Retail Memo: Newest Texas 'Newflower Farmers Market,' Which Sprouted From Parent 'Sunflower Farmers Market,' Blooms in Dallas, Texas

What's a "Newflower?"

Well, for purposes of this piece, it's a seedling that sprouts from a Sunflower, in this case Boulder, Colorado-based Sunflower Farmers Market, the fast-growing, fighting tiger chain of natural foods grocery stores founded and run by Mike Gilliland, who's first crack at the natural foods retailing game was Wild Oats Markets, which he founded in Boulder and ran for many years, and which today exists only as a now near-fully integrated part of Austin, Texas-based Whole Foods Market, Inc., which acquired Wild Oats in 2007 and finally gained full control of it on March 6 of this year, when it reached a settlement agreement with the U.S. Federal Trade Commission (FTC) over the regulator's nearly two year antitrust legal challenge against the acquisition. [See a linked bibliography on FTC v. Whole Foods here: Retail Memo: David Wales, Who Headed Up the FTC's Nearly Two Year Legal Challenge Against Whole Foods' Acquisition of Wild Oats is Leaving the Agency.]

Sunflower Farmers Market opened its third and newest "Newflower Farmers Market," banner store in Dallas (pictured at top), deep in the heart of Whole Foods Market country in Texas on March 18, less than a month ago. Whole Foods was founded in the 1970's and is headquartered in Austin, Texas.

Sunflower Farmers Market opened its first Texas store in November 2008 in Plano. It's second "Newflower Farmers Market" store bloomed in February 2009 in Austin, Whole Foods Market's hometown.

Why "Newflower" and not "Sunflower" in Texas?

When Sunflower Farmers Market opened its first store in Plano, Texas in November 2008 it went by the Sunflower Farmers Market banner.

However, the name "Sunflower Market" for natural foods stores happens to be owned by the supermarket chain Supervalu, Inc. Supervalu used to operate a handful of natural foods markets in the Midwest named Sunflower Market. The chain closed the stores in 2008, ending what was a new format test for Supervalu. However, the company retained the ownership of the Sunflower brand as it pertains to retail natural foods stores. [See our January 25, 2008 piece here: Breaking Retail News: SuperValu, Inc. to Close Sunflower Market Stores.]

Boulder, Colorado-based Sunflower Farmers Market, which currently operates 23 stores has a license from Supervalu to use the "Sunflower" name in the states of Colorado, Arizona, New Mexico and Utah, where it operates 20 of its 23 stores.

But Sunflower Farmers Market doesn't have a license from Supervalu, Inc. to use the "Sunflower" name in Texas, as well as in numerous other U.S. states, hence why the natural foods grocer changed the name of its then one store in Texas to "Newflower," and why the newest two Texas stores, and the all the other stores in the Lone Star State it will open, are and will be named "Newflower."

There's been some speculation that the reason Sunflower Farmers Market is using the "Newflower" name for its Texas stores is because there is an independent heath foods store in Texas named Sunflower. That's true, there is such a store. But the reason for the Newflower rather than Sunflower Farmers Market banner in Texas is because of the Supervalu ownership of the Sunflower name in the state.

Newflower Market, Inc. (the business name Sunflower Farmers Market uses) has a license from Supervalu, Inc. for the name Sunflower for certain states, but not for Texas," Bennett Bertoli, vice president of real estate for Sunflower Farmers Market, told Natural~Specialty Foods Memo (NSFM).

Additionally, Supervalu, Inc. confirmed to us that is owns the Sunflower Market name and currently licenses it to Sunflower Farmers Market only in Colorado, Arizona, New Mexico and Utah at present.

Supervalu, Inc. has no plans to bring back its small-format Sunflower Market natural foods format or stores anytime in the near future. The stores were a test of a standalone natural foods retailing format for the supermarket chain, and Supervalu decided to close the stores and beef up the natural and organic foods item selections in its over 2,000 U.S. supermarkets, including creating a new natural and organic store brand, rather than go forward with opening more Sunflower stores and creating a natural foods store chain.

Although from a retail marketing standpoint being able to use the Sunflower Farmers Market name in Texas and in other new states the natural grocer enters is a plus, there is a certain delight in the fact it is using "Newflower" in its newest state and market -- Texas. After all, sunflowers are plants that shed lots of seeds. And for Sunflower Farmers Market, other than being able to use its flagship "Sunflower" banner in Texas, which it obviously wanted to do, "Newflower," which sprouted from the "Sunflower" banner, seems to us to be about the next best thing. And to take the metaphor to a further extreme, more Newflower Farmers Market stores will "bloom" in Texas over the next couple years.

Dallas Newflower Farmers Market blooms

The grand opening on March 18 of the Dallas "Newflower Farmers Marke"t store, which is located at 1800 North Henderson Avenue at Lewis Street in the city, was jam-packed. The Sunflower-Newflower format (the store formats are the same, just the names are different) focuses on offering natural and organic groceries and fresh foods at discount prices. In fact, it's slogan is "Serious Food...Silly Prices."

Dallas residents aware of the discount pricing focus of the stores, along with hearing about it via the pre-Dallas store opening press attention and advertising in the city, turned out in large numbers for the store's grand opening, many with reusable shopping bags in hand, looking for natural and organic food and grocery bargains.

