Retail Memo - Breaking Developments: FTC, Whole Foods Market, Inc. Progressing in Settlement Talks; Could the Negotiated End-Game Be Near?

FTC. v. Whole Foods Market, Inc. - Settlement Negotiations

A source close to the settlement negotiations between the U.S. Federal Trade Commission (FTC) and Whole Foods Market, Inc. over the FTC's attempt to overturn Whole Foods' 2007 friendly $565 million acquisition of Wild Oats Market, Inc. on anti-trust grounds tells Natural~Specialty Foods Memo (NSFM) that the two parties are possibly getting close to an agreement that could end the legal battle over the merger.

As we reported in this January 29 story [Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement], Whole Foods Market, Inc. made a settlement offer to the FTC that if excepted by the regulator would end the near-18 month legal battle over the merger. In return, the FTC called a five day halt of action in its administrative process designed to overturn the deal.

That five day "cooling off period" ends on Thursday, February 5, just two days from today.

Here is what we've learned thus far: Our source tells us the FTC has reviewed Whole Foods' initial settlement offer but wasn't completely satisfied by what it contained. We are told one element of the offer involves a willingness on Whole Foods' part to sell a number of the former Wild Oats stores, now rebranded under the Whole Foods Market banner, in some of the 29 U.S. markets where the FTC says a combined Whole Foods-Wild Oats is a monopoly in what the regulator calls the "premium natural and organic retailing segment (PNOS).

After reviewing the Whole Foods' settlement offer, we're told the FTC sent the natural grocery chain's outside legal counsel back to company CEO John Mackey and his top executives, suggesting the grocer needs to sharpen its pencil a bit more regarding its settlement offer. We were unable thus far to find out if the FTC has made any specific suggestions to Whole Foods' lawyers regarding in what specific ways Whole Foods Market, Inc. needs to sharpen the settlement offer.

But it appears to be positive news that the FTC's first review of the offer is such that it wants to continue the negotiations. Although the five day FTC halt ends on Thursday, February 5, the regulator has the power if it desires to extend it if it believes negotiations are moving along in a positive direction.

Judge Friedman cancels upcoming hearings

In another development today that tends to reinforce what we're being told by our source -- that Whole Foods Market and the FTC could be near a settlement -- U.S. Federal Judge Paul Friedman has canceled a two day hearing he had previously scheduled on his court calendar for February 17-18, in which he had planned to hear arguments from the FTC and Whole Foods on a motion filed by the FTC, asking the judge to order the natural grocery chain to: (1) stop rebranding all remaining former Wild Oats stores to the Whole Foods banner, (2) have Whole Foods rebrand about 100 of the former Wild Oats stores its already rebranded to Whole Foods Market back to the Wild Oats name, and (3) put the operations of those about 100 stores in the hands of a third party entity, so that they would remain separate from Whole Foods Market, Inc.'s corporate ownership until the merger is resolved. [Read our January 25 story on the hearings here: Retail Memo: Judge Sets February Hearing Dates On FTC Motion That Could Result in Whole Foods Market Having to Rebrand 100 Former Wild Oats Units]

Judge Friedman's decision to cancel (not postpone) the February 17-18 hearings was the result of a joint request by the FTC and lawyers for Whole Foods Market, Inc. he said today in his announcement.

The fact that the FTC and Whole Foods jointly made this request of Judge Friedman, who has been hearing most aspects of FTC. v. Whole Foods Market, Inc. case since the regulator first opposed the deal in the summer of 2007 (and ruled in favor of Whole Foods before the FTC got that decision reversed by a federal appeals court), suggests to us strongly that the two parties are progressing in the settlement talks.

Additionally, although Judge Friedman offered no public explanation today about his decision to postpone the upcoming February 17-18 hearings other than to announce it, based on our close observation of the judge's behavior and his rulings in the case, we doubt he would have postponed the hearings had he not been given information from the FTC and Whole Foods Market that solid progress is being made in terms of negotiating a settlement of the merger case. Judge Friedman's canceling the hearings is a major indicator to us that a negotiated settlement could be forthcoming very soon.

Rumblings on Capital Hill & Whole Foods' D.C. team leader

Natural~Specialty Foods Memo (NSFM) also talked today to a Congressional staff member who works on a Congressional committee on Capital Hill in Washington, D.C. that deals regularly with the FTC. The senior staffer, who has been following our coverage in the Blog of FTC v. Whole Foods Market, Inc. since early December, 2008, said that although the merger case isn't a "hot button issue" at present on Capital Hill because of the "big hot button" issues of passing an economic stimulus package, solving the ongoing financial crisis, and the hearings on President Obama's various cabinet nominees, that there is a feeling among many members of the U.S. House and Senate that overturning the Whole Foods-Wild Oats merger has become far too significant of a priority for the FTC.

These members, Democrats and Republicans, have been lobbied on the issue by Whole Foods' Washington, D.C. lobbying firm, the Glover Park Group, which is connected heavily with Democrats on the Hill, as well as in some cases been talked to personally by Whole Foods Market's lead outside legal counsel on the case, former Clinton Administration special counsel Lanny Davis, who is a partner in the Washington, D.C. office of the Orrick Law Firm, where he specializes in the political aspects of legal issues like FTC. v. Whole Foods Market, Inc.

