Marketing Memo: Store Brands 2.0: Better Store Brands and Brand and Shopper-Marketing Changing How Food Retailers Sell Their Own Brands

From the Natural~Specialty Foods Memo Editor's Desk: On August 6 we wrote about Safeway Stores, Inc.'s plans and initial strategy to market its O' Organics and Eating Right organic and healthy food and grocery (store) brands to competing retailers in the U.S. and to retailers throughout the world: Marketing Memo: Safeway's Challenge: Going From Store Brand Marketer to Consumer Brand Marketer With its O' Organics and Eating Right Brands.

Both brands have been so successful for Safeway that it is that success (above expectations) which provided the idea for the grocery chain to take the brands beyond the walls of the retailer's own stores and market them to its U.S. competitors and to food and grocery retailers throughout the globe.

Safeway is part of a growing trend among food retailers to go from being "private label" sellers to "store brand" marketers with their own-brand food and grocery products.

Traditionally, especially among American supermarket chains and mass merchandisers, private label was viewed primarily as a retailer's price and value store brand. The product quality was generally good but not outstanding, the packaging utilitarian, and the marketing focus strictly price and shelf placement. More sales promotion really rather than marketing.

This private label emphasis started to change slightly in the late 1980's when supermarkets like Loblaws introduced its more upscale Presidents Choice brand, which the Canadian food retailer eventually marketed to supermarket chains in the United states, as well as using it as its higher end store brand in its Canadian stores.

By the mid -to- late 1990's numerous other supermarket chains were starting to create better quality and looking store brands, along with using beginning to use some classical brand marketing strategies to create different levels (and brand names) of store branded products: super value, value, premium, natural, organic and the like.

About five years ago retailer branding started getting kicked up a notch with Safeway Stores, Inc. creating O' Organics, Kroger improving its store brands and developing its own natural and organic store brands, regional supermarket chains like Wegmans and Publix doing the same, as well as mass merchants target and Wal-Mart greatly upscaling their store brands.

Natural foods retailers Whole Foods Market and Wild Oats (now part of Whole Foods), along with specialty grocer Trader Joe's and the Costco and B.J's Wholesale club chains, were a major influence on these supermarket chains in terms of developing the higher quality and more niche oriented store brands like O' Organics. All of these retailers were leaders in the creation and marketing of these store brand 2.0 lines.

Along with this development, food and grocery retailers started putting much more emphasis on store or shopper-marketing of their store brands, developing and using numerous marketing-oriented ways to build the brands besides the past reliance and traditional emphasis on price and display building in-store only.

The marriage of higher quality store brands and shopper marketing is in full bloom today. Food and grocery and discount chains led by Safeway, Kroger, Wal-Mart (which right now is developing an upscale food and grocery store brand), Target, Trader Joe's, Whole Foods, Costco, BJ's (and others) and numerous regional players, are beginning to view their store branding operations in more classical brand marketing terms rather than as merely an extension of the procurement department, which is how private label was handled for decades.

Jim Lucas, who is the executive vice president of the shopper marketing division for DraftFCB, a marketing and advertising agency in Chicago, writes about what we call store brands 2.0 and shopper marketing in an article in tomorrow's (August 25, 2008) Advertising Age. Mr. Lucas' piece is informative theoretically but also extremely applicable and hands on. That's why we wanted to bring it to Natural~Specialty Foods Memo readers. Below is the piece and by Jim Lucas.

The Newest Brands? Open for Business
Retailers Have Switched Gears, Marketing Their Stores and Labels and Strengthening Bonds With Shoppers
By Jim Lucas: August 25, 2008

Many marketers are rapidly becoming more concerned with how retailers think. They want to know their concerns, objectives, equities and images and how they go about creating bonds with shoppers.

That's because today's retailers are evolving far beyond their historical role as simple points of distribution for selling national brands. They have changed their approach, marketing their stores as their own brands and systematically building better, stronger relationships with shoppers.

As a result, on behalf of our clients, we must now help the retailer build its business.

Think about it: With the average U.S. household making 150 to 200 store visits a year, it seems reasonable that while shoppers might make several trips to their local stores each week, they may not purchase the same branded products each time. Thus, shoppers generally have more contact and experience with their local retailers than with the majority of national brands.

Going their own way

Clearly, the nature of retailers' value creation has dramatically changed. And rather than just establishing loyalty to branded products, retailers want voices of their own. They are seeking to establish their own brands, and they are doing so by tailoring their customer experiences, differentiating them from their competitors' and creating better, ongoing relationships with shoppers.

Today's retailers have made huge inroads in fortifying their relationships with shoppers. Research by "Private Label Strategy" authors Nirmalya Kumar and Jan-Benedict E.M. Steenkamp clearly suggests that the nature of shopper loyalty is changing. While many shoppers are still loyal to brands, a significant portion increasingly are loyal to stores. This may be largely a function of convenience, but at the very least, retail brands are becoming more established in the minds of shoppers.

For example, Aldi, the European hard-discounter extraordinaire, has done a good job making its customers feel like smart shoppers. It has been aggressive in driving down prices on branded consumer package goods through strongly negotiated deals with manufacturers. It has created a wide range of store-brand products that also keep the price of the average shopping basket down. Its small, Spartan store formats help make the shopping experience more efficient. It has also developed a number of near-legendary promotions featuring "hot-priced" items ranging from well-known brands of wine to laptops specifically designed for and sold through Aldi stores, which are known as a place to "treasure hunt."

Believing that their long-term growth is tied to shopper loyalty, retailers increasingly want to develop their own shoppers. And because it is easier to get additional shopping trips, and increased purchases per trip, from shoppers who like your store, retailers are consistently using organized, data-driven, shopper-insight approaches. Retailers as diverse as Best Buy, H&M, Zara, Tesco, Tchibo, Kroger and Safeway are creating better touch points and shopping experiences to build stronger, more-loyal shoppers. This is largely the result of the creation of their own voices -- their retail brands.

U.S. supermarket chain Kroger is a prominent example of such a makeover. While working hard to become more efficient in its operations, Kroger also has negotiated sharper prices for its shoppers, has developed its store brands and is experimenting with new formats (for example, Kroger Right Now, a convenience, vending-machine format at gas stations). Kroger also is leading retailers in its investment in a shopper-loyalty program (with Dunhumby, the same firm that was instrumental in establishing Tesco's successful shopper program), the kind of strategic investment that provides an advantage in developing shopper insights and the ability to uniquely tailor the shopping experience to reach core shoppers.

Fresh focus

Safeway, another U.S. food retailer, recently has aligned itself with freshness and quality. Its lifestyle-store format has remade perishable areas such as produce, ready-to-eat meals, bakery and salad bar while creating new category/aisle descriptors (for example, Poetry in Bloom for floral). Its "Ingredients for Life" campaign extends the freshness/quality focus beyond the store. Moreover, its creation of store-brand product lines Eating Right and O Organics is designed to meet shoppers' needs. Such store-brand product lines are not simply about price points but are in sync with customers' lifestyles -- and unique to Safeway. It will be interesting to see how the marketplace reacts to Safeway's announced rollout of its house brands to competitive grocery chains. Will the availability of those brands at other stores cannibalize Safeway trips and sales?