Newflower didn't let the shoppers down. The natural grocer offered hot grand opening deals in every department of the store. Sunflower-Newflower puts a major emphasis on offering fresh produce at everyday low prices, and the Dallas store's produce department was packed with opening day shoppers grabbing up cart fulls of low-priced fruits and vegetables.

The store's grand opening began at 6:30am with a free breakfast served in the store's parking lot to opening day early birds courtesy of the natural grocer.

The Dallas "Newflower Farmers Marke"t store's doors were opened at 7am on March 18. And the first 200 shoppers to enter the store and make a purchase were given a nice surprise -- each was presented with a free reusable shopping bag filled with $50 worth of free groceries courtesy of the Newflower store team.

Day-long grand opening activities included lots of food sampling throughout the store, a free beef bbq and even free chair massages for the bargain hunting grand opening day shoppers.

Sunflower-Newflower founder and CEO Mike Gilliland, who attends every new store grand opening, was at the Dallas store event on March 18, spotted throughout the store, and often in the produce department, which some say is his favorite part of the stores.

Sunflower Farmers Market founder and CEO Mike Gilliland stationed in the Dallas "Newflower Farmers Market" store's produce department on grand opening day. The word is that the produce department is the grocer's favorite of all. In fact, a Dallas Newflower store employee says that on the March 18 grand opening day that the CEO, who also bagged customers grocery as part of the opening, kept running off from the store front end to spend more time in the produce department.

Never the shy entrepreneur and grocer, Gillian said at the grand opening: " We're thrilled to bring our grocery store concept to Dallas, especially with today’s hard economic times. Newflower is the most cost-effective grocery choice, by offering fresh produce and all-natural meats from local vendors at down-home prices. We make healthy cooking easy, with in-store recipe cards, nutritional programs and the lowest prices around."

The Sunflower-Newflower markets are a bit of what we call a hybrid natural foods store, reminiscent of what Gilliland did with the Henry's (Southern California) and Sun Harvest (Texas) banners when he was at Wild Oats and the banners were a part of the chain. By this we mean they aren't orthodox natural-organic foods stores. The stores feature more mainstream-type and specialty items, along with natural and organic products.

Whole Foods Market, Inc. sold off the 35 Henry's and Sun Harvest stores in Southern California and Texas to Los Angeles-based Smart & Final shortly after acquiring Wild Oats in 2007. Gilliland had left Wild Oats long before the Whole Foods acquisition.

The format

The Sunflower-Newflower stores are no frills markets in terms of their design; attractive but basic. This allows the natural grocer to have less overhead, which allows it to achieve cost savings, and in-turn offer natural and organic food and grocery items at generally everyday lower prices than Whole Foods market and most supermarket chains do.

In a sense, Gilliland and team are attempting a natural-organic foods retail natural-organic category killer format, while at the same time trying to make sure sure the markets are both destination as well as neighborhood-oriented markets. The format seems to be working so far in all three regards, from our observations and analysis.

The new Dallas "Newflower Farmers Market" store also has a number of "green" features, according to the retailer. These include: energy efficient light fixtures, the use of recycled and refurbished equipment, cases and fixtures whenever possible, and cash registers that use double sided receipts to reduce paper waste by 40%.

The front of the store also features a skylight-style awning designed to let natural light into the front of the store, as the photograph at the very top of this piece shows.

One of the fighting tigers

Natural~Specialty Foods Memo (NSFM) has termed Colorado-based Sunflower Farmers Market one of what we call the three fighting tiger natural grocery chains. The other two fighting tigers are Arizona-based Sprouts Farmers Market and Colorado-based Natural Grocers.

All three of the Western U.S.-based natural grocers are fast-growing, and all three fear not to take on Whole Foods Market head-to-head in various markets, hence the fighting tiger name. All three, for example, are taking on or plan to take on Whole Foods right in its very own backyard of Texas, as they are in Colorado, Arizona, Southern California (Sprouts only so far there), New Mexico and Utah.

All three of the fighting tigers are using a similar, no frills everyday low-price formula as well, although each does so in its own unique way. It's not an accident that Whole Foods is focusing much more on value and pricing these days in its stores. The competition from these three fast growing natural grocery chains, along with the bad economy, has and is forcing Whole Foods to become much more price competitive, both on everyday prices and in its promotions. And Whole Foods is doing so.

Competition good

This competition, along with the competition from supermarkets and discounters that are getting deeper and deeper into the natural and organic foods categories, is good for the industry overall because it will lead to a greater democratization of healthy, natural and organic foods.

The better the prices on the category items the more consumers can buy them, changing the industry from a niche (and some might say even elitist) enterprise to one aimed more at the masses. That's good for retailers and suppliers as well. More shoppers equals more sales. And more sales equals more efficiencies, which translates into higher profits.

That's a prescription both Dr. Natural and Dr. Organic would love to write.

Below are photographs from the grand opening of the new Dallas Newflower Farmers Market that sprouted in Dallas, Texas on March 18, 2009:

Shoppers check out and get "checked out" at the Dallas "Newflower Farmers Market" store on grand opening day, March 18, 2009.

The produce department is a central departmental feature in the Sunflower-Newflower stores. Although the stores average about 15,000 -to- 25,000 thousand square feet, the produce department in the stores is much larger than an average store of that size would have. This is by design. Sunflower-Newflower prices both conventional and organic fresh produce at low everyday prices. This serves not only as a way to draw shoppers to the store but helps grow market basket sizes in the stores as well. Notice the no frills, farmers' market-style design of the produce department above in the new Dallas Newflower store. Doing so provides cost savings which allows for the everyday low produce pricing practice. It obviously also fits in with the chain's overall theme and name.