Lanny Davis is very well connected in Washington, D.C. political circles, most strongly with Democrats but also with many Republicans. Davis is sort of a "Political Zelig (Woody Allen's movie) or the political version of " Chance the Gardner" from the book and movie "Being There," in that he seems to have "been everywhere" and connected closely with powerful political figures throughout his life. Like 'Zelig" and "Chance," Lanny Davis appears to always be in the picture.

For example, Davis was a fraternity brother of former President George W. Bush when both were undergraduates many decades ago at Yale College at Yale University, where the two shared the same fraternity house. Later, as a law student at Yale Law School, Davis met and became best friends (to this day) with Hillary Rodham Clinton (then just Hillary Rodham). As a result of his close friendship with now Secretary of State Hillary Clinton, Davis became a close friend many decades ago of her husband, the former two-term President of the United States. (Perhaps there's something to that notion about making important connections at Ivy League schools after all?)

And it was to Lanny Davis that in the mid-to-late 1990's then President Clinton and former First Lady and now U.S. Secretary of State Hillary Clinton turned to as White House Special Counsel when they were neck-deep in a series of White House legal messes and scandals that to this day can be identified by single words -- "Whitewater," "Travelgate," "Troopergate" (brought back from the dead from when President Clinton was Governor of Arkansas), "Monica" and eventually the biggest Kuhuna of all: "Impeachment."

The Clintons' survived these legal scandals, including in the case of President Clinton not being impeached, with the help of Lanny Davis.

President Clinton has since gone on to be a widely respected and very popular former President, both at home and internationally, and former First Lady Hillary Clinton nearly won her party's nomination for President and is now President Obama's chief foreign policy voice as Secretary of State. Whole Foods Market, Inc. hired Lanny Davis to head up its legal and lobbying team in hopes that he can work some of that same magic in the case of FTC v. Whole Foods Market, Inc.

Davis also played a key role in Hillary Clinton's run for the Democratic party nomination for President. And as soon as she dropped out of the race and supported President Barack Obama, it was Lanny Davis who fast became the most vocal advocate in private to the Obama camp and in public on the cable news programs, for then Senator Clinton's being the Vice Presidential nominee. And when President Obama named then Senator from Delaware Joe Biden as his Vice Presidential nominee rather than Senator Clinton, it was Lanny Davis who behind the scenes and publicly started advocating Hillary Clinton for Secretary of State, a post she was officially sworn into today by Vice President Joe Biden.

The Congressional senior staffer told us today numerous members of Congress have made their feelings known to the FTC in one way or another that they would like to see a settlement of the merger rather than seeing it drag on and go to trial. The FTC has an administrative trial set on the merger for April 6, 2009. Of course, nobody will publicly confirm such messages being sent because of the potential political land mines associated with saying so in public. We should add that we have no information or evidence that any messages sent by members of Congress are or might influence FTC Commissioners, who once appointed hold their positions for a set term.

What we do feel confident in reporting is, based on our sources, it appears that progress is being made in the settlement talks between the FTC and Whole Foods Market, Inc. We asked our key source today (the one initially sighted in the lead paragraph of the story) to handicap the odds of the FTC and Whole Foods Market, Inc. reaching a settlement by Thursday, February 5, when the five day FTC halt ends. He initially said that was impossible for him to do. However with some gentle encouragement (we explained since he was talking to us on the condition we wouldn't print his name it was fine to handicap it) he gave it a 60%-40% as of this afternoon in favor of the two parties reaching a settlement by Thursday.

Of course there's no way to determine right now if those 60-40 odds are indeed real. But whether its a 60%-40% or a 50%-50% proposition (or even if there's a mere 10% chance of settlement), the state of negotiations between the FTC and Whole Foods is 100% beyond where it was just one week ago when there were no negotiations going on, and for that matter far beyond what the promise of a negotiated settlement has been since the FTC first opposed the merger in the summer of 2007.

In our analysis, a settlement, and thus the negotiated end-game to the long-running case of FTC v. Whole Foods Market, Inc., could well be near. Stay tuned.

Food Retailing & Society Memo: Wal-Mart Donates $2.5 Million to 'Feeding America;' Will Also Give 90 Million Pounds of Food A Year to the Organization

America's banks and financial institutions, many of which are run by members of the "greed is good crowd," asked for and received their $700 billion bailout courtesy of former Goldman Sachs CEO and now Secretary of the Treasury Hank Paulson, the U.S. Congress and President George W. Bush.

Yesterday the CEO's of America's big three auto makers, General Motors, Ford and Chrysler LLC, spend hours with their financial hats in hand (but not letting the hats cover their tin cups) before the banking committee in the U.S. Senate and its counterpart committee in the U.S. House of Representatives, pleading for $25 billion of U.S. taxpayer money as a bridge loan to keep their respective companies, each which is burning through a couple billion dollars a month in cash, operating.

Many think the insurance industry will be the next in line asking for a bailout. AIG,which insures financial instruments for investment banks and other financial institutions already has set the stage for that, receiving something in the neighborhood of $120 billion of U.S. taxpayer's money thus far. In return the federal government now owns a big chunk of AIG. Does anybody wonder how soon that investment is going to pay off for the average American taxpayer and consumer?

All this charity being requested by banks, financial institutions and the auto industry makes the retail industry, particularly the food and grocery retailing industry seem like a quaint bunch of business people. The kind of folks who reply on the marketplace for profit and loss.