It's an intriguing move because there does not seem to be a clear historical precedent. For example, Canadian-based Loblaw sold its President's Choice products to other retailers, typically in the U.S., so increased sales were generated from the additional distribution. But typically only one retailer or store banner carried the President's Choice items in a given market; thus there was really no competition for shopper loyalty or trips.

These supermarket examples, which similarly exist in other retail categories, indicate a fundamental change in how retailers are now approaching profitability. While efficiency is important, it's a "greens fee." Whether they be Whole Foods Market (natural/organic), H&M (celebrity design) or Zara (fresh fashion), retailers see long-term profitability as linked to their ability to provide unique shopping experiences that create loyal shoppers.

This shift in perspective suggests that the brand-marketing discipline many grew up with -- and the marketing-mix tools previously used -- have evolved. Retailer brands are now about connecting with shoppers' lives to build bonds and differentiate one retail experience from another.

Complex brands

Retailers are focused on positioning themselves through alignment with shoppers' lifestyles, and these positionings are less about marketing platforms than strategic cultural ideas.

It is also worth noting that retailer brands are generally complex, with many more dimensions than a traditional CPG brand, demanding that retailers turn to a new and growing set of marketing-mix tools to create the voices of their multidimensional brands.

The new marketing mix being used to create and maintain these retail brands is a far cry from the traditional one. Store ambience, layout, category organization, food theater, store-brand product lines, shopper programs, design, assortment and websites are just a few of the tools being used.

Today's retailers are first and foremost "meaning managers" or "choice editors" aligned with the needs and lifestyles of their shoppers. Retailers and manufacturers together must align with shopper needs to create unique shopping experiences and programs that help shoppers choose one store over another.

Working together

It is also important for retailers and manufacturers to align business goals, including driving traffic to the store or a specific destination in the store; creating larger sales receipts, better conversion rates, solution selling and cross-selling; and improving the total shopping experience -- for example, making it easier or more engaging, entertaining, educational or inspirational to shop.

Manufacturer brands must provide solutions that align with and help build and leverage retailers' equities, are tailored to retailers' needs and objectives, and are consistent with the positions the retailers are trying to establish and maintain.

Today's challenge for brand marketers is to help leverage retailers' marketing-mix tools (the shelf, category organization, in-store media or loyalty programs) or co-create new tools (new media, unique offerings, tailored products or packaging) to help retailers build stronger, better brands.

ABOUT THE AUTHOR
Jim Lucas is exec VP-director of the shopper-marketing division of DraftFCB in Chicago. He previously served as director of strategic planning and research at Draft, Chicago.

Independent Grocer Memo: Birmingham, Alabama USA's Western Supermarkets Goes its Own Way Against the Big Chains With Service and A Local Focus

From the Natural~Specialty Foods Memo Editor's Desk: The Birmingham, Alabama USA food and grocery sales market has become considerably more competitive and fragmented over the last decade, says Ken Hubbard, the owner and president of seven-store Birmingham-based Western Supermarkets. He's the local guy.

"You've got the big box stores on one end, the smaller independents in the middle and on the other end the pharmacies, convenience stores and others also selling groceries," Ken Hubbard says in describing today's Birmingham, Alabama retail food and grocery retailing market.

Over the last 10 years, Wal-Mart, Inc. has been building and opening Supercenter after Supercenter in the Birmingham market, making it the number one seller of food and grocery products today in that market, according to locally-compiled statistics.

In addition, discount retailer Target has been adding stores in the market as has the very successful Florida-based Publix supermarket chain. Then there's longtime region market share leader Bruno's supermarkets, which is growing once again, and the famous southern USA's Piggly-Wiggly chain, along with all of those other format retailers Ken Hubbard describes.

Then there's Hubbard's own seven-store Western Supermarkets, the hometown multi-store independent grocer. Despite all this competition, including from mega-Wal-Mart, Hubbard, like numerous of his fellow independent grocers throughout the U.S., is surviving and doing well.

Hubbard's Western Supermarkets is surviving and even thriving by focusing on those key things a locally-based food retailer can do best, which include offering superior, personalized customer service, along with product selections customized to local shoppers needs, tastes and desires. The independent generally knows these local consumers best because he lives and works among them daily.

A key to Western Supermarkets' success is that it customizes elements of the design and merchandising of each of its seven stores based on the neighborhoods they're located in. For example, a number of the stores feature extensive wine selections, which draw customers not only from the neighborhood, but also from throughout Birmingham and even neighborhing cities. Western Supermarkets publishes two wine newsletters as part of its wine merchandising program, the Wine Celler, pictured above, and another newsletter named the Grape Press, which you can view here.

Another example of this localized merchandising is that three of its seven stores have "The Original Soupman" gourmet soup bars in them. There are numerous other examples of this neighborhood marketing and merchandising, which is one way the multi-store independent competes with the big chains without trying to match them on price.

This prescription--service, niche marketing and localization--is the same formula allowing thousands of multi-store and single-store independently-owned and operated supermarket retailers to continue to succeed in the U.S. despite the continued competitive pressure from big discounters like Wal-Mart and Target, warehouse clubs like Costco and BJ's, giant national supermarket chains like Kroger, SuperValu and Safeway, and mega-regional chains like Piggly-Wiggly, Bruno's and Publix in the Birmingham, Alabama market.

Birmingham-based Western Supermarkets is 60 years old this year. Ken Hubbard, who worked for the local supermarket chain's original owners as a bag boy in 1960 while attending college, and a partner bought the company in 1987. A little later Hubbard bought out his partner, becoming the sole owner of the seven-store hometown mini-chain.

Roy L. Williams, a staff writer for the hometown Birmingham News newspaper, profiled Ken Hubbard and Western Supermarkets in yesterday's edition of the paper. Below is that profile of the 60-year old successful multi-store independent grocer in a market full of white hot competition, with numerous retailers of various formats all after a bigger share of shoppers' food and grocery dollars.

Western Supermarkets hits 60-year milestone: 7-store chain puts focus on service

By Roy L. Williams: Birmingham News staff writer

Ken Hubbard earned some of his tuition to the University of Alabama in 1960 by working as a bagger at Western Supermarket's Five Points West store.

Today, Hubbard is now sole owner of the seven-store chain that this fall will mark 60 years in business - a milestone that comes amid the toughest operating environment seen in decades for the grocery industry.

Hubbard, who along with former partner Ed Goodwin bought the company from co-founder Inos Heard in 1987, says Western is managing to weather what he calls the toughest economic storm of his career, brought on by stiff competition from bigger rivals and soaring gasoline and wholesale food prices that have pinched grocery margins.

"Despite it all, we've been blessed to experience overall same-store increases over the last year or so," said Hubbard, who bought out Goodwin in 1996.