Inside the Newflower Farmers Market store that opened in Dallas, Texas on March 19, 2009. Notice the basic, no frills product refrigerated cases and the painted cement floors. This is part of the chain's no frills store design which allows it to offer natural and organic products at lower everyday prices than many of its competitors. The focus is on the the product and its price rather than on the store's design. The balloon the happy little girl is holding were given out to children, along with other treats, all day at the store's March 19 grand opening event. The balloon is doing a great job of holding her attention so that mom can concentrate on her shopping.

Below is a selection of related, past stories and posts from NSFM:

~March 12, 2009: Retail Memo: Whole Foods Market is Selling Brand 'Wild Oats'- We Offer Three Retailers We Suggest Could Benefit From Buying the Brand

~December 6, 2008: Retail Memo: Fast-Growing and Scrappy Sunflower Farmers Market Ventures Deep in the Heart of (Whole Foods Country) Texas

~October 27, 2008: Retail Memo: Sprouts Farmers Market Store Number Eight 'Sprouts' in Texas; Deep in the Heart of Whole Foods Market Country

~October 21, 2008: Retail Memo: Natural Grocers Joining Sunflower Farmers Market in Opening First Stores in Whole Foods Market's Home City of Austin, Texas USA

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

~August 15, 2008: Retail Memo: 'Business Week' Discovers Sunflower Farmers Market, Just As Many Shoppers Are Doing Daily

~June 19, 2008: Retail Memo: Two Food Retailing Chains (Among the Growing Legions) Who Fear Not the Whole Foods Market, Inc.-Wild Oats Juggernaut

~July 8, 2008: Retail Memo: Former Raley's CEO Michael Teel and Partner Developing New Prepared Foods, Natural-Specialty Foods Chain in Sacramento, California

~May 18, 2008: Small Format Food Retailing Special Report: Raising (the stakes in) Arizona: Wal-Mart On-Track to Open First Marketside Stores in Arizona This Summer

~May 13, 2008: Small Format Food Retailing Special Report: Sprout's Farmers Market Gets $22 Million in New Financing; Will 'Sprout' 100 New Stores Over Next 5 Years

~April 29, 2008: Independent Grocer Memo: Utah's 75 Year Old Harmons Combats the Big Chains With Low-Prices; Gets Ready For Whole Foods' By Going Upscale & Natural

~February 24, 2008: 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

~December 20, 2007: Retail Memo: Natural-Born Category Killers

[You can follow Natural~Specialty Foods Memo (NSFM) on Twitter.com at www.twitter.com/nsfoodsmemo.]

Retail Memo: Fast-Growing and Scrappy Sunflower Farmers Market Ventures Deep in the Heart of (Whole Foods Country) Texas

Sunflower Farmers Market founder and CEO Mike Gilliland in the produce department of the natural foods retailer's new store in Plano, Texas, its first natural market in the state. The store opened in late November. [Photo credit: Amy Gutierrez, American-Statesman.]

Earlier today we wrote and published this piece, "Fast-Growing Natural Foods Chain Sunflower Farmers Market Responds to Whole Foods Market, Inc. Subpoena For Sales, Financial and Related Information," about Boulder, Colorado-based Sunflower Farmers Market's responding to a subpoena it received, along with 95 other natural products retailers, from Whole Foods Market, Inc. for its sales, financial and related records. Whole Foods Market has issued the subpoenas to these retailers as part of its battle with the U.S. Federal Trade Commission (FTC) over last years' acquisition of Wild Oats Market, Inc.

In the piece, we mentioned that Sunflower Farmers Market, which was founded by Mike Gilliand, who is the company CEO and who also happens to be the founder and former CEO of Wild Oats, is going head-to-head against Whole Foods Market, Inc. in a number of markets, including in its home state and headquarters city of Austin, Texas.

Below is a recent story by Lily Rockwell, a staff writer for the American-Statesman newspaper based in Austin, Texas where Whole Foods Market, Inc. is headquartered. Ms. Rockwell covers the Texas food retailing scene closely and does so well. Below is the story:

Sunflower makes a bid for Austin's organic food shoppers
Colorado chain making inroads on low-cost premise

By Lilly Rockwell
American-Stateman Staff Writer
Sunday, November 23, 2008

Plano, Texas — At 6:30 a.m., the sun hasn't risen yet, and the streets in this Dallas suburb are deserted. But in a beige strip mall surrounded by newly built homes, hundreds of people are waiting in line, shuffling their feet in the cold air.

They are here for the grand opening of natural foods chain Sunflower Farmers Market's first store in Texas . With stores that are smaller than those of traditional grocers, Colorado-based Sunflower touts its rock-bottom prices, convenience and wide selection of produce.

Sunflower is expanding into Texas. In addition to the Plano store, which opened Nov. 12, the first of several planned Austin-area stores — at William Cannon Drive and Manchaca Road —is scheduled to open in January, followed by a second Dallas-area store later in the year.

Sunflower will be the first significant new grocery player to enter the Austin market in years, and it aims to be a major competitor among organic food stores such as Whole Foods Market, Central Market, Sun Harvest and Wheatsville Co-op.

Customers who had lined up for Sunflower's Plano opening said they were lured by advertisements offering grapefruit at 10 for $1 or natural lean ground beef for $1.57 a pound.