It's true economic times aren't near as tough for food and grocery retailers (they are for all other retailers though) as they are for the big three auto companies (the banks are a different matter all together), but some are struggling big time.

Why not a little bailout money for Whole Foods Market, for example, it could use it. Instead, despite a 40% drop in income and a stock worth 70% less than it was just a year ago, the U.S. Federal Trade Commission (FTC) still argues Whole Foods holds a monopolist position in the supernatural foods retailing segment.

The FTC is still planning a hearing on the issue in February, 2009. We suggest President-Elect Barack Obama, who along with his wife are known to be Whole Foods Market-Chicago shoppers, put an end to that shortly after he takes office in late January, 2009. It is the height of absurdity for the FTC to continue this matter in light of where Whole Foods Market is financially and operationally currently, and will be for some time.

If anything, Whole Foods needs life support, which it recently got by selling 17% of the company to an investment group.

No, the food and grocery and related retail industries aren't asking for bailouts. Instead they are adapting to the current financial crisis and economic recession, something America's banking and auto industries have failed to do. Of course the failures of those two industries, greed in the case of most of the banks that have gone under and a failure to be consumer-driven by the automakers, are largely self-inflicted.

America's food and grocery retailers in fact are giving rather than taking -- donating tons of food and cash to the poor and hungry at this pre-holiday time. Compare that to Wall-Street and Detroit, where the company CEO's literally fly into Washington D.C. in private jets that cost $20,000 per trip, enter the capital, take out a 50-cent tin cup, beg Congress for billions, put the tin cup back in their expensive briefcases, and jump back into their private corporate jets for the return trip home, which costs another $20,000. Who said hubris is fading away in these struggling industries?

Meanwhile the world's and America's largest corporation and retailer, Wal-Mart Stores, Inc., is giving big time to groups that assist the hungry and the soon to be hungry in the USA.

Yesterday the giant retailer, which is based in Bentonville, Arkansas, said its Wal-Mart Supercenters and Wal-Mart Neighborhood Markets will partner with Feeding America (formerly known as the Second Harvest Food Bank system), a nationwide charitable hunger-relief organization, to provide about 90 million pounds of food each year to needy families by the end of 2009. Yes, 90 million pounds.


Wal-Mart said it will donating produce, deli meat, beef, chicken, dairy and other groceries directly from its stores. The groups said the 90 million pounds of food is the equivalent of 70 million meals.

Also, the Wal-Mart Foundation announced a $2.5 million cash donation to Feeding America, which will help its food banks improve warehouse capacity and purchase 20 new refrigerated trucks.

"We are pleased to partner with Feeding America during a time of nearly unprecedented need and provide nutritious meals for their families," said Bill Simon, executive vice president and chief operating officer of Wal-Mart U.S. "Given the current state of the economy and the increased burden on neighborhood food pantries and soup kitchens, we are enlisting our entire network of stores and clubs to participate in this food donation program to provide relief to communities throughout the country."

Wal-Mart Supercenters and Neighborhood Markets in Bentonville, Fayetteville and Fort Smith, Ark.; Denver; Ft. Wayne, Ind.; Springfield, Mo.; and Houston, as well as 450 Sam's Club locations across the U.S., are participating in the food donation program.

By the end of 2009, Feeding America expects its affiliated community food banks across the U.S. to be connected with each of Wal-Mart's 2,724 Supercenters and Neighborhood Markets, and its 594 Sam's Club locations.

This isn't a one-time donation for Wal-Mart, nor is it the only one. For example, as we reported in this October 22, 2008 piece, "Food Retailing & Society Memo: Wal-Mart Foundation Gives New York USA Food Bank System Over Half Million Dollar Cash Donation," Wal-Mart donated over half a million dollars last month to New York state-area food banks and pantry's feeding the hungry.

The retailer also made a number of similar donations in October, less than half a million but in the six figures in other states in the U.S. where it does business.

And on top of the $2.5 million national commitment to Feeding America Wal-Mart announced yesterday, it also donated $250,000 on the same day to a variety of programs that feed the hungry in its home state of Arkansas

Wal-Mart also is holding food drives for the holidays at most of its Supercenters and Sam's Club stores in the U.S. The retailer will match the donations customers make with product from the stores.

Add these donations to the one announced yesterday -- but the many more to come -- and unlike the banking and auto industries that are begging for taxpayer money, Wal-Mart is actually filling a void by donating serious sums of money to groups feeding America's hungry and food insecure. That void is the one created by the near-bankrupting of the U.S. federal government by President George W. Bush and the U.S. Congress over the last eight years.

Despite the severe recession, the U.S. federal government is giving less aid to programs to help the hungry than ever before. Enter Wal-Mart, which is donating millions of dollars to these groups.

Wal-Mart has lots of haters out there. But compare what its doing to the banking and auto industries, along with those industries who you can be certain will soon be next in line with their tin cups out asking for a bailout.

Love them, hate them or have no opinion at all, the fact is Wal-Mart is walking the walk when it comes to donating real money to help feed Americans in need, which is increasingly including more middle class people.

The mega-retailer is giving while huge companies in other industries are taking. Of course the issues involving the financial crisis are more complex than just handouts -- but the fact is if America's banks had stuck to the fundamentals of their business like Wal-Mart sticks to the fundamentals of retailing, those banks, and the U.S. economy, likely would not be in the mess it is in.