He didn't release sales numbers for the chain. Darwin Metcalf, Western's president and chief operating officer, said Western's value-oriented FoodSmart stores in the Festival Center on Crestwood Boulevard and Keystone Plaza on U.S. 31 in Pelham have especially benefited as consumers have grown more cost-conscious.

Hubbard acknowledged that Birmingham's grocery landscape has changed over the past decade since Bentonville, Ark.-based Wal-Mart Stores Inc. began adding supercenters that sell groceries. The world's biggest retailer has commanded the No. 1 market share for groceries in the area Birmingham for several years now, according to the Shelby Report, a Georgia-based grocery industry research firm.

In addition, discount retailer Target and Florida-based Publix Supermarkets have expanded their presence in Birmingham in an attempt to wrest market share away from long-established players such as Western, Bruno's Supermarkets and Piggly-Wiggly.

"The grocery market in Birmingham is much more fragmented than it used to be," Hubbard said. "You've got the big box stores on one end, the smaller independents in the middle and on the other end the pharmacies, convenience stores and others also selling groceries."

Recent months have added the challenge of surging prices for grocery staples such as milk, eggs, rice and items made from corn. Consumer prices for food items have been rising at the fastest pace in 17 years, putting pressure on operators.

Western has managed to survive by sticking to its roots, said Jack Taylor, the Joseph S. Bruno professor of retailing at Birmingham-Southern College.

"Bruno's used to be like that when run by the Bruno family," Taylor said, referring to the Birmingham-based grocery chain that once dominated the area's grocery business. "When Bruno's was bought out by KKR (an investment firm) in the early 1990s, that's when the chain began to struggle."

After a period when it was controlled by a sister firm based in South Carolina, Bruno's operations are again based in Birmingham. After the return to Birmingham, executives pledged to strengthen service, refocus the product assortment and improve the decor in the chain's stores.

Unable to compete on size, Hubbard said Western has focused on customer service. Half of its full-time employees have been at the company 10 years or more and all of the general managers of its seven stores have been with Western at least 20 years, he said.

Taylor said Western "isn't the cheapest store," but staying small allows the chain to focus on meeting customer needs.

"I bet the meat market managers at Western know regular customers by name, something you can't get at the big chains," Taylor said.

Western has also focused on making each of its seven locations cater to the communities they serve, Metcalf said. Western converted a store at 7737 Second Ave. South into a concept called The Village Market to meet the needs of East Lake and Roebuck residents who wanted a neighborhood market, he said.

"It's more of a market concept," Metcalf said. "It's not so much what we carry there, but how much. We may carry turnip greens or fruits by the pallet load at certain times."

The Mountain Brook location at 2717 Culver Road is known for its wide assortment of 3,000 wines, which draws patrons from as far away as Mobile and Huntsville.

Hubbard, whose son Brett serves as Western's director of deli and floral departments, said he is confident Western will be able to weather its latest economic storm.

"We plan to be here for a long time," Hubbard said. "We have no plans to add any new locations. We will just focus on continuing to provide better service at our existing locations.

Guest Retail Memo: A Brooklyn, New York USA Neighborhood That's Just 'Too Good' For Whole Foods Market, Inc. Not To Open A Store In

The Gowanus Canel, in Brooklyn's Gowanus neighborhood, which is one of the last industrial tracts to be developed in the area, sits close to where Whole Foods Market, Inc. first proposed locating a store in 2004, and still hasn't ruled out, despite making little progress in the four years since making the announcement.

From the Natural~Specialty Foods Memo Editor's Desk: To paraphrase the classic American book, "A Tree Grows in Brooklyn" (New York USA), and the 1945 classic movie of the same name, we wonder: Will a Whole Foods Market natural foods superstore ever bloom in Brooklyn's Gowanus neighborhood?

As we reported last week, Whole Foods Market is cutting back to 15 from 25 -to- 30 the number of new stores it plans to open in 2009, on the heels of announcing a 31% decline in net profits last week for the most recently ended quarter.

Those plans include "revising" its plans to open a store in Brooklyn New York's Gowanus neighborhood, where it first announced it planned to open a Whole Foods Market natural foods and products emporium in 2004. Our sources tell us the Gowanus location is on hold, as Francis Morrone writes in the story below in tomorrow's New York Sun newspaper.

Ms. Marron's piece is an interesting back story to the Gowanus Whole Foods site and the neighborhood in general. It's a neighborhood she suggests is just too good of a location for Whole Foods to not build and open a store in.

Gowanus, Where Irony Meets Hope
By FRANCIS MORRONE, New York Sun

August 21, 2008

In 2004, the Austin, Texas-based gourmet grocery chain Whole Foods Market, which by now has five Manhattan stores, said it was going to open a store the next year on a mostly empty lot at the southwest corner of Third Avenue and 3rd Street in Brooklyn. The next year came, and Whole Foods announced a new opening date: early 2007. Early 2007 came; there was no Whole Foods in Gowanus.

In the last quarter, the chain posted a 31% net income loss, and announced it is "revising" — not abandoning — its Brooklyn plans.

That Whole Foods should still be thinking of opening a store on a toxic floodplain (hence the delays) tells us something about the site. Namely, it's a location too good to be true. The same may be said of much of the oft-maligned part of Brooklyn called Gowanus.

Gowanus is the neighborhood along both banks of the Gowanus Canal, abutting Park Slope to the east and shading into Carroll Gardens to the west. Once, there was a Gowanus Creek, a meandering freshwater stream that flowed from Gowanus Bay (which separates the South Brooklyn neighborhoods of Red Hook and Sunset Park) approximately as far north as the canal extends today, or roughly to Douglass Street in Boerum Hill, a neighborhood once known as North Gowanus.

In the 1850s the creek was straightened out to be made into a navigable canal to serve inland industries. It got its biggest boost in 1869, when Edwin Litchfield dredged it, drained the neighboring marshlands, and built four sizable basins, along which factories and warehouses flourished until after World War II. A number of factories and warehouses, some still making use of the waterway, operate there to this day.

Litchfield owned the land that sloped westward from Brooklyn's terminal moraine, atop which in 1854-57 he built his spectacular house, later absorbed into Prospect Park and still standing.

On the upper portion of Litchfield's land rose the late-19th-century neighborhood of Park Slope. The marshy lowlands, Litchfield felt, were unsuitable for fine residences, but perfect for a canal, factories, and warehouses, interspersed with humble homes of factory workers.

As factories were built, the canal became horribly polluted. The water became an oily sludge with a sickly lavender color and an unbearable stench. In 1911 a great pump was constructed at the northern end of the canal so that fresh water could regularly flush out the channel.

The pump broke in the 1960s. All the ordinary delays ran up against the 1970s fiscal crisis, and the pump stayed broken. The canal re-putrefied until 1999, when the pump was fixed — and, we believed, a new day had dawned for Gowanus.

