vast world of niche marketing do we see a food product targeted to native Americans in the U.S. Asian Americans, Afro-Americans, Latino's, Woman and others---yes--but creating a product and targeting it to Native Americans is new and rather interesting marketing strategy in the food industry. And that's just what motivated Karlen Hunter, among other reasons, to create the Tanka Bar, which is a modern version of a traditional food called Wasna, a mix of meat and berries that plains Indians used to pack into Buffalo horns to sustain them on long journeys. Hunter, CEO of Native American Food Company, and a member of the Lakota Indian tribe, hopes the Tanka Bar and its sister product Tanka Bites, a bite-sized version of the Tanka Bar, will be a healthy alternative for young people who are more likely to grab a snack of potato chips or candy.

"We want to show them (young native Americans) that this is our original fast food," Hunter recently told the New York Times. Her message--and product--are timely in that Native Americans are among the highest sufferers of obesity and diabetes in the U.S. Her marketing message is creative and culturally relative as well. "In Indian country we don't say, 'this is good for you'...that will turn them away. We say, 'in traditional times our people could run great distances eating this food. So taste it. It tastes good.' "

The Tanka Bar and Tanka Bites are made primarily from Buffalo meat and cranberries. The Buffalo meat is softer than beef jerky and the cranberries give the bar a slightly fruity taste. The initial run of 1.5 million bars and bites has sold out. Hunter says her dream is to make the product "the first national break-out product made on an Indian reservation." The bars and bites are produced on a Lakota reservation where Hunter lives and works. To make the products the first reservation-produced national break-out product, Hunter also wants to get non-Native Americans to buy the products. Among her marketing tools are Myspace and Facebook sites which introduce the bars and bites, discuss their origins and heritage, and talk about their nutritional benefits. Read all about the bars and bites and their heritage and other facts here.

Natural~Specialty Foods Memo's Retail Roundup

Retail Innovation: Illycaffee's Push-Button Cafe

Triest, Italy-based premium coffee producer, marketer and retailer Ilycaffee has found an innovative, inexpensive and quick way to build and open a cafe with essentially the push of a button. Ilycaffee has taken the "Push Button House," designed by Adam Kalkin, and turned it into a rapid-construction cafe for hard to build locations or places where the retailer wants to set up and operate a cafe temporarily. In fact that's what the premium coffe company going to do with there first "Push-Button Cafe" when they set it up in New York City's bustling Columbus Circle between November 28 and December 29 of this year.

Manhattan, and Columbus Circle, are teaming with holiday shoppers and others during this period of time. A great opportunity for a retailer like Illycaffee to sell thousands of gallons of specialty coffee drinks and lots of deserts in a prime location without the investment of actually building or leasing a permanent "brick and mortor" store in the area. That's if they could even find a location in the high-rent, retail mecca of Columbus Circle where the temporary cafe will be located.

Illycaffee's Push-Button Cafe opens at the push of a button in 90 seconds and go anywhere.

The "Push-Button House" is an innovation designed by Kalkin to be used in areas where there has been a natural disaster, such a Huricane Katrina, or the current wildfires in Southern California. It's also designed for lower-income people (or anyone who wants to live in one frankly) who can't afford a traditional house but wants to own rather than rent. It's essentially a "house in a box." It comes prefabricated in a container. And with the push of a button it transforms into a living space in about 90 seconds. It has a kitchen, small dining room, bedroom, bathroom, living room and even a small library. You can read more about the "Push-Button House" and view pictures of it here.

As you can see in the pictures above and below, the "Push-Button Illycaffe" has pretty much everything a "brick and mortar" cafe would have. It's also rather attractive. We find this concept not only innovative but effective as well. Food retailers can use it to extend their brands to places they currently aren't: fairs, sporting events and a myriad of other venues. Manufacturers could use it to sell their products direct to the public, as could small start-up and artisanal food and beverage companies on limited budgets.

The uses are as varied as the retail imagination is. It's also great for test marketing and special events or seasonality retailing like Illycaffee is doing. In many ways its a serious lemonaide stand concept for grown-up and start-up retailers. Once word gets out on what Illycaffee is doing we expect others to adapt the "Push-Button House" for their own retail uses like Illycaffee has.

Retail Briefs

Whole Foods' New Market Hall Store: In mid September we wrote about the new Whole Foods Market "Market Hall" style store which was set to open in Oakland, California on September 26. The store, a first-of-its-kind design for Whole Foods, opened on the 26th to much acclaim from shoppers, suppliers and Oakland city officials. We recently read an excellent profile and review of the Oakland "Market Hall" store, which we have visited, written by Julie, a blogger for the sfist, a San Francisco Bay Area-based blog. You can read her piece on the new Oakland Whole foods Market Hall here. She has great pictures of the European-style food hall format store as well.