Food Retailing & Society Memo: Wal-Mart Foundation Gives New York USA Food Bank System Over Half Million Dollar Cash Donation

Volunteers at this Manhattan food pantry, which is one of the hundreds located in communities throughout New York that are supplied by the food bank network and other donors, pack food boxes for fellow New Yorkers who need food assistance.

The Food Bank Association of New York state USA said yesterday it received a check for $577,000 from Wal-Mart Stores, Inc. to be used by the state's food bank network to provide food and groceries for the increasing number of New York residents caught in the nation's severe economic recession.

A spokesperson for New York's food bank network told Natural~Specialty Foods Memo that because of the network's size and ability to purchase food and grocery products at bargain rates from manufacturers, it believes it can leverage Wal-Mart's $577,000 donation into as much as $6 million dollars worth of food to distribute to the state's needy.

Wal-Mart broke down its donation to the food bank network this way, in order to localize the monies as well as to provide a significant portion to the main food bank network: it gave a lump-sum cash grant of $322,000 to the New York Food Bank Network from its Wal-Mart foundation, and an additional award of $25,000 to seven of the Food Bank Association's eight affiliates. On top of that it gave an $80,000 grant to the Food Bank of New York City.

Yesterday, Wal-Mart representatives and leaders of New York's food banks also announced the mega-retailer would hold a major food drive at all of its New York state Wal-Mart and Sam's Club stores beginning next month and continuing over the following 12 months.

Scores of Wal-Mart-New York store associates also said on Tuesday they are planning to volunteer at the food banks and in other activities designed to help those in need of food assistance.

At yesterday's announcement, Wal-Mart also donated a semi-truck full of food and grocery essentials to the food bank network.

Last year, Wal-Mart Stores, Inc. gave more than $7 million in cash and in-kind donations to causes and organizations throughout New York state, according to audited records.

The retailer has a strong and growing presence in the Empire State, with 92 Wal-Mart Supercenter and Discount stores, 17 Sam's Clubs, and three distribution centers.

Wal-Mart gets lots of flack, some of it deserved, for being a big bad corporation and mega-retailer. However, we should note we did a little checking and none of New York's investment or commercial banks -- the ones with their headquarters in New York City and the ones that the American taxpayer is now bailing out to the tune of $700 billion -- have donated anything even coming close to the $577,000 Wal-Mart donated in just this one check to the state's food banks.

Love it or hate it, or remain in between, but Wal-Mart isn't asking the American taxpayer for any sort of bailout. And in these tough economic times it is emerging as one of if not the major corporate charitable contributor in the U.S.

If you are hungry and in need of food assistance in New York and elsewhere in the U.S., you're going to be mighty happy that Wal-Mart is willing to write half a million dollar checks, along with conducting year-long food drives and other activities which will raise even more than that for the state's food banks. In fact, Wal-Mart is making similar cash donations and conducting similar food drives throughout the U.S.

Meanwhile, many of those New York investment banks that should be giving big donations to the New York Food Bank Network this year are instead asking New York and American taxpayers for a bailout because in numerous instances, unlike Wal-Mart and other retailers that do business the old fashion way -- they buy goods and sell them for a profit, adding value along the way to consumers -- these financial institutions created a way of doing business that made a few rich at the expense of many. In fact, it is safe to say the behavior of many of these financial institutions is having a direct effect in adding more Americans to the food insecurity roles.

Supply-Side Memo: Kraft Foods, Inc. CEO Irene Rosenfeld is 'Rewiring' the Food Giant's Culture, Focusing on Organic Growth and Revitalizing Brands

Irene Rosenfeld is an unfortunate rarity in the food and grocery industry. No, she's not an industry rarity because of anything "exceptional" such as having a photographic memory or having been raised by wolves in the Australian outback until age 18--although her friends and associates say she is rather exceptional in many ways.

Rather, as the CEO of Kraft Foods, Inc., which is the world's second-largest food company in terms of total annual sales, Ms. Rosenfeld is one of the rare few woman at the top of a major global food company in an industry that across all segments--manufacturing, marketing, sales and retailing--is still headed by and large by men.

Ms. Rosenfeld also might be a rarity in that she is in the process of "rewiring" what many food and grocery industry analysts and observers (and Ms. Rosenfeld herself publicly admits) say has been a rather tired corporate culture and company of late--Kraft Foods, Inc.

Kraft, which is headquartered in Chicago, Illinois USA owns some of the most iconic food brands in the world, including its Kraft brand, which in addition serving as the company name also graces the packages of such globally iconic products as Kraft Macaroni & Cheese, Kraft Mayonnaise, Kraft Miracle Whip, Kraft Velveeta Cheese, Kraft Marshmallows and numerous others. The Kraft brand is a global billion dollar brand all by itself, according to the company.

Other global Kraft-owned brands include Nabisco (cookies and crackers), Philadelphia brand Cream Cheese, Oscar Mayer (meats), A1 Steak Sauce, Maxwell House (coffee), Kool Aid, Tang, Cool Whip, Post Cereals, Planters Peanuts, Capri Sun (drinks) and numerous others.

Kraft Foods, Inc. also is a major global player in the heath and wellness and specialty and premium foods segments.

Its premium and specialty brands include the LU brand line of European-style biscuits and cookies and the Cote d 'Or, Milka, Toblerone and Marabou premium confections brands, among many other brands in the categories.