By then, Park Slope and Carroll Gardens were scorchingly hot real estate markets. Visions emerged of splendors that might rise along the waterway's banks — some invoked Venice, others San Antonio — infilling this once seemingly impenetrable divider between the two neighborhoods.

It's been slow to happen. Toxic residues left from the halcyon industrial days have proved a greater problem than developers expected. Cleanup costs are sky-high — and perhaps can't be justified in the recent economic downturn. Some environmental scientists even say that much of Gowanus's ground is so contaminated it simply cannot be adequately cleaned up, at any cost.

And the old pump should have been replaced, not repaired; its inefficiency hasn't quite cleaned up the canal as we'd hoped. The city says it will build a new pump, to be ready in 2012. With city projects stalling left and right for want of funds, it's likely we'll miss that goal.

Meantime, Gowanus goes its sweet way. The vistas stun, the old bridges crossing the canal are beauties, there are classic factories and warehouses, and artists and arts organizations have flocked to the area.

In 2006, the New York City Landmarks Preservation Commission landmarked the New York and Long Island Coignet Stone Company Building, which stands at the southwest corner of Third Avenue and 3rd Street, on Whole Foods's property. Designed by William Field & Son and built in 1872-73, it's the oldest known concrete building in the city.

It served as offices of a large concrete manufacturing complex specializing in the patented Beton Coignet that was invented in France in the 1850s. Now in an advanced state of deterioration, it had artificial brick put on it in the 1960s. The two-story Italianate building looks as though it's an old mansion incongruously set in an industrial wasteland.

The architecture critic Lewis Mumford took a walk around Gowanus in 1952, and described "grimy factories and warehouses and gas tanks" and "empty lots and industrial rubble" — evoking "a segment of a bombed city."

In the midst of this emptiness, the Brooklyn Improvement Company, whatever that may be, occupies a classic stucco mansion, standing ... in ironic solitude — or should one say hopeful anticipation?

Brooklyn Improvement Company was the name of Litchfield's concern, which owned the land the concrete company occupied. That company was short-lived, and by 1882 the Brooklyn Improvement Company had made the "stucco mansion" its own offices, which it would inhabit until 1957.

Fifty-six years after Mumford wrote, and we still don't know if it's ironic solitude or hopeful anticipation.

Retail Memo: Are Whole Foods Market, Inc.'s Current Problems In Part Do to the Retailer's Losing Track of its Original Mission?

The two-story, approximately 75,000 square foot Whole Foods store pictured above in Pasadena, California, the retailer's largest store in the Western USA, is a natural foods and products emporium, featuring everything from ultra-premium confections, gourmet baked goods and premium-priced fresh, prepared foods like sushi and lobster, to expensive yoga clothing made from organic cotton, along with more basic natural and organic food and grocery products.

Opinion--Guest Retail Memo: By Mathew Dubord.

Whole Foods Market Inc. — or, as it's become better known recently, No.48 in the bestselling book "Stuff White People Like" — has problems. Chiefly, there are fewer people, white or otherwise, interested in paying a premium for its ethically cultivated, fair-trade, organic gourmet fare. Eating might be a necessity, but the current economic downturn has sent consumers scurrying for cheaper grub, which in turn compelled Whole Foods to announce that its third-quarter financial results were off by more than 30 percent. Its stock price was accordingly hammered last week.

For 30 years, Americans have been drastically modifying their diets. The organic movement specifically, once the province of affluent Berkeley bohemians and an elite cadre of idealistic farmers who despised big agribusiness, has made significant inroads with an American public raised on Wonder Bread and canned ham. Whole Foods boomed alongside this national trend and was handsomely rewarded. But sticker shock was always an issue; the grocer earned the derisive tag "Whole Paycheck" because even free-spending customers with a jones for wild-caught salmon were taken aback when the contents of a single reusable shopping bag ran them $100.

Still, when times were good, folks with the wherewithal could view such spending as a kind of "virtuous inflation," a volitional exercise that flew in the face of actual inflation, which for years was low. Consumers didn't have to shell out a lot of dough for organic plum tomatoes lovingly cultivated in volcanic soils.

They did so because they could. And because this choice, while economically perplexing, allowed them to bolster a view of themselves as opposing rapacious mega-corporations that peddled genetically modified products grown in vast fields rendered toxic by industrial fertilizers and pesticides.

It was political action, practiced at the dinner table, energized by books such as "Fast Food Nation" and "The Omnivore's Dilemma." It's the same spirit that moves people to pay extra for hybrid cars. Paying the higher price is self-imposed inflation, but Prius lovers prefer to think of it as a down payment on a future with fewer environmental problems caused by automotive emissions and oil drilling in wildlife refuges.

Grocery store chains that cater to the less persnickety sensed the opportunity, too. Hence, we now have Whole Foods-esque selections at Ralphs and Vons. And as several commentators have noted, even Wal-Mart has stepped up, officially bringing the gourmet-organic trend to the masses.

This is all great, except that it reveals a point of profound ignorance about Americans and their eating tendencies. We are recent converts to the idea that you absolutely are what you eat, unlike citizens from countries with a truly embedded food culture, such as France and Italy. Unlike a Parisian or Roman, we're unlikely to insist on organic chow if it means we'll have to drive less or turn off the air conditioning all summer.

In fact, when the economy goes south and belts are tightened, the first area of spending that we seek to attack is food: As the cost of consumer goods jumped 5 percent this year, business articles have relayed tales of shoppers scouring the aisles for cheap store-brand products and supermarkets doling out more coupons.

Any form of "virtuous inflation" quickly vanishes in the face of the real thing. I'll probably be just as healthy if I eat the plain old nonorganic apple, even though it may have been sprayed with pesticides. I'll certainly be less stressed about my bottom line. Ultimately, this is a strength: Under duress, many Americans focus on the fundamentals and defer gratification on the indulgences.

Moreover, Whole Foods these days seems to hawk fewer daily necessities and more expensively marketed perks. Several of the company's new stores, such as the two-story circus-like affair in Pasadena, Calif., have engendered a backlash among those who believe that Whole Foods is now more interested in promoting a luxury lifestyle that includes chocolate fountains and tapas bars. Off to the neighborhood farmers market those shoppers will go.

Whole Foods ultimately fueled its success on a very dangerous business wager: that once customers had grown accustomed to the good vibes that virtuous inflation inspired, they would ignore their self-interest. Whole Foods is struggling to sustain this key psychological link (and regrettably, the larger organic movement will probably see a rollback of its recent gains as consumers ride out the economic downturn).

A scientist would point out that the body doesn't care what you're feeding it, so long as it's nourishing. When times are tough, that means the value-pack bag of frozen chicken thighs wins and the vegetarian-fed, free-range whole fryer does not. Virtue is a funny thing: It has a hard time competing with an empty stomach. Or an empty wallet.

Natural~Specialty Foods Memo Editor's Note: Matthew DeBord is a writer in Los Angeles. He originally wrote this essay/opinion piece for the Los Angeles Times, where it was published earlier this week. The opinion is that of the writer and not Natural~Specialty Food Memo.