Columnist Dissed For Liking Whole Foods: Liberal San Francisco Chronicle columnist Mark Morford likes the new Whole Foods Market Hall store in Oakland. In fact, he likes Whole Foods in general and recently said so in his Chronicale column. (You can read the column, "Is it OK to love Whole Foods?" here.) In response to his positive column on the supernatural grocer Morford receives an email box full of angry and nasty responses from readers who have a distain for Whole Foods. These anti-Whole foods folks essentially acused Morford of "selling out" his "Liberal" credentials by giving the grocer an overall favorable nod despite having some intellegent critiques of how they do business.

Morford didn't take the nasty detractors sitting down though. He does what a writer should do. He took fingers to keyboard and wrote another column (10-12-2007) about those who dissed him for liking Whole Foods. In that column (read it here) Morford said most of the letters he recieved were in agreement with his point of view on Whole Foods or were a i reasonable and polite disagreement with his opinion. There was a segment of letters however which Morford takes off on.

These letter writers he says are absolutist, extreme and voracias Liberals. Morford asks: "Does the Extremism of some progressives spell danger to delicious evolution?" His answer: "Well, yes." But read his 10-12 column for yourself as it's witty, satirical and biting. He makes a number of larger political and social points using his writing about Whole Foods--and the "Whole-Paycheck-label-crowd's" letter-writing responses to his column--as not only the chief topic at hand but as a metaphor for the larger issues of public discourse and debate. The column is pretty humorous as well.

FTC Re-opens Whole Foods' Merger Wound: Federal agencies just don't like losing court battles. That was the case when the U.S. Federal Trade Commission (FTC) lost its first try to stop the Whole Foods' acquisition of Wild Oats Markets, Inc. A judge ruled in favor of the acquisition/merger but the FTC then went back to court and tried again. The same judge once again ruled in favor of the acquisition, which then went through in September.

Now the FTC is back again, this time appealing the ruling with a new court motion designed to overturn the merger on anti-trust grounds despite the fact that Whole Foods is well on its way to integrating Wild Oats into its operations. In fact, it's this integration the FTC aims to stop with its appeal. This is an unusual move by the FTC, attempting to stop a merger not only after it has gone through, but at a point where the acquiring company is well on its way to integrating the company it has purchased into its culture and operations. You can read more details about the FTC's appeal here and here. For a satirical take on the FTC's new court filing to stop the Whole Foods' acquisition of Wild Oats take a look at this dialogue from the Wonkette Blog. The topic: "The FTC hates Hippies."

H.E.B's New Natural-Specialty Cypress Market: H.E.B's newest retail format, its 112,000 square-foot upscale Cypress Market, made its debut yesterday when the first store opened in the Cypress neighborhood in Houston, Texas. The huge store features the largest meat market (full-service and self service) in the area. It features aged prime, all-natural and organic meats. The store also has a giant fresh fish and seafood department. The department will get fresh fish deliveries seven days per week in order to ensure optimum freshness, according to H.E.B. A large selection of both wild, farmed and locally-fished seafood and fresh fish are offered in the upscale department.

The store's produce department is expansive and upscale. It features over 900 varieties of fresh fruits and vegetables, including more than 100 varieties of certified organic produce. Cypress Market also features a huge wine department which includes a temperature controlled wine cellar and tasting room. The wine department features at least 2,000 different varieties of wines from throughout the world, according to an H.E.B. executive. The store's bakery is equally as expansive and upscale. It features a wood-burning hearth oven. Artisan, craft and organic breads are baked in the bakery multiple times daily. The store also has an international cheese shop that includes a cheese aging cave. The cheese shop offerers over 400 varieties of cheeses from throughout the world.

The store also features a Central Market "Cafe on the Run," which has numerous upscale meals for takeout or catering. There also is a full-service eat-in restaurant nearby in-store. Other ser vice highlights include a tortilleria where homeade tortillas are made, an eat-in sushi bar which also offers sushi to go, a cafe/coffee bar with an in-store coffee bean roaster.

The store also has the "Cooking Connection," an in-store department staffed full time by a professional chef and assistants. The department oeprates numerous "H.E.B. Showtime Cooking Stations" located throughout the store. Store culinary professionals will interact with shoppers every day of the week, consucting over 30 in-store demos or tastings each week, according to an H.E.B spokesperson.