Other specialty and premium category brands Kraft owns include California Pizza Kitchen (gourmet frozen pizza), DigGiorno Ultimate (pizza and Italian prepared foods) Tassimo premium coffee and others.

In the health and wellness segment, Kraft owns and is aggressively marketing its South Beach Living brand of food products, which are designed after the popular South Beach Diet, popularized in the best selling book of the same name.

Kraft also owns the popular Balance nutritional bar brand in the natural sports nutrition category, and has extended its Kraft brand onto dozens of products in the healthy snacks, cereal bar, cereal and meals categories, including its new Kraft Golden Harvest brand of snacks and related food items.

View a list of Kraft's largest brands across all categories here.

Health and wellness, including numerous natural foods product categories, along with the specialty and premium foods categories, are two chief global growth segments for Kraft, under the leadership of CEO Irene Rosenfeld, who told the Financial Times newspaper in an interview piece published in today's edition that her goal as a young girl wasn't to be the CEO of one of the world's largest companies, but rather to be President of the United States.

Ms. Rosenfeld is still young enough, and Hillary Clinton has put as she said lots of cracks on the Presidential male gender-bias glass ceiling by nearly being the first woman to be nominated by either political party in the U.S. as candidate for President this year, so we suggest the current Kraft Foods' CEO not give up on her childhood goal just yet. After all, presumptive Republican Party candidate for President John McCain turns 72-years old soon.

There can be life after Kraft. And if Ms. Rosenfeld were elected President, say nine years from now, not only would she be the first female President of the United States, she also would be the first food company CEO every elected to the highest office in the land.

But we digress.

It isn't thoughts of U.S. Presidential politics Kraft Foods' CEO Irene Rosenfeld is focusing on these days. Rather, it's what she calls "rewiring" the company's culture, which she says in the Financial Times interview requires first admitting past mistakes Kraft has made, then moving forward in three key ways: reworking some top management, promoting organic (growth from existing brands) growth, and tweaking, improving and extending on many existing brands.

Read the Financial Times interview piece about Kraft Foods' CEO Irene Rosenfeld here.

Green Transportation Memo: Coca-Cola Enterprises, Inc. to Go Green; Plans to Add 142 Hybrid Electric Delivery Trucks to its North American Fleet

In a major green transportation move that not only should save the beverage bottling industry giant substantial diesel fuel costs over the long term as well as reduce its delivery fleets carbon emissions, Coca Cola Enterprises, Inc. plans to add 142 hybrid electric delivery trucks to its huge North American fleet this August. [The picture above is what the Coca-Cola Enterprises, Inc. hybrid electric delivery trucks will look like.]

Coca-Cola Enterprises, Inc. is the bottling arm of beverage industry giant Coca-Cola Co. and is a separate company.

The beverage bottling industry leader plans to add the 142 hybrid electric delivery vehicles throughout the United States and Canada, once it completes a huge addition its adding to its already large Midwest Coca Cola Bottling facility in August. The Midwest bottling facility is located in the Minneapolis-St. Paul USA Twin Cities region in Minnesota.

In announcing the major green transportation initiative, which will result in Coca-Cola Enterprises, Inc. having the largest hybrid electric delivery fleet in North America when it adds the 142 delivery vehicles, company CEO John Brock said the initiative is part of a larger environmental and conservation program the giant beverage bottler is embarking on.

"Coupled with other energy saving measures here in the Twin Cities and elsewhere, adding the hybrid electric vehicles not only is a commitment to the environment, but it's also good business practices," Brock says.

According to Brock, the hybrid delivery trucks will be the largest such vehicles in use in North America.

The hybrid electric trucks cost considerably more than conventional Coca-Cola delivery trucks, about $85,000 each, according to Brock. However, it's estimated the hybrid electric delivery trucks will use 32% less fuel than the company's standard trucks, which with diesel fuel averaging about $6 a gallon in North America will be a substantial savings, both in the short and long term.

The hybrid delivery vehicles also produce 37% less carbon emissions than the standard delivery trucks, which will amount to a significant carbon reduction for the company once all 142 of the hybrid trucks are in service, which should be by the end of August, according to the company.

Since Coca-Cola Enterprises, Inc. is one of the largest beverage bottlers in North America, as well as a major truck fleet operator, the company's investment and commitment to hybrid electric technology by buying the 142 trucks and adding them to its conventional truck fleet, could serve as a leadership initiative for other beverage bottlers and grocery industry companies to do the same.

With diesel fuel averaging $6 a gallon (numerous oil and gas industry analysts are predicting $7 a gallon diesel fuel by the end of this year), it seems a tipping point has arrived in which food, grocery and beverage industry companies and transportation firms would benefit economically in both the shorter and longer term by investing in hybrid electric trucks and incorporating them in their fleets.

The time also is good for the U.S. department of Transportation to sponsor a bill which would give tax rebates to companies for each hybrid electric delivery truck they purchase, in Natural~Specialty Foods Memo's analysis and opinion. The economic and social benefits--fuel reduction and the carbon emissions decrease--make it a worthy use of taxpayer money in our view.

Doing this would provide an incentive--along with the market incentive of current $6 a gallon and soaring diesel fuel prices, for companies to make this investment.

If numerous industry companies were to begin purchasing these hybrid electric delivery trucks in serious numbers, the increased demand for the trucks would increase the supply of them, thus resulting in the cost of the vehicles coming down, thereby making them affordable for smaller companies as well as larger ones.