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.

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

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

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

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

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

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

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

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

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

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

by Jessie Scanlon

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

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

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

Growing His Second Chain

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

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

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

Pricing, Pricing, Pricing

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

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

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

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

A natural surge?

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

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

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

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

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

Retail Memo: Soaring Gas Prices Leading to Increased Grocery Category sales At U.S. Convenience and Drug Stores; Good For Small-Format Grocers Too

Guest Retail Memo From the Washington Post

From Soda and Chips To Grocery Staples
Shoppers Turn to 7-Eleven, CVS to Beat High Gas Prices

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, August 9, 2008

Walk into Zulfiqar Ali's 7-Eleven in Arlington and you'll find the standard stack of newspapers, rack of magazines and ATM in the front of the store. And, lately, two red grocery baskets.

Ali added them a few months ago after he noticed shoppers making multiple trips between the grocery shelves and the checkout counter, carrying cans of Goya black beans, Aunt Jemima pancake syrup and fresh fruit. On a recent evening, two elderly women who live nearby spent $150 on groceries. Ali has even expanded his stock of sugar, salt and cooking oil due to popular demand.

"It was not like that before," said Ali, who has worked at the store for six years and owned it for the past two. "Before, people just buy a couple of things and pay and leave."

Once primarily the province of Big Gulps and beef jerky, convenience and drug stores are siphoning away sales from traditional supermarkets as the weak economy and high gas prices force consumers to save more by driving less. They are stopping by not only for the quickie quart of milk, but also for pantry items normally bought at the supermarket -- and even for dinner. Some are using the stores to stretch their paychecks, buying what they need when they need it instead of stocking up.

At 7-Eleven stores in the Washington region, grocery sales were up 2 to 3 percent last month compared with last year, said Tom Gerrity, director for processed foods. Frozen food sales grew 7 percent, and ready-to-eat meals jumped 9 percent. Other regions across the country are seeing similar growth, with weekly spikes following paycheck cycles.

"Some of the products that would typically be purchased at a supermarket or club store in bulk quantities, we're seeing more customers buy those products throughout the month at a 7-Eleven," he said.

According to local trade publication Food World, 7-Eleven is among the top 10 grocery destinations in the Washington area, ranking ninth with annual sales of $469 million and 3.3 percent market share -- ahead of chains such as Harris Teeter (10th) and Whole Foods (11th). CVS ranked fourth with $941 million in sales, excluding prescriptions, and 6.5 percent of the market. Giant dominates the region with $3.3 billion in sales and 23.2 percent market share. Safeway follows with $2.6 billion in sales and 18.3 percent of the market.

Part of the strong rankings are due to the sheer number of convenience and drug stores in the region: 7-Eleven has 416 and CVS has 190. Whole Foods and Harris Teeter together have just 32 stores. But as gas prices continue to nibble away at consumers' wallets, many are finding that they can get what they need closer to home.

"It's a big number because convenience stores are everywhere," said Jeff Metzger, publisher of Food World. "They're trying to use the edge that they inherently have."

Convenience and drug stores have been ratcheting up the competition with traditional grocers over the past three years with expanded food offerings, Metzger said. CVS does not break out sales numbers for grocery, but general merchandise accounts for 15 percent of revenue, according to the company's latest annual report. CVS spokesman Mike DeAngelis said the retailer does not position itself as a grocery destination but does tailor merchandise to neighborhoods.

"Where we see a need in a particular community, we make efforts to expand our selection of staple food items (bread, milk) as well as our convenience food assortments," he wrote in an e-mail.

At Ali's store, grocery sales are up 6 percent, while chips grew 16 percent and take-home cookies and crackers skyrocketed 39 percent. Budget beers rose 15 percent. Yesterday morning, one customer bought toilet paper, napkins, Ritz crackers and Sunkist soda. Two boys walked in for a gallon of milk.

Mustafa Abdellatif, 68, stopped by for the newspaper and a Perrier mineral water. He lives nearby and shops at 7-Eleven when he doesn't feel like driving to the supermarket.

Lately, he has tried to cut back on his time behind the wheel because of gas prices. When he does drive, he said, he finds himself glancing at the fuel gauge more often. The 10-minute walk to the 7-Eleven qualifies as his exercise for the day.

"When I have a small list of groceries," he said, "then that's when I come here."

Food is an important profit-driver at convenience stores, particularly service items such as fountain drinks and on-the-go meals. Consulting firm Technomics estimates that profit margins on such items can easily hit 40 percent and may exceed 60 percent.

"A trip to the gas station may be unavoidable, but now consumers are more likely to also pick up a quick meal or a snack at a [convenience store] and avoid another stop," he said.

Pennsylvania-based Wawa, which has 30 locations in the area, recently began offering a six-item dinner menu at its convenience stores for $3.99 each or three for $9.99. Lisa Wollan, head of consumer insights and brand strategy, said the program has been a success and helped showcase the brand as a one-stop shopping destination.

"We were trying to give our customers maximum value," she said.

Still, a recent report by consumer behavior research firm TNS Retail Forward showed that the primary reason shoppers visited convenience stores was to fill up their gas tanks. Grocery shopping ranked last. Among store merchandise, cigarettes and other tobacco products make up the bulk of sales, followed by bottled beverages and alcoholic drinks.

"It's important to add destination appeal so that shoppers think of them not only as convenience," said Jennifer Halterman, Retail Forward senior consultant. "Adding that second layer can help them in the future."

Marketing Memo: Is the Branding of Agriculture Products A Way For Developing Nations to Better Participate in the Global Food Marketing Economy?

Guest Marketing Memo From Brandchannel.com

Emerging Nations Cultivate Agricultural Brands
by Randall Frost August 11, 2008 issue

“There may be an inherent perceptual bias against developing countries’ products, serving as an entry barrier to industrialized markets," write Professor Eugene D. Jaffe and Israel D. Nebenzahl in National Image & Competitive Advantage (2006). "In general, American consumers are more receptive to products from developed countries and less so from developing countries.”

But not everyone agrees with this statement. Thomas Cromwell, president of East West Communications in Washington, DC, questions the conclusion relative to agricultural imports.
“Because agricultural products are natural, and people associate quality with natural factors, such as climate, soil quality, and organic growing methods, the positive association with agricultural products has little if anything to do with the overall level of development of the country from which they come,” he told brandchannel.

Professor Nicolas Papadopoulos of Carleton University in Ottawa, Canada, disagreed. “All the research to date shows that products from developing countries are viewed with greater ‘suspicion’ and a higher discount is expected, by consumers in developed and developing nations.” An exception occurs, he says, when the developing-to-developing country exchange occurs between nations that are geographically close, culturally similar, or at least not at odds with one another.

Professor Jaffe, co-author of the above-mentioned book and head of the MBA programs at Israel’s Ruppin Academic Center, says that although agricultural commodities are harder to brand than manufactured products, there are nevertheless success stories for developing-country-based agricultural brands. As an example, he cited Brazilian coffee and that country’s advertisements for wine. Jaffe added that there is no doubt these brands have contributed positively to the nation’s image.