But the real attraction was the free bag of groceries the first 200 customers received, a popular draw for shoppers who said they are watching every penny as the economic downturn continues.

"We stayed up all night," said Angela Wendt, who arrived at 6:15 a.m. to check out the store. She said she normally shops at stores such as Wal-Mart, Kroger or Sprouts Farmers Market, another natural foods store in the Dallas area.

But what about Whole Foods, which has a 62,000-square-foot store little more than a mile away?

"I can't afford it," Wendt said. "They are too pricey."

Sunflower wants to lure customers who, like Wendt, are as concerned about price as about organic and natural foods. Sunflower offers a mix of organic and conventional foods, and hopes to undercut even Wal-Mart on its produce prices.

"They do have an excellent selection, really good pricing, and they've done extraordinarily well in the markets they have gone into — and they have gone into some competitive markets," said Mary Mulry, a food consultant who once worked for Central Market and Wild Oats Markets.

In Austin, Sunflower will go up against market leader H.E. Butt Grocery Co., which owns Central Market and stocks some organic and natural foods in its H-E-B stores, as do Wal-Mart and Randall's.

"There is definitely a depth in the market for organic similar to Boulder," said Steven Hoffman, the director of the Boulder, Colo.-based Organic Center. Whole Foods spokeswoman Libba Letton said about Sunflower: "More competition is healthy for the marketplace."

Sunflower was started by Mike Gilliland, who in 1987 co-founded Wild Oats Markets Inc., long considered one of Whole Foods' biggest rivals. He left Wild Oats in 2001.

Last year, Whole Foods purchased Wild Oats for $565 million, buying out its largest competitor. Although the sale was completed in August 2007, the Federal Trade Commission is still contesting the purchase on antitrust grounds.

Gilliland's inspiration for Sunflower came when he was chief executive for Wild Oats.

"Towards the end of my time, Whole Foods was just kicking our butt everywhere, and so we bought a chain of stores called Henry's Marketplace in the San Diego area. And they just seemed really, really different enough that they competed well against Whole Foods and against everyone, really," Gilliland said.

He recommended to the board that Wild Oats pursue the Henry's strategy of natural foods at low prices, he said, but they declined to pursue it.

"I essentially did it myself in 2002," Gilliland said, noting that the stores seek to appeal to a wider audience than a Wild Oats store.

"Instead of trying to concentrate on the top 5 or 10 percent of the market in terms of income or education, we are trying to grab that 60 percent of customers that are somewhat interested in natural foods but are price-sensitive or ... are almost part-time natural foods folks," Gilliland said.

Sunflower has emerged in a different era than Wild Oats did, Gilliland said.

"Twenty-five years ago, if you had the product and you were a big natural foods store, it was a big deal," Gilliland said. "All you had to do was open the door and people would pay whatever."

Now, Gilliland said, "it's more of a precision business than it used to be in terms of we don't work on a lot of margin, so we have had to adopt a lot of big-grocery-store practices in terms of ... just really watching the pennies."

Mulry said Gilliland is renowned for his frugality, making sure to buy the least expensive furnishings in a new store. "It doesn't cost him as much to open a store as, say, the equivalent size would be if it were a Whole Foods," Mulry said.

Although Sunflower's first store was in Albuquerque, N.M., it is based in Boulder, where Gilliland lives.

In 2007, Sunflower received a $30 million investment from PCG Capital Partners and began rapidly expanding into Arizona, Colorado, Utah, Nevada, New Mexico and Texas.

Gilliland said Sunflower has no plans to expand beyond those states and instead will focus on more stores in the states it already serves.

"It's a concept that really fits a large, unmet demand," said Tim Kelleher, a partner with PCG. "They offer tremendous value, fresh and natural foods in a farmer's market setting. While Whole Foods has done a great job over the last 10 years, it is not a store that everyone can shop because of the high prices."

Sunflower's motto is "Serious food. Silly prices," and through its own distribution and delivery system and local food sources, it aims to have the lowest-priced produce of any grocery competitor.

Industry experts say Sunflower is smart to position itself around the low-price theme.

"Sunflower is very appealing for a number of reasons," said Mulry. "The produce is very, very competitive, and they do have a good selection of organics. They will compete with Whole Foods, Central Market and H-E-B. It's a smaller store, and this is something that has been overlooked."

Sunflower's first big test came when it opened a store in Boulder this year.
Boulder has a large variety of organic food stores, including several Whole Foods locations, and Safeway's Lifestyle stores, which are similar to Central Markets.

"I know that here in Boulder, the Whole Foods store has a big bulletin board where they compare prices to show it is a good place to shop where you are being cost-conscious," Hoffman said. "Sunflower will try to come in at a niche where you can get healthy fare at lower costs. That is their marketing strategy, but it needs to play out in terms of whether that is true or not."

Gilliland said Whole Foods might struggle to convince customers that it is price-competitive.

"They are very intelligent pricers; they are smart guys," Gilliland said. "I don't know how you overcome the glitz image. At the end of the day, people impulse-shop. They have great prices on macaroni and cheese and canned soup and the commodity stuff, but people still go in and grab the $8 loaf of bread and the $15 cheese."

Whole Foods, which historically has performed well during recessions, is now watching its store sales growth slow and its profits fall. To shore up sales, Whole Foods began a national "Whole Deal" price promotion, which has included coupons and frequent-shopper cards.