Additionally, with each truck using 32% less fuel and emitting 37% less carbon than standard delivery trucks, the potential exists for substantial fuel savings, along with real carbon reduction over time.

Coca-Cola Enterprises, Inc. bottles various natural beverages along with Coca-Cola and the company's other varieties of soda pop. These include bottled water, Vitamin Water and various juice and other beverage products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday Fishwrap: Safeway's O' Organics Brand

Safeway Stores, Inc. is already selling its O' Organics store brand in Asia: At Carrefour in the Republic of Taiwan

The international business press and numerous grocery industry trade publications reported last week on a major announcement from Pleasanton, California-based Safeway Stores, Inc. CEO Steve Burd that the grocer would begin selling some items from its hugely popular O' Organics organic grocery products line to food retailers in Asia and South America next year.

This is an innovative move for a U.S. supermarket company, as historically it's difficult to find a retailer that has broken "out of the box" and offered a store brand to other retailers to sell, either overseas or domestically. It's brand marketing thinking by a retailer rather than the industry norm of merely merchandising and selling store brands in just a retailer's own stores. Food retailers all to often forget they're marketers as well as sellers--and Safeway is acting more and more like a brand marketer in all respects these days.

But, Memo to the Press: Safeway already is selling its O' Organics brand in Asia. In fact, a number of the organic brand's items are currently being sold by Carrefour supermarkets in Taiwan. Carrefour, the worlds second largest retailer after Wal-Mart, and Europe's largest, is selling O' Organics' brand peanut butter (creamy and crunchy styles), pastas and noodles, popcorn, salad dressings and a few other items in the 300-item organic grocery products line in at least one of its supermarkets, and maybe more, in Taiwan.

The jar of Safeway's O' Organics crunchy peanut better pictured above was bought by our primary source at a Carrefour supermarket in Taiwan. As you can see, it's sitting on the shelf in her home refrigerator.

The O' Organics items are doing rather well at the Taiwan Carrefour store, according to our sources. Shoppers especially seem to like the peanut butter, which contains only organic peanuts and salt, and has no hydrogenated oils.

One shopper at a Carrefour in Taiwan told us the O' Organics peanut butter is far cheaper--and tastes much better--than the organic brands she previously bought at two supermarkets there, Jason's and Wellman's, both which offer decent organic foods selections, she said.

The major Safeway brand initiative was announced by CEO Steve Burd on December 13 at the company's annual investors day conference for stock analysts and institutional investors at the company's corporate headquarters in Pleasanton. The conference also was broadcast live over the web.

At the conference, Burd announced the O' Organics marketing initiative to food retailers in Asia and South America, but didn't name retailer names--and made no mention of any current deal with Carrefour, nor that some of the brand's items were being sold in Taiwan. But the O' Organics items are in the Taiwan stores. Our sources have purchased them there.

Having an international food retailing heavyweight like Carrefour, which has about 12,179 supermarkets, hypermarkets, deep discount format food stores, cash & carry stores, and convenience stores in 40 countries, ranging from Europe to Asia and the Middle East to North Africa, offers a huge opportunity for Safeway to grow O' Organics into a global organic grocery products brand.

Carrefour, through its vast international multi-format retail food store network, could literally provide the brand international distribution in-house, so to speak.

Safeway's O' Organics brand was introduced in 2006. The grocer has said it's been the most successful one-year launch of any of its store brand launches to date historically. Currently, there are 300 items in the line, including packaged grocery goods, milk and other dairy items, beverages, juices and other perishable items, including organic chicken. The largest number of skus are in the dry grocery/packaged goods category. Safeway also has recently branded a few fresh produce items with the O' Organics brand, perhaps signaling a further branding effort in the perishables categories.

Burd said at the December 13 conference, the company expects the organic brand to do gross sales of about $300 million in 2007, up from about $164 million last year. That's huge growth, attributed significantly to a vast expansion of the brand and line in late 2006 and this year, however. These sales numbers still are most impressive because to date Safeway, like other chain grocers, has only sold the O' Organics line in it own stores. Safeway currently has 1,738 stores in the U.S. and Canada.

In another "outside the box" development regarding the organic brand, Safeway has inked a deal with mega-food service distributor Sysco Corp. to distribute selected items from the brand to its vast customer base of food service operators. Sysco has already began distributing some of the items in the line, and plans to expand both the number of O' Organics products it distributes, and the number of operators it's distributing them to, as well as the geographic reach of its distribution of the brand items.

We haven't been able to find out if Carrefour is selling O' Organics brand products in its stores in other parts of the world besides Taiwan. However, we're working on that. Meanwhile, it looks like we broke a story.

Since Asia is one of the two countries CEO Burd mentioned in describing the initiative at last weeks conference, we expect an announcement regarding Carrefour shortly.

The international marketing effort by Safeway for its O' Organics brand will be interesting to watch and analyze. With 300 items under the brand, it's already one of the largest organic foods brands in the U.S.; not just store brands, but overall brands. Safeway also has major plans to continue adding items and categories to the brand, so its sku count growth will be considerable in just the next 12 months.

With double-digit organic products category growth throughout the western world (especially in the U.S., Europe, Canada and Australia), and fast growing organic foods' sales in Asia, South America, Africa and other developed and developing nations, the brand has the potential to be a real, global, billion dollar brand in just a couple years.