Of the developing countries, Brazil has one of the most advanced agricultural branding programs. Alexandre Rocha of the Brazil-Arab News Agency in Sao Paulo told us that in addition to the country’s promotions for Brazilian coffee, there are also branding programs for Brazilian beef, Brazilian fruit, Brazilian chicken, and wines from Brazil.

Brazil exports many of its agricultural products to other developing countries. Says Rocha, “Russia is the main buyer of Brazilian pork meat, Egypt is the main importer of Brazilian fresh beef, the Middle East in general is the biggest market for Brazilian poultry and sugar, Algeria is the main buyer of Brazilian dairy products, China is the biggest importer of Brazilian soy beans, and Iran is the main market for the Brazilian corn.”

According to Rocha, expanded trade with the developed nations has not been an option. “Many developed countries, such as the US, Australia, and nations of the EU, are our competitors, and impose barriers to the imports of Brazilian products. This is one of the more difficult problems for the WTO Doha Round.”

Several years ago, a Hindu Business Line (India) editorial considered the role of regional trade blocs in the global economy. The editorial went on to recommend that developing countries preferentially export branded agricultural produce to regional trade partners, rather than focusing on major importers like the US and EU.

Brazil’s successes notwithstanding, this strategy may not be feasible for all developing countries. Although the greatest potential for growth in food and agricultural trade is among developing countries due to higher population and income growth rates, Professor David Blandford of Pennsylvania State University notes, “Barriers to South-South agricultural and food trade tend to be high, due to high transactions costs and tariff protection.”

Still it can be quite expensive to build a brand in the US and EU. “There may be some cost savings in staying regional. And building brands up slowly from the local to the global is an old strategy for many firms,” says Professor Keith Maskus of the University of Colorado.

Christa Lachenmayr, an agricultural economist with Nathan Associates in Arlington, Virginia, works with clients in developing countries, helping them acquire intellectual property rights for agricultural brands. She says, “One of the limiting factors in developing countries is whether or not they have the appropriate regulatory regime to recognize and for companies to register a national identity.”

In a project designed to create a regional brand for Mongolian cashmere, Nathan Associates began by helping Mongolia draft a law that allows companies to register a geographic indicator. Lachenmayr explains, “Then we assisted them with the testing to document the unique properties of Mongolian cashmere. We registered the mark first in Mongolia—you have to register it worldwide. Then we helped them develop a branding campaign around that mark. It wasn’t cheap but it wasn’t prohibitively expensive.”

East West Communications’ Thomas Cromwell believes country-based agricultural brands can help build affinity between nations. Citing examples like Egyptian cotton, Sri Lankan tea, tilapia from Honduras, and cut flowers from Central and Latin America, he says, “A well-known, well-branded agricultural product can do a great deal to help build a nation's brand.”

“Perhaps the best [example of this] is Colombian coffee and the famous Juan Valdez marketing campaign,” he told us. “If you think about it, Colombian coffee has long been just about the only positive thing most people in the world have been able to associate with Colombia, against a background identity of narco-terrorism and crime.”

Cromwell added, “Sudan is the largest country in Africa, with its vast fertile regions fed by the White and Blue branches of the Nile. It is located near the arid lands of the Arabian Gulf, where oil-fueled economies are strong and most food is imported. Yet the country is only known for its sugar and gum arabic. With good planning and incentives, Sudan could begin to change its image from sponsor of terror to bread basket or market garden, beginning on a regional level.”

But, alas, every silver lining has a cloud. Cromwell notes that if a developing country becomes too closely identified with an agricultural brand, the association might make it difficult later for the country to upgrade its identity from being agrarian to being technologically advanced.

Randall Frost is a freelance writer based in Pleasanton, California. He is the author of The Globalization of Trade. His work has appeared in Worth, The New England Financial Journal, CBSHealthWatch, and a variety of educational publications.

Wine, Spirits & Craft Beer Memo: Northern California Craft Brewer Wins Right to Tout 'Legal Weed' On Beer Bottles

Guest Memo From the Associated Press

By Juliet Williams
Thursday, August 7, 2008

Sacramento, CA -- A Northern California USA brewer who tangled with federal regulators over the caps on his beer bottles said Tuesday that officials have given him permission to keep the message "Try Legal Weed."

The Alcohol and Tobacco Tax and Trade Bureau had ordered Vaune Dillmann to stop using the caps, which are a play on the name of the Siskiyou County town where he brews his beer: Weed. The bureau said the message amounts to a reference to illegal drugs.

Dillmann appealed and was preparing for a legal fight when he received a registered letter this week saying he can continue using the bottle caps. He shared a copy of the letter Tuesday with the Associated Press.

"Based on the context of the entire label, we agree that the phrase in question refers to the brand name of the product and does not mislead consumers," said the letter, dated Thursday.

A message left after hours for alcohol bureau spokesman Art Resnick in Washington was not immediately returned Tuesday.

The dispute started last winter after Dillmann sent the agency Mt. Shasta Brewing Co.'s proposed label for its latest beer, Lemurian Lager.

He included the same bottle cap he'd been using on his other five brews. This time, the branch of the U.S. Treasury rejected it because of federal laws that strictly prohibit drug references on alcoholic beverages.

Since the dispute was publicized in April, Dillmann said he has received letters, phone calls and messages from more than 1,200 people around the world - including old friends and his high school football coach in his hometown of Milwaukee.

"We have not had one even remotely negative comment," Dillmann said.

Dillmann started his brewery in 2004 and named the company's first official brew for the town's founder, Abner Weed, a timber baron who eventually was elected to the state Senate. He was only the latest resident to exploit the name of the town of 3,000.

All the attention has led to booming sales, but it's also been stressful, Dillmann said.

He plans to resume using the now-infamous bottle caps, which had been replaced with blanks while the dispute was pending.

Dillmann also drafted a letter thanking supporters. His message: "Weed fought the law and Weed won!"

Small-Format Food Retailing Memo: Does Wal-Mart Plan to Build A $10 Billion A Year 'Small-Mart' Empire?

The Financial Times is reporting today that Wal-Mart, Inc. had an advertisement it later pulled on its Marketside.com website that described the small-format Marketside combination fresh, specialty, natural foods and basic grocery stores to eventually be a chain of over 1,000 stores doing about $10 billion in annual sales.

Below is today's report from the Financial Times:

Wal-Mart sees Marketside as $10bn chain

From the: Financial Times
By Jonathan Birchall in New York
August 7, 2008

Wal-Mart, the world’s largest retailer, says the new small Marketside grocery stores it is to launch this autumn could expand to a chain of more than 1,000 stores, delivering $10bn-plus in annual sales.