Whole Foods and Wild Oats had a notoriously competitive relationship. Whole Foods CEO John Mackey once sent Gilliland a copy of the board game "Risk" with the note "Forewarned is forearmed" when Whole Foods was going to open a store in Boulder, which was Wild Oats' home base. Gilliland replied with the board game "Twister" and this note: " We are going to twist around you by being nimble."

Gilliland called their rivalry fun, but said he and Mackey no longer talk.

"In the old days, everybody was friends and knew each other and helped each other out. And then we became public companies and ... had investors, and everybody has to play it closer to the vest," Gilliland said. There are no hard feelings over the purchase of Wild Oats, Gilliland said, calling it a "logical outcome."

"When it becomes a public company, you don't have that ownership or the emotional investment that you had in the early days," Gilliland said.

When Whole Foods opened a store near Wild Oats in the past, the Wild Oats store would lose 40 to 50 percent of its business, Gilliland said.

In contrast, at Sunflower "that doesn't seem to be the case," he said. "In Colorado, they've come (within) a couple square miles of us, and it might get a little effect the first week, and then a week later it is back to normal."

[Natural~Specialty Foods Memo Editor's Note: Sunflower Farmers Market will open its first Texas store in Austin, where Whole Foods is headquartered, early next year. Click on the link to Watch video from the opening of the Sunflower Farmers Market in Plano, Texas.]

Retail Memo: Fast-Growing NF Chain Sunflower Farmers Market Responds to Whole Foods Market, Inc. Subpoena For Sales, Financial and Related Information

The FTC, Whole Foods Market and 96 Natural Products Retailers

Boulder, Colorado-based Sunflower Farmers Market, one of the fastest-growing natural foods retailing chains in the U.S., has submitted a response to the subpoena it received from Whole Foods Market, Inc. asking the natural products retailer for three years' worth of sales data, its strategic plans, market analysis reports and other related documents, including any that might discuss its plans to compete with Whole Foods, according to CEO Mike Gilliland, who just happens to be the founder of Wild Oats Markets, Inc., which Whole Foods acquired last year.

The U.S. Federal Trade Commission (FTC) continues to dispute the Whole Foods-Wild Oats merger, which is now pretty much completed, which is the reason Whole Foods Market, Inc. says it had to subpoena the sales and related information from 96 natural products retailers, including Sunflower Farmers Market.

The FTC is holding a hearing on the Whole Foods-Wild Oats merger in February of next year in order to determine the combined company's fate post-merger. Whole Foods' legal council has subpoenaed the records of these retailers in order to build and prove its case that the combined Whole Foods-Wild Oats does not represent an anti-competitive natural segment retailing force in about 18-29 markets where the FTC says that is the case.

Sunflower Farmers Market received the same subpoena that Portland, Oregon-based nine-store New Seasons Market and 94 other natural products retailers received from Whole Foods Market, Inc.'s lawyers.

As we've been writing about in a series of pieces over the last week, New Seasons Market CEO Brian Rohter is disputing the Whole Foods subpoena for his company's proprietary sales, financial and related records, and took the issue public on the natural grocer's company Blog.

See these posts from Natural~Specialty Foods Memo:

>December 1, 2008: Retail Memo: Whole Foods Wants A Court-Mandated Financial Records Dump from Portland-based New Seasons Market; it Says For its Battle Against the FTC

>December 2, 2008: Retail Memo: Whole Foods' Paige Brady Responds to Yesterday's New Seasons Market Piece; Lots of E-Mails; Issue Heats Up On the New Seasons Market Blog

>December 2, 2008: Retail Memo: Portland, Oregon-Based New Seasons Market CEO Brian Rohter Responds to Whole Foods Market's Paige Brady

>December 3, 2008: Retail Memo: More on the Whole Foods Market-New Seasons Market Subpoena Issue; FTC Holding Firm For February, 2009 Hearing

Sunflower Farmers Market CEO Mike Gilliland did not describe the content of the natural foods retailer's response to Whole Foods Market, Inc.'s subpoena.

It is well known within the natural products industry that Gilliland and Whole Foods Market CEO John Mackey don't like each other. They even avoid one another at industry trade shows and related functions.

Gilliland, the founder of Wild Oats, left the company long before it was acquired by Whole Foods last year.

A few years ago he founded Sunflower Farmers Market in Boulder, Colorado, the same city in the same state where he started Wild Oats, and where its corporate headquarters remained until merging with Whole Foods last year.

Gilliland is competing head-to-head in a number of markets against Whole Foods Market with Sunflower. He recently has opened stores in Whole Foods' home state of Texas, for example. Last year Sunflower Farmers Markets received a $30 million investment to expand the chain by opening numerous new stores over the next five years.

The Sunflower Farmers Market stores are much smaller than Whole Foods' natural foods stores are. They average about 15,000 or so square feet and are relatively no frills in design. They operate on an everyday low-price model which Sunflower says offers everyday low prices across all natural and organic products categories that are at least 15% less than Whole Foods'

The Sunflower format, which reminds us a bit of Gilliland's original model for the Henry's stores which Whole Foods sold to Southern California-based Smart & Final, Inc. after it acquired Wild Oats last year, puts a major emphasis on fresh produce, including organic, at low prices. The large produce departments are located in the center of the store like a farmers market in order to draw attention to the "fresh" aspect of the Sunflower stores.