Combine these new international developments with Safeway's plans to create numerous more O' Organics branded products, and increased placement in it's existing stores, plus in the 23-25 new Lifestyle stores it will build just next year alone, and pretty soon you've got one hell of a brand.

Monday Morning Java: Safeway Small Format Stores On the Way

The small food store format invasion is coming: Safeway, perhaps Wal-Mart, to counter Tesco's Fresh & Easy Neighborhood Markets' San Francisco Bay Area entry

As our readers know, we've been reporting on and writing extensively about Tesco's Fresh & Easy Neighborhood Market format. In particular, we've been among the first publications to break news about the retailer's Northern California plans. (Read our December 5 story about Fresh & Easy store developments in Northern California and the Bay Area here.)

We also were one of the first publications to report that Wal-Mart has had a high-level team in the San Francisco Bay Area working on the development of two small format retail stores--one a small footprint, convenience-oriented grocery store similar in concept to Tesco's Fresh & Easy markets, and the other a stand-alone health and wellness-style format which would feature an in-store health and wellness clinic and sell a wide range of health-oriented goods, including natural products. (Wal-Mart has trademarked two retail store names, "City Thyme" and "Field & Vine," as we reported here.)

We named the Wal-Mart small format project--along with the Fresh & Easy format and other new age convenience-style stores from the likes of Giant Eagle (Giant Eagle Express) and Whole Foods Market (Whole Foods Market Express; a prototype store being developed in Boulder, Colorado)--"Small Marts," a play on words combining the Wal-Mart name and the shortened name often used for a retail market or store.

In our September 6, 2007 piece, The invasion of the "Small Marts": Will there be a small format revolution by U.S. retailers, we provided an analysis of what Tesco's Fresh & Easy format could mean in terms of other food retailers following a similar path in the U.S. In addition to discussing Giant Eagle's, (Express) Whole Foods' (Express) and Wal-Mart's developments, we also talked about Pleasanton, California-based Safeway Stores, Inc. It's CEO, Steve Burd, said the grocer is watching Tesco closely, and researching the Fresh & Easy format, it's potential locations, and possible competitive pressures on the retailer's Western U.S. operations, especially in California. (Read more here.)

In the "Invasion of the Small Marts'" piece mentioned above, and in all of our writing on the issue, we've discussed how one market in particular, Northern California and particularly the San Francisco Bay Area, will be the most competitive and difficult for Tesco with its Fresh & Easy stores thus far--compared to Southern California, Nevada and Arizona--where the British grocer now has about 20 stores open.

Among the reasons for this increased competition, we've sighted Safeway Stores--the fact that it's the food retailing market share leader in the region, that the Bay Area is home to it's corporate headquarters, and of course the small format research project articulated by CEO Burd in response to the entering of Fresh & Easy stores in the region.

Additionally, we've discussed the major expansion efforts in Northern California (focused in the Bay Area) by Whole Foods Market, Inc., which plans to build 20-25 large supernatural supermarkets in the region (in addition to the 20-plus it already has) in the next five years, according to former Whole Foods' Northern California president Anthony Gilmore, who left his position with the grocer in October to join Safeway Stores as a director of new store development.

Safeway moving from research to action in small format store development

According to a story today in The Silicon Valley/San Jose Business Journal, CEO Burd and Safeway are moving from the research phase of their smaller format food store project to an action phase. That's right, according to the publication's sources (and confirmed by a number of our own), Safeway Stores is seeking as many as five locations in the San Jose area for stores of about 20,000 square feet, which would feature extensive selections of fresh, prepared foods, Tesco's "stock-in-trade" in it's Fresh & Easy format. At 20,000 square feet, these smaller-format stores would be less than half the size of Safeway's new Lifestyle stores, which average 45,000 to 65,000 square feet, but about double the size of Tesco's Fresh & Easy markets.

According to the Business Journal story, Safeway has retained Cornish & Carey Commercial Real Estate Brokerage to find locations for the five stores in and around the San Jose area. This is the same Bay Area region where we reported Tesco has inked a deal for it's first store in the Bay Area, on Bird Avenue in San Jose, and likely will locate as many as ten to twelve stores in the city and it's immediate environs.

Word is Safeway has Cornish & Carey trying to lock up a number of former Albertsons' supermarket buildings in the San Jose area for its new small format food stores. This is interesting since Tesco's Bird Avenue location is a former Albertsons' store, which the grocer closed a couple years ago along with a number of others in Northern California. Tesco has been targeting these empty Albertsons' stores throughout the Bay Area as locations for its Fresh & Easy Neighborhood Markets.

Safeway is a major commercial real estate player in the Bay Area, with almost 300 stores. In other words, it's a priority customer for shopping center and other commercial real estate managers. As such, it looks like the grocer is playing some store location hardball with Tesco in terms of that retailer's sight search. In the Business Journal piece, local commercial real estate sources give Safeway the thumbs up in terms of being the preferred tenant for any of the vacant Albertsons' stores. As we've reported however, Tesco already has a number of store locations locked-up in the Bay Area, with numerous other sights in negotiation.