Specialty, gourmet, ethnic, natural and organic grocery products and non-foods play a major role in the store. The shelves are full of premium specialty, international, natural and organic groceries. There also is a large store-within-a-store natural and organic health & beauty care and nonfoods area. A "Healthy Living Department" features row upon row of natural and organic bulk foods.

H.E.B. is one of the pioneer retailers of natural and specialty foods with its Central Market format. This format inspires the specialty and natural product offerings in the Cypress Market, which takes the Central Market concept to its next level in terms of upscale, premium, natural and organic retailing. The store also offers a huge selection of basic groceries and an expanded basic non-foods offering in its 112,000 square-feet. Everything from small appliances and kitchenware (basic and upscale) to various types of furniture and other offerings. H.E.B says on of the goals is for the Cypress Market to not be just an upscale specialty market but also a complete destination retail shopping center for consumers. It is.

Mid-Week Roundup Ender

Unmentionable Cuisine: We happen to be big believers in the concept of cultural relativism when it comes to food choices. That one regions food choices, like eating beef from cattle, can be considered unmentionable in another culture. We also are major advocates of fresh, all natural foods, procured locally whenever possible.

However, we aren't sure if the cuisine being offered by Britian's Famous Wild Boar Hotel restaurant might not just be taking the concepts of natural, fresh and locally procured just a little to far. The restaurant, located in Crook, near Windermere, in Cumbria UK, is preparing and serving up pancakes made from grey squirrels to diners, according to a story in the London Daily Mail (10-16-2007). And the price is right--as an introduction to the squirrel pancakes, which head chef Marc Sanders describes as "Peking duck-style squirrels wraps, the restaurant is currently offering them to diners for free as an introduction to the new dish on its menu.

Head Chef Marc Sanders diplays his creation: Grey Squirrel Peking Duck-style wraps or panckaes.

The grey squirrels also are locally procured. They're caught on the hotel's 72 acre wooded grounds. Hotel general manager Andy Lemm says the grey squirrels are everywhere on the grounds. "Our diners seemed to enjoy the squirrel pancakes," Lemm told the Daily Mail, "and I thought they tasted rather nice, a bit like rabbit," he added.

Grey squirrels are killing off red squirrels in the UK. As such the reds have become an endangered species while the government has encouraged hunters and others to eliminate the greys. Britian's Lord Inglewood, a conservationist, warned Brits that the red squirrel would soon become extinct if grey squirrels are allowed to go on increasing. Red squirrels are native and the greys aren't.

Lord Inglewood also suggested one way to deal with the problem would be to foster a market for grey squirrel meat. He told Brits that Americans eat grey squirrel and even have a number of recipes for the meat, including what he discribed as the most popular dish in the U.S., Brunswick Stew, which the Lord says "is casseroled squirrel."

He wants famous British chefs like Jamie Oliver to promote grey squirrel-based dishes for school dinners. (Really, the Lord told the Daily Mail that, we couldn't make it up.)

Meanwhile, chef Marc Sanders decided to take the Lord up on his suggestions by creating the squirrel pancakes and putting them on the hotel's menu. The hotel's general manager also had a hand in the dish since he was looking for a way to help rid the grounds of the grey squirrel infestation.

Fresh, all natural, locally procured--the grey squirrels do hit all the hot buttons with today's foodies. And we must say the squirrel Peking-style pancakes do look attractive in the picture. Perhaps what was once unmentionable cuisine will become tomorrow's new trendy food dish. We're not sure though, those grey squirrels are rather cute. And a wise man once told us never to eat meat from an animal that's much cuter than you are.

We would give the squirrel pancakes a go as the Brits say. Would you? Let us know if you would in the comments link below.

Tesco Fresh & Easy Update: News & Analysis

New Retail Regions: Tesco Aggressively Seeking Fresh & Easy Store Sites in Northern and Central California

On Friday, October 19 we reported here that Tesco had secured its first store location in Northern California in the Bay Area city of San Jose. That store will be located in a former Albertsons supermarket building in San Jose's Willow Glen district.

According to commercial real estate and municipal official sources we talked to, Tesco will completely renovate the building to decrease it's square-footage and make it suitable for its 10,000 to 13,000 square-foot Fresh & Easy Neighborhood Market format. These sources also told us plans call for the store to open in the summer of 2008.