New Season's Market CEO Brian Rohter says his company has been forced into the "crossfire" of the FTC's continued legal challenge to the Whole Foods-Wild Oats merger, the result being the subpoena for the natural grocer's sales, financial and related proprietary information.

New Season's lawyers filed a brief with the FTC last week to kill or limit Whole Foods' subpoena, saying in the legal brief it will cost New Seasons Market over $250,000 to comply with the subpoena's demands, along with arguing that disclosing the proprietary sales and related information will open the door for Whole Foods to engage in anti-competitive conduct against the Portland-based retailer because it will have this inside information.

Whole Foods Market, Inc. says the law does not allow its outside counsel to share any of the proprietress information obtained from the retailers via the subpoena with operational employees of Whole Foods at any level. It says the information is strictly for the lawyers use in arguing the retailer's case against the FTC.

The brief filed by New Seasons Market's lawyers also contains quotes it says have been made by Whole Foods Market, Inc. CEO John Mackey and other executives referring to its wanting to "crush," "punish" and "eliminate" competitors such as Wild Oats and Earth Fare, a 15-store chain on the East Coast.

As a result of this behavior... "New Seasons has no reason to believe that Whole Foods would not relish the opportunity to do to New Seasons what it did to Wild Oats and what it does to other competitors such as Earth Fare ..." the lawyers wrote in the brief to the FTC to stop the subpoena.

CEO Rohter also says the numerous postings Whole Foods CEO Mackey made using a fictitious screen name in various Yahoo Finance online message boards during the run up to the Wild Oats acquisition, postings in which he made comments about the incompetence of the then Wild Oats CEO for example, demonstrate a pattern of behavior in which Whole Foods is willing to do whatever it takes to crush and eliminate its competition.

Mackey was investigated by the U.S. Securities and Exchange Commission for the postings and was cleared of any illegal activity. However, numerous ethical and judgement questions have been raised about the behavior.

Whole Foods Market's social media director Paige Brady posted a company response to New Seasons Market's position in Natural~Specialty Foods Memo on December 2, following our publication the day before about the issue. [See the December 2 link above.]

Whole Foods spokeswoman Kate Lowery says Whole Foods was put in the position of having to issue the subpoenas by the FTC because the agency lumped it, Wild Oats, Earth Fare and New Seasons into the four-member class of groceries called "premium natural and organic supermarkets" during federal court proceedings last year.

It is in this natural products retailing market segment (which doesn't really exist in the minds of most people in the food and grocery retailing industry. The lines are far to blurred.) the FTC continues to argue the merged Whole Foods-Wild Oats presents a monopolistic and anti-competitive force in.

A federal court in Washington D.C. has twice ruled against this claim being made by the FTC and in Whole Foods' favor. Despite the ruling, the FTC reopened its administrative case on the merger after getting a green light from a court to do so. That is the hearing scheduled for February 16, 2009 in Washington, D.C.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related Stories from Natural~Specialty Foods Memo:

>October 19, 2008: Retail Memo: First Two Sprouts Farmers Market Stores Sprout in Colorado; Another Challenge to What The FTC Says is Whole Foods' Category Hegemony

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

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

Retail Memo: First Two Sprouts Farmers Market Stores Sprout in Colorado; Another Challenge to What The FTC Says is Whole Foods' Category Hegemony

When Whole Foods Market, Inc. acquired rival Wild Oats in a friendly merger last year, the Austin, Texas-based supernatural foods retailer became a major player in Colorado, the state where Wild Oats' was founded, headquartered and had its highest per capita store count.

The Colorado market is in fact one example the U.S. Federal Trade Commission (FTC) sited in its arguments that post the Wild Oats' merger Whole Foods Market, Inc. is a monopolist in the natural foods retailing category. And despite every sign to the contrary -- Whole Foods' profits are down by 40%, its stock is at an historic low and it's been laying off headquarters employees just for starters -- the FTC continues to press its case, having set a hearing for February, 2009 to review the merger once again.

As we've argued, the FTC is not only wasting its resources and U.S. taxpayer money by persisting in this folly, it's demonstrating a total ignorance of one of the very industries it is supposed to regulate -- food and grocery retailing.

If the FTC wasn't ignorant of the market forces in the industry, it would drop its February, 2009 hearing immediately. Why? Because the facts are that rather than being in a monopolistic position vis-a-vis the retailing of natural and organic products, Whole Foods Market, Inc. is in reality fighting for its life. Of course, we've seen much ignorance, along with outright neglect, from U.S. Government regulatory agencies in the last eight years. The words "financial crisis" come top of mind.

Whole Foods, as we written about regularly, is being challenged on two retail format fronts throughout the U.S.

One the one front are the still small but fast-growing natural foods chains like Sunflower Farmers Market, Sprouts Farmers Market, Natural Grocers, Canada's Planet Organic (its Mrs. Green's Natural Market chain in the U.S.) and a couple others. These natural products retailers are rapidly opening new stores, including in Whole Foods Market's backyard market of Texas, where the grocer is headquartered.

The other format or sector front which Whole Foods is being attacked on is by the supermarket sector.

For example, mega-chains like Kroger with its Fresh Fare format and Safeway with its Lifestyle format are taking a bite out of Whole Foods' sales throughout the U.S. Both the Kroger Fresh Fare and Safeway Lifestyle formats put a major emphasis on offering expanded selections of natural, organic, specialty and gourmet food and grocery products, along with premium, in-store prepared foods offerings. These are Whole Foods' niches.