As mentioned above, some months ago before Tesco opened a single Fresh & Easy store, CEO Burd said Safeway was preparing itself for the British grocer's small format stores, which combine basic private label and nationally branded grocery items with prepared foods offerings. Burd said, among other things, he believes Safeway has an advantage in that the grocer is a well-known brand in California (especially in the Bay Area), especially in the prepared foods niche. In fact, Safeway has been perfecting it's fresh, prepared foods over the last five years in it's Lifestyle format stores, including branding the items with an upscale flavor, using such names as Safeway Signature and Safeway Select.

Along with the extensive prepared foods initiatives in-store in its Lifestyle format supermarkets, Safeway purchased a restaurant in San Jose last summer, where it's been testing various prepared foods entrees it wants to sell in its stores. Ownership of the restaurant, called Citrine New World Bistro, was announced last month by CEO Burd. It's an innovation incubator, and consumer test kitchen for a variety of prepared foods that observers expect will be offered in the new, smaller format food stores.

Anthony Gilmore, the former president of Whole Foods' Northern California division also joined Safeway in October as a director for new store and format development. While in charge of Whole Foods' Northern California operations, Gilmore lead the development of a number of innovative formats, resulting in new stores opening this year. Among them are the European Food Hall format store in Oakland, which opened in October, and the Northern California flagship store in the Silicon Valley city of Campbell, which features a food and wine bistro in-store, along with the supernatural grocers first mini day spa, among other innovative features.

Gilmore was hired in large part to bring that experience in retail food store format innovation to Safeway, where he began his retail grocery career as a courtesy clerk. He's involved in the new small format store development, including the prepared foods offerings, as well as in another new development for Safeway--the design of a "next generation" Lifestyle format, which is part Safeway Lifestyle stores, part Whole Foods Market. As we reported three months ago, Safeway is planning to build this new, Whole Foods-like store in Pleasanton, where it's corporate headquarters is located. (More on this development soon.)

Turf war battle, small format competition could get even hotter in Bay Area

As we mentioned at the beginning of this piece, and first wrote about in August and again in September and November, a high-level team from Wal-Mart was in the Bay Area for some time researching and developing two small retail formats for potential implementation by the retailer. These two formats, a small-footprint grocery market and health and wellness store, would allow Wal-Mart to enter into markets such as the San Francisco Bay Area where they've been unsuccessful in getting permits to build Supercenters do to objections by city officials, community groups and the retail clerks union, which represents workers in nearly every Bay area supermarket.

We've continued to follow this story closely. However, our commercial real estate and industry sources in the region haven't heard much in the last couple months. Here's what we know: First, as reported earlier, Wal-Mart has trademarked two trade names for use on "unspecified retail stores." These names are "City Thyme" and "Field & Vine." Both these names sound like they would fit a retail food store but we can't independently confirm that, nor is Wal-Mart confirming it for us.

Second, we know the Wal-Mart team is no longer in the Bay Area. Our sources told us the group completed their project, at least the on-site aspects of it. We have been told, but can't confirm, that a report on the small format research has been given to Wal-Mart CEO Lee Scott.

We've also been told by multiple sources that, in terms of the small format grocery market, there's a division within the team in terms of going forward with it or just focusing on the retailer's existing smaller format grocery store, Wal-Mart Neighborhood Market. These stores average about 48,000 square feet in size, and are a full-department supermarket. Although much smaller than a Supercenter, they aren't considered "small format" in terms of the supermarket industry. Rather, they're about average size in terms of a stand-alone grocery store.

Regarding the small format health and wellness stores, we've been told Wal-Mart is more excited about their potential, especially the combining of in-store health clinics with the natural, health and wellness-oriented product mix. (Wal-Mart is putting an increasing number of health clinics in its Supercenter stores.) Beyond that, we don't currently have any further specific information we're comfortable reporting in terms of that format's status.

We do know Tesco's rapid rollout of it's Fresh & Easy stores has taken Wal-Mart a bit by surprise, and that the retailer is concerned about Tesco's taking food dollar market share away from the retailer in California. Wal-Mart has only been able to build about half of the number of Supercenters in the state as it planned to build to date, do to the highly-organized campaigns against the big box stores throughout California. As a result, this fact has caused the retailer to lower its projections considerably in terms of the share of retail food sales it planned to have in the Golden State.

Wal-Mart recently announced it would build two Neighborhood Markets in Southern California early next year, its first in the state. This has lead to speculation that the retailer will rollout this format as a way to increase its retail food dollar market share in California as an alternative to its original Supercenter strategy. There's less organized objection to this Wal-Mart format.

If Wal-Mart either rolls out its Neighborhood Market stores in a big way in California--including Northern California and the Bay Area,which is logical as that's where the strongest Supercenter objections are--or goes forward with its "Small Mart" grocery market format, this will add even more heat to the smaller food store competitive landscape in the region. Not only will Safeway be challenging Tesco with it's 20,000 square foot format, but Wal-Mart could pose a serious challenge to both with either its 48,000 square foot Neighborhood Markets or the yet to be officially announced smaller format grocery market (the "Wild Thyme" or "Food & Vine" concepts).

As we've written extensively, Northern California and the Bay Area will be a competitive and operational challenge for Tesco's Fresh & Easy Neighborhood Markets. It also seems the region's going to become a small format food retailing laboratory of sorts as a result of Fresh & Easy's entry into the market next year. Our sources tell us there are a number of other retailers looking at the small format food retailing opportunities for them in the region as well. The small format turf battle and competitive environment in the region is just beginning--and will heat-up even more soon.