Talking with the same and additional sources in the San Francisco Bay Area yesterday (10-26), we learned Tesco is aggressively looking for Fresh & Easy store sights throughout the nine-county Bay Area (including in San Francisco), as well as in other Northern California regions and in the Central Valley, which is located mid-way between Southern California and Northern California.

In addition to the San Jose location, which is a done deal according to our sources, Tesco has inquired with the East Bay Area city of Danville's Economic Development Department about possibly locating a Fresh & Easy store in that city's Green Valley Shopping Center. The shopping center in the upscale, high-income community, is currently without an anchor retail food store since an Albertsons supermarket closed there in 2006.

Jill Bergman, Danville's economic development director, recently said Tesco has talked to her about tenant improvements to the center's vacant Albertsons store but hasn't filed any applications regarding the store as of yet. Commercial real estate sources also told us Tesco has been talking with the building's owner and shopping center representatives about locating a Fresh & Easy store there.

Our commercial real estate sources also told us Tesco is busy looking in other cities in the East Bay Area, including Pleasanton, Livermore, Walnut Creek, Concord and others. They also told us Tesco is interested in a number of other empty Albertsons store buildings in that region as well as in the South Bay Area, where San Jose is, and the San Francisco Peninsula county of San Mateo.

A commercial real estate agent in San Francisco told us he recently talked to a business associate who said Tesco representatives told him they plan on opening more than one Fresh & Easy store in the city of San Francisco if they can find suitable locations in the dense, urban city.

The Bay Area and other Northern California regions aren't the only areas north of Southern California where Tesco is aggressively looking to locate store locations for its Fresh & Easy convenience-oriented grocery markets.

Last week, the Bakersfield Californian newspaper reported that Tesco is in serious negotiations with a property management firm to locate a Fresh & Easy Neighborhood Market in Southwest Bakersfield, at a shopping center at White Lane and Buena Vista Road, south of the city's Stockdale High School.

Bakersfield is located in the center of California in Kern County, about a 100 miles from Los Angeles to the south, and about 250 miles from Sacramento to the north. Tesco wants to locate the store at that particular location and has a zoning change application before the Bakersfield City Council. The change of zoning would allow retail food stores to locate in the shopping center (which currently isn't the case for some reason) and pave the way for the Fresh & Easy store there, according to the newspaper report.

Natural~Specialty Foods Memo's Analysis:

If Tesco moves aggressively into Northern California--which we believe it will based on our information and analysis--it will add an interesting competitive twist to food retailing in the region, especially in the Bay Area, which currently is home to about seven million residents.

Safeway Stores, Inc. has its U.S. corporate headquarters in the Easy Bay Area city of Pleasanton and is the food retailing market share leader in the nine-county Bay Area. Recently, Safeway has been opening up very upscale versions of its "Lifestyle" format Safeway banner stores in the Bay Area. These new stores average about 45,000 to 65,000 square-feet in size and feature numerous prepared foods offerings, including in-store restaurants, cafes with fresh baked goods and gourmet coffee, wine departments with tasting bars, gourmet olive bars, and other upscale features. Huge selections of specialty and natural groceries and expansive fresh produce departments also are part of the mix in these stores.

Whole Foods Market, Inc. also is a major upscale player in the Bay Area with about 21 stores at present. The retailer has opened three new, large natural foods lifestyle-oriented supermarkets in just the last two months, with more new stores on the way. The supernatural grocer plans to built at least 21 new stores in the next 3-5 years in the Bay Area. Upscale quality, prepared foods are a major feature in Whole Foods' Bay Area stores, like they are in Tesco's Fresh & Easy format stores.

The Bay Area also is home to numerous upscale multi-store and single store independent retailers. Many of these grocers have been national pioneers in upscale, natural and specialty foods retailing. Among these independents are Mollie Stones Markets, Andronico's, Lunardi's, Draeger's, Cosentino's, Zanotto's, Berkeley Bowl, and a number of others. All offer high quality prepared foods in their stores, which are collectively located all over the nine-county Bay Area.

Tesco's Fresh & Easy format has some major differences from these upscale supermarket and supernatural foods retailers however, despite the fact that prepared foods play a major positioning point in what all of them do. First, the Fresh & Easy format is smaller--about 10,000 square-feet--and designed to bridge the gap between huge superstores and traditional convenience stores.

Second, It's upscale, but also offers basic groceries and non-foods offerings. Fresh & Easy stores also will have fresh produce and meats, perishables of all kinds and other offerings one would expect in a neighborhood grocery store. This helps them in that they can supply basic needs to shoppers (like all the supermarkets mentioned above do) and not become just a tertiary retailer in the region.