Along with the giants, regional supermarket chains such as H.E. Butt and United Supermarkets (its Market Street banner) in Texas, Publix in Florida, Wegmans in the east, Raley's in the west, as well as numerous others, all are stealing share from Whole Foods with their upscale supermarkets, which not only offer expanded assortments of natural, organic and fresh foods but sell basic groceries alongside them.

Instead of enjoying the luxury of a monopolistic position in the natural and organic products retailing sector post its Wild Oats' acquisition, Whole Foods finds itself challenged on multiple fronts. It's also being challenged by the sour U.S. economy in which even traditional natural foods choppers are trading down out of a need to do so rather than a choice.

In the case of the fast-growing natural products retailers mentioned earlier. Sunflower Farmers Market, which happens to be founded and run by Wild Oats' founder Mike Gilliland, as well as headquartered in Boulder, Colorado, is opening new stores throughout the Western U.S. Sunflower has thus far even opened two of its smaller-format discount natural products stores in Texas and plans to open more in the state where Whole Foods' is headquartered.

With its base in Boulder, Sunflower is becoming a natural foods retailing force in Colorado and the west; a force Whole Foods is having to take seriously. Sunflower Farmers Market currently has seven stores in the state. It opens Colorado store number 8 next week in the city of Arvada -- and more units are on the way.

Whole Foods market has 18 stores in Colorado. Four of those stores are in Boulder. The majority of the remaining 14 are in the Denver Metropolitan region.

Two of the four Boulder stores operate under the Whole Foods' banner. One operates under the Alfalfa's banner. The other goes under the Ideal Market name. Both of those stores are former Wild oats units, as is one of the two Boulder Whole Foods' banner stores.

Alfalfa's was a Boulder-based natural foods chain Wild Oats acquired. It kept that name on the one store, as has Whole Foods. Ideal Market was a popular independent store in Boulder that Wild Oats also acquired. It kept the historic name. Whole Foods plans to keep the name as well.

Lakewood, Colorado-based Natural Grocers by Vitamin Cottage also has become a serious player in the Colorado market, adding to Whole Foods' competition in the state. Natural Grocers now has 28 of its natural products stores in Colorado.

But another fast-growing natural products retailing force just hit Colorado as well. Arizona-based Sprouts Farmers Market opened its first two stores in the Rocky Mountain state on Friday of last week, in the Denver Metro region cities of Westminster and Parker. Sprouts says it plans to add at least eight more stores in the region by the end of 2010. It's next two units will be in Fort Collins and Aurora, Colorado.

Whole Foods Market has a store in Westminster which isn't located far from the new Sprouts Farmers market unit that opened Friday. Whole Foods also has a store in Fort Collins, which is where one of the next two Sprouts units will open. [Memo to the FTC: If Sprouts Farmers Market believed Whole Foods Market, Inc. was a monopolistic natural products retailer would it really be opening two of its first three Colorado stores in cities where Whole Foods Market has existing stores?]

Sprouts currently has 30 stores in Arizona, California, Texas and now Colorado. More Sprouts stores are planned in Texas, Whole Foods Market's base, as well. The retailer also says it will open additional stores in Southern California and Arizona (and of course in Colorado), along with perhaps entering additional states in the Western USA.

The two Sprouts stores that opened on Friday were jammed with opening day shoppers, according to the company's president and chief operating officer, Doug Sanders. Sanders said 6,000 opening day shoppers walked through the doors of the two new Colorado Sprouts Farmers Market stores during the first 6 hours they were open on Friday.

A Natural~Specialty Foods Memo reader who was at the Westminster store shortly after it opened on Friday says the aisles of the store were packed with shoppers looking to grab-up the numerous grand opening day bargains Sprouts' had advertised in advance for the two stores.

Among the bargains she says she picked up included some hot deals in the produce department: Bell Peppers at three-for-a $1.00; Cantaloupes for 88 cents each; and tomatoes for 69 cents a pound, along with numerous other grand opening specials in all store categories.

Like Sunflower Farmers Market, Sprouts operates on a discount price natural and organic category premise or philosophy. It claims overall prices across all food and grocery categories in its stores are at least 15% lower everyday than Whole Foods' prices, for example.

Sprouts also runs weekly ads in which it offers fresh produce, meats and natural and organic food and grocery products for deep discounts.

Sprouts like Sunflower also puts a major emphasis on offering an abundance of fresh produce items at affordable everyday prices.

Both Sprouts and Sunflower have been cutting into sales at Whole Foods stores in Arizona, Southern California, Colorado and elsewhere because of this price and value emphasis.

In fact, Whole Foods has been fighting back -- not just against the two fast-growing natural foods' chains but against all competitors -- by offering discounts and promotions under its "The Whole Deal" value program. For example, right now Whole Foods is offering an online coupon good for $5-off any total order of $25 or more in its stores. That's a 20% discount on a $25 purchase.

Additionally, Whole Foods has had to get much more price-competitive, as have all food retailers, because of the sour U.S. economy.

Sprouts Farmers Market is making a significant impact in the Metropolitan Phoenix, Arizona market and in Southern California where it has numerous stores. There's no reason to believe it won't do the same in Colorado.