The retailer plans to open 10 of the 15,000 sq ft Marketside stores initially, including four in the Phoenix area, where they will be competing directly with Tesco’s recently launched US Fresh & Easy store concept. Wal-Mart’s executives have described the Marketside stores as a pilot project, although it is the first new store format to be launched by the company in a decade. But a job advertisement for the retailer indicates the scale of its ambitions for Marketside, saying the format “is expected to start with 10 stores and evolve to between 1,000-1,500 stores with over $10bn annual sales."

At less than a 10th of the size of the average Wal-Mart superstore, Wal-Mart said the new stores would be aimed at “the needs of a time-starved, higher-income consumer that is interested in convenience and premium fresh, natural and organic offerings.”

The approach contrasts with Wal-Mart’s experience with the Wal-Mart Neighborhood Market stores it launched 10 years ago, which are about the size of a traditional US supermarket.

In response to an inquiry from the Financial Times, Wal-Mart stressed the Arizona stores were a pilot project. The retailer subsequently removed from its website the job advert that included the more ambitious targets.

Wal-Mart’s superstores are built around high volume and low cost, and the group has faced challenges in adapting to the supermarket-sized Neighborhood Market stores it launched in 1998, opening more than 140 outlets. The Marketside stores will require a fast turnover of stock, which could be a difficult fit with Wal-Mart’s distribution system.

Tesco has opened more than 60 Fresh & Easy stores in California, Arizona and Nevada since November and plans to have several hundred operating during the next two years.

Wal-Mart, the largest US grocer with more than 20 per cent of the market, is developing the Marketside format as growth slows at its 2,500-plus superstores.

The Marketside format is also expected to spearhead a broader drive by the retailer to improve its overall grocery offering.

Safeway and SuperValu, two of the largest US supermarket chains, are also experimenting with small, local formats.

Natural~Specialty Foods Memo Analysis

As our readers know, we've been covering Wal-Mart's Marketside format development closely as part of our extensive coverage of what we termed the small-format food and grocery retailing revolution in the U.S.

The Marketside stores, which will feature in-store, fresh prepared foods (and in-store seating for about 9-10 customers along with take out), specialty and natural foods and groceries, fresh meats and produce, along with a limited selection of basic grocery items, will average about 15,000 -to- 20,000 square feet--which is a fraction of the size of its Supercenters, which are about 180,000 square feet on average, and less than half the size of its 45,000 square foot Wal-Mart Neighborhood Market supermarkets.

The format's focus will be on consumers who desire quality foods at reasonable prices. The first four Marketside stores are scheduled to open in the phoenix, Arizona Metropolitan region this fall.

We started covering the Marketside format development last year, and have broken numerous stories about its progress. During this more than one year coverage of the story, we've developed some very good sources.

We talked to a couple of our Wal-Mart sources today about the Financial Times report. One of those sources, who has been very good thus far, told us the mention of an eventual 1,000 store, $10 billion a year Marketside chain was on the job advertisement online board. However, the source says not to take it too seriously, not to think it means plans call for such a chain in the near future.

Rather, the source says its an internal long range goal number, and it didn't belong on the job board website, which is why it was taken down after the Financial Times reporter contacted the company about it.

This doesn't mean Wal-Mart doesn't plan to be aggressive with its Marketside format--just not 1,000 stores, $10 billion a year aggressive in the short to medium term.

As we've reported, Wal-Mart is looking for additional Marketside sights in Arizona, in addition to the four set to open this fall. The retailer also is looking throughout California and Nevada (Tesco Fresh & Easy country along with Arizona), as well as in other U.S. states.

Thus far we've reported for example that Wal-Mart is considering signing a lease for site in Reno, Nevada, along with in various particular California locations for the stores.

The current poor U.S. economy also has factored into Wal-Mart's planning for its Marketside small-format fresh food and grocery stores, according to our source. That source says because the stores will be more upscale in design and positioning--along with putting an emphasis on fresh, prepared foods--the retailer is exercising caution as it is well aware of the current consumer trend in the U.S. to trade down to discount food stores like its Wal-Mart Supercenters.

This fact isn't putting the brakes on Marketside. Rather, its providing a moderating theme to how fast the retailers grows the stores.

After all, there is no need to open Marketside stores in the way for example that Tesco is opening new Fresh & Easy Neighborhood Market stores--about at a pace of one new store every three or four days on average--since Wal-Mart's strategy with Marketside is part of a multi format strategy while Tesco is engaged in a single format--Fresh & Easy--U.S. food and grocery retailing strategy.

Having said that, we are currently working on reporting about a couple possible Marketside store sites in California. We hope to write about just where those locations are soon. Like we said, Wal-Mart is taking a moderate, but still plenty aggressive, approach with its new, small-format Marketside retail development and format.

Marketing Memo: Safeway's Challenge: Going From Store Brand Marketer to Consumer Brand Marketer With its O' Organics and Eating Right Brands

Pleasanton, California USA-based Safeway Stores, Inc. is preparing to roll out its popular O' Organics organic foods and Eating Right healthy foods store brands to a wider audience-- competing food retailers in the U.S.--along with to grocers globally, as we reported and wrote about in this April 28 piece: Marketing Memo: Safeway Stores, Inc. to Market its 'O' Organics' and 'Eating Right' Organic and Healthy Brands to Other Retailers in U.S. and Globally.

The supermarket retailer's target date to begin selling the brands (they won't be store brands anymore) to other U.S. food retailers and wholesalers is sometime this fall, just a few short months away.

Natural~Specialty Foods Memo was the first publication of any kind to report in this piece in December, 2007 and in others that Safeway Stores, Inc. was already selling some items in its O' Organics organic food and grocery product brand in Asia and South America through a distribution deal with the giant French supermarket chain Carrefour, which is the second largest retailer in the world after Wal-Mart, Inc.

Safeway plans to extend international sales of both its O' Organics and Eating Right brands to other international retailers and to other parts of the world. Plans call for the increased international marketing also to begin this fall in conjunction with the launch to various U.S. supermarket chains and wholesalers at home.

Today's Advertising Age, the trade publication for the marketing and advertising industry in the U.S., has a story about Safeway's plans to launch the two brands into the stores of many of its competitors this fall, as we've previously detailed in Natural~Specialty Foods Memo.

Safeway's O' Organics brand--which currently consists of an impressive 300 items in over 30 product categories, including dry grocery, perishables, fresh meats, dairy and fresh produce--did about $150 million in gross sales in its first year, 2005. Last year the brand did about $300 million in annual sales. Safeway is projecting sales of $400 million for the brand this year in its 1,750 stores in the U.S. and Canada. That's impressive by any score card.

Safeway CEO Steve Burd told Natural~Specialty Foods Memo earlier this year that the Eating Right healthy foods brand was on track to do even more the O' Organics' $150 million in its first year, which won't be until a bit later this year. Safeway is projecting annual sales of about $200 million for Eating Right this year. That would surpass first year sales of the O' Organics brand by about $50 million. Even more impressive.

In our earlier pieces we've projected that with the rollout to competing retailers in the U.S. beginning this fall, along with the expanded international marketing program, O' Organics and Eating Right have the potential to become the leading brands/product lines in their respective categories--organics and healthy foods--in the U.S. By this we mean not the leading store brands--but the leading brands period in those respective categories.