Lastly, Fresh & Easy is non-union. All of the major supermarket chains and independents in the Bay Area (except Whole Foods and Wal-Mart) are union shops. The average retail clerk, with one year's full time experience (journey level), makes about $20.00 per hour in wages and has a full health benefits package which adds another $10-$12.00 an hour to their compensation in terms of the high-quality value of their benefits package.

However, like Whole Foods and Wal-Mart (which has only a handful of Supercenters in the region), Tesco's Fresh & Easy will be a non-union shop. With the exception of management staff, all of the retail associates in the Fresh & Easy Neighborhood Market stores set to open in Southern California, Nevada and Arizona, will be part-time. They will work at least 20 hours a week and no more than about 35 hours a week. Their average salary will be $10.00 hour, according to Tesco. Fresh & Easy store's part-time associates will have a health care policy but it will be nowhere near as good as what the unionized supermarket retail clerks have. In fact, the union retail clerks health policy is one of the best in the U.S.

We suspect Tesco to basically try to maintain their current employment policy and wage structure for Northern California, although the retailer likely will have to increase the hourly wage by at least two or three dollars an hour in order to attract employees in the Bay Area, which has a very low unemployment rate, and was recently ranked number one as the region with the highest salaries in the U.S. The Bay Area is a much more competitive labor market than Southern California, Nevada and Arizona are.

Even if Tesco has to pay two, three or four dollars an hour more, it's still at an advantage from a labor standpoint compared to the unionized retailers. Of course, the Bay Area is a heavy union region, and shoppers support union supermarkets like Safeway, Lucky Stores, the independents mentioned above, and others who pay their employees well. In fact, it's likely Tesco will be welcomed to the Bay Area with an organized campaign against their lower wages. There is such a campaign currently going on in Southern California against Tesco but its fairly small. Expect a larger, better organized campaign in the Bay Area, which is the most liberal region in the U.S.

Either way, established Bay Area retailers like Safeway and Whole Foods won't sit back and let Tesco take significant market share with its Fresh & Easy stores in the region. In fact, Safeway CEO Steve Burd has already said the chain is studying Tesco's format and is prepared to open its own Safeway convenience-type stores if the retailer believes Tesco is becoming a threat with its Fresh & Easy format in the Western U.S.

Whole Foods also is in the process of converting a former Wild Oats store in Boulder, Colorado into a new retail concept for the grocer called "Whole Foods Express." We think this development is in part a reaction to Fresh & Easy. We also believe Whole Foods won't hesitate to roll its "Express" stores out in places like the Bay Area and Southern California if they determine Tesco is taking market share from them with its upscale, convenience-type stores.

Tesco's Fresh & Easy Neighborhood Market format could do very well throughout the Bay Area and elsewhere in Northern California however. In the Bay Area's suburbs there's a huge base of time-pressed dual income families who like the concept of being able to get fresh, prepared foods, fresh produce and meats, basic, specialty and natural groceries in a fast and convenient way, without having to shop a large store.

In both the suburbs and cities like San Francisco, Oakland and San Jose, there also is a large, single professional population who doesn't cook often or at all and spends a sizable amount of their disposable incomes at restaurants and for prepared foods to go.

Trader Joe's has markets throughout the Bay Area and Northern California and is adding more stores at a rapid clip. Their smaller store, upscale format is very successful in the region. The Bay Area also is a "foodie" region. Its consumers have an appreciation and like for quality foods, and if Tesco is able to offer the same quality upscale fresh, prepared foods at its Fresh & Easy markets as it does at its stores in the UK, the offerings should go over well with the region's quality food loving population, helping to make Fresh & Easy stores a success.

Fresh & Easy Store Opening Update

Coming Up: The first six Fresh & Easy Neighborhood Markets will open at 10:AM on November 8 in Southern California cities of Los Angeles, Anaheim, West Covina, Upland, Arcadia and Hemet. Five Fresh & Easy markets will opn in the Las Vegas metropolitan area on November 14. On November 28 another store will open in the Orange County (Southern California) of Laguna. Stores will open in Arizona before the year is over, as well as additional Fresh & Easy markets in Southern California (including San Diego) and Nevada.

A Little Background Reading: This article from today's (10-27-2007) London Daily Telegraph newspaper talks about the numerous British retailers of all types who have ventured to the U.S., only to fail. As the article says, "The U.S. has long been a graveyard for UK retailers." However, in the piece Tesco says it will be different than all of the others who've ventured into the U.S. retail market, only to fail and close shop. The story provides some good background to our piece.