Safeway is banking on this as well, as it makes its unique for a U.S. supermarket chain transition from store brand marketer to consumer brand marketer.

In fact, in today's Ad Age article, James White, president of Safeway's Lucerne Foods division, which is handling the marketing for the two brands, and Safeway corporate vice president for consumer brands, says he believes the organic food and grocery market particularly is strong enough in the U.S. and internationally that Safeway will neither see a drop in sales in its own stores, or have a problem gaining distribution and sales to its competitors, with the O' Organics brand.

The O' Organics brand is "democratizing the organics market by making organics available for everyone." He (James White) said both lines represent a "great-tasting, highest-quality, more-affordable option [than established organic brands], which allows for the mainstreaming of market," White is quoted as saying in the Ad Age story.

Further, the Ad Age piece quotes Mr. White as saying: "The economy isn't affecting the organic segment's pricing power. "There is a significant consumer market for organics, and I don't think that will slow down."

We disagree with Mr. White on these two counts, despite being fans of both O' Organics and Eating Right, as well as being very impressed with the two brands' performance.

First, in terms of O' Organics' democratizing the organics category, we think that's yet to be seen. In fact, when it comes to price, O' Organics products are far from being all that reasonably priced. For example, in its current weekly advertising circular, Safeway is promoting O' Organics Boneless,-Skinless Chicken Breasts for $8.99 pound in its California, Nevada and Arizona stores. Natural~Specialty Foods Memo has seen independent natural foods stores selling organic boneless-skinless chicken breasts for $2 less per pound everyday.

This pricing scenario plays itself out on many of the O' Organics brand products vis-a-vis other supermarkets' and natural and specialty foods retailer's house brands. For example, overall Trader Joe's, Kroger divisions, Costco and Tesco's new Fresh & Easy Neighborhood Market stores in California and elsewhere in the Western USA have considerably lower everyday and promoted prices on organics than Safeway offers with its O' Organics brand.

Safeway does offer some good deals on a variety of O' Organics brand items--but its far from a pricing policy one could call a democratizing of the organics category in our analysis. The Safeway O' Organics' marketers' pricing pencils need to be sharpened a bit to achieve that.

It will be very interesting to see the retails on the O' Organics brand items in competing retailers' stores, since they should be higher priced than what they currently are selling for in Safeway stores since the company has to take a margin on the items as a brand marketer and distributor, along with building some margin into the cost of goods to retailers and wholesalers for marketing and promotional brand building expenses.

Further, if Safeway doesn't sell the O' Organics brand items for less than competitors' stores do, it could lose substantial sales in the brand. Conversely, if Safeway sells the brand's items for too much less than its competitor's are, it will create a disincentive for those retailers to carry the brand. A fine balancing act it will be indeed.

We happen to know Safeway makes a very healthy gross margin, based on its current retails, on the O' Organics brand items. Therefore, it has some room to get more value-centered with the brand in its stores if it wants to--and might have to because of the current poor U.S. economy--and lower the retail prices across the brand.

Safeway itself is seeing its customers move from higher priced national brands to value-based store brands like its Safeway, Lucerne and other economy branded food and grocery product lines, as company CEO Steve Burd himself said in this April 28 story in the blog. Within the store brand organics category this has helped O' Organics in part since Safeway makes sure the items in the brand are about 10 -to-15% cheaper overall than similar national and regional organic branded items in its stores, thus tapping into the consumer store brand trend within the organic category to take sales away from those national and regional brands and drive shoppers to buy O' Organics over the national and regional brands.

But in this poor U.S. economy, average consumers just can't afford $8.99 per-pound organic chicken breasts or $7 per gallon organic milk. Not when they can buy conventionally-raised boneless-skinless chicken breasts at the very same Safeway store on sale for $2.19 pound; or Lucerne non-organic milk for less than half the price of the O' Organics organic milk next to it in the dairy case. For most shoppers the discretionary money for organics just isn't there right now.

Whole Foods Market, Inc's poor quarterly sales performance this week demonstrates how even organic-loving shoppers are trading down in the poor U.S. economy out of need rather than choice.

Safeway shoppers are no different, nor are customers of those competitor stores Safeway plans to sell O' Organics to. We are going to see organics take a considerable sales hit until the U.S. economy turns around. Retailer scan data already is showing lower organic category sales across the U.S. Sales numbers for 2008 category sales don't come out until next year--and we bet they show a drop in overall category sales.

It's also important to note that once O' Organics is marketed by Safeway to competing retailers, it no longer becomes a store brand. This means no favored shelf placement, no special treatment by those retailers in terms of end-cap display space, no "free" weekly ad circular feature ad placement, and the like. The brand will have to be marketed as and compete equally without the advantages Safeway is able to give it as a store brand. Those home court advantages after all are part of the reasons we call them store brands.

As a result, Safeway will have to compete with its organics brand just like all of the national and regional organic products' brand marketers are in this down economy--along with suffering the lower sales fate most category marketers are currently suffering ,which has as a key feature soaring food price inflation--because the average (and many above average) U.S. consumers just can't afford to buy that $8.99 pound organic chicken, even if the breasts are boneless and skinless. Just ask the Whole Foods guys. They are seeing organic category sales dropping across the board--from fresh produce and meats to dry grocery.

However, while we disagree with Mr. White regarding his view that the poor U.S. economy won't hurt organic sales in general and O' Organics' sales specifically, we understand and appreciate his marketers' optimism. We also think the O' Organics and Eating Right brands have the potential to do very well at competing supermarkets, as well as continue to sell well and grow in Safeway's stores.

One important note is that sales of the O' Organics brand in Asia have been at best mediocre. A regular reader who lives on the island of Taiwan has reported to use that since our piece about the brand being sold in Carrefour stores there, she has seen many of the O' Organics brand items discontinued in the Carrefour hypermarts on the island. She has been told by store managers it is for lack of sales performance. (Well, that's what happens to non store brands.)

Of course that's Taiwan, not the U.S. or Western Europe. But it does illustrate that Safeway will need to market the brand in ways other than just using price promotions--which has been the case in the Carrefour stores--if it hopes to build the brand in stores other than those owned by Safeway.

Food and grocery retailers can use push marketing to build a store brand and grow sales in their own stores, using the techniques we mentioned above, but it's much more difficult to do so in competitor's stores when its just a brand and not that particular retailer's store brand.

Despite these concerns, we see a bright future inside of and outside Safeway stores for O' Organics and Eating Right. Of course, in the competitors' stores it will all come down to distribution, marketing, merchandising and promotion, along with allocating the budget to achieve all four.

And, of course, Safeway will get a taste of being on the other end of those slotting fee, ad space and display space fees in its role as a consumer brands marketer. Our advice: Better build in plenty of extra margin on the O' Organics items as brand marketers have learned to do with the brands they sell to Safeway Stores, Inc.