Meanwhile, when you combine Sprouts, Sunflower Farmers Market and Natural Grocers on the natural foods format retailing end in Colorado, then add Safeway, Trader Joe's, Wal-Mart, Costco, Target and others -- supermarkets and mass merchandisers deep into the natural and organic foods category in the market -- not only isn't Whole Foods Market, Inc. in a monopolistic position, it's being squeezed in various ways from three sides -- by natural foods format grocers, supermarket chains and independents, and deep discounters like Wal-Mart, Target and Costco.

Perhaps the FTC should hold that February, 2009 hearing about the Whole Foods/Wild Oats merger after all. But instead of the topic being the commission's ongoing argument that Whole Foods' is a monopolistic category retailer since acquiring Wild Oats, it could change the topic to how since the natural grocery chain acquired Wild Oats a little over a year ago it has had its most difficult time in history.

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

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

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

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

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

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

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

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

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

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

by Jessie Scanlon

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

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

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

Growing His Second Chain

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

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

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

Pricing, Pricing, Pricing

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

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

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

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

A natural surge?

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

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

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

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

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

Breaking Retail News: SuperValu, Inc. to Close Sunflower Market Stores

Eden Prarie, Minnesota-based SuperValu, Inc., is closing all of its Sunflower Market natural and organic foods' format stores in Ohio, Indiana and Illinois, Natural~Specialty Foods Memo has learned.

There are five stores in the small chain: three stores in Ohio, and one each in Indiana and Illinois respectively. (See store location addresses here.) All five stores will be closed the week of February 18, 2008, according to Haley Meyer, a SuperValu, Inc. spokesperson. The format will cease to exist once the stores are closed.

Meyer said the Sunflower Market units are being closed because the stores' performance wasn't meeting the company's goals. "Sunflower Market was an innovative approach to the national organics market and we'll take the learnings from that format and apply them elsewhere in our organization," she said by way of explaining the Sunflower Market format experience.

The Sunflower Market format, which we've written about here before, is a fairly no frills, price-impact, natural and organic products' category-killer concept. The stores are small-format, and offer a limited but strong selection of fresh natural and organic foods, groceries and non-foods' natural products. The markets' have all the departments of a supermarket: fresh meat and seafood, produce, grocery, perishables and non-foods. They also have an attractive in-store combination bakery/cafe which has table and bar seating for customers as well as offering takeout foods and beverages.

Sunflower Market's everyday prices for fresh and packaged natural and organic foods, groceries and non-foods are about 15-20% cheaper than Whole Foods Market store prices and prices at upscale supermarkets' that offer broad selections of natural and organic products. This is the "category killer" aspect we referred to.

As we've written before, we believe the format has lots of potential. We even suggested in a piece that SuperValu consider taking the concept national after the acquisition of Wild Oats Markets by Whole Foods Market, Inc. created what we see as an opening in the supernatural food retailing category for a limited assortment, national natural products retailer that offered considerably lower retail prices on organic products than Whole Foods does.

In fact, towards the end of last year SuperValu announced it planned to expand the chain, saying it would build about 50 stores over the next four -to- five years. Apparently the grocer changed its corporate mind.

SuperValu, Inc. has seen its stock share price fall dramatically in the last two quarters, and has had its hands full integrating the Albertsons stores it acquired when it bought Albertsons, Inc. a few years ago.

Further, the retailer has been reorganizing, and its our opinion that as part of this reorganization SuperValu executives felt Sunflower Markets was just too far from their core business--large, full service supermarkets, discount stores and grocery wholesale distribution--to continue trying to nurture the small natural and organic products' chain, which the retailer has had to continue putting funding into without taking any profits to date.

That fact, combined with the performance issue Meyer described, resulted we feel in the corporate decision to shutter the five stores and eliminate the format.

We're sorry to see it go. Perhaps another major food retailer will pick-up on it, as we see a market for such a natural products chain nationally. There is another sunflower actually; Boulder, Colorado-based Sunflower Farmers' Market.

This retail sunflower is an independently-owned chain which operates a format very similar to SuperValu's Sunflower Market. Sunflower Farmer's Market recently announced plans to grow rapidly, and its stores are doing well. We think this proves the format is solid. Perhaps its more at home all by itself, rather than as a tiny part of a huge multi-format, multi-billion dollar grocery distribution and retailing corporation?

Sunflower Market Linkage: Below are some articles we've written about, and relating to, SuperValu, Inc.'s Sunflower Market:

>Natural-Born Category Killers.

>Retail Memo: The Small-Format Revolution Continues to Heat Up.

>NSFM Retail Memo: Sunflower Market.

>Will The Big Three Supermarket Chains Challenge Whole Foods in its Niche?

Retail Memo: Natural-Born Category Killers

The small store, no-frills, price-impact food retailing format revolution has arrived in the natural and organic foods retailing category, as well as in the conventional food retailing segment. The rapid growth in the natural and organic products categories has created an opening for category-killer formats, and a couple are emerging. Both are small format stores compared to supernatural grocers, and both recently announced major growth initiatives.

Supervalu Inc.'s 15,000 square foot Sunflower Market (pictured above) is one of the two small format, price-impact natural foods stores we believe has the potential to be a real player in the natural and organic foods "category killer" retailing segment. The format is no-frills but extremely attractive in design.

In August and September of this year, when the U.S. Federal Trade Commission (FTC) was vigorously opposing the acquisition of Wild Oats Markets by Whole Foods Market, Inc., we wrote about and offered our analysis on why such opposition by the FTC (and others) made little sense in light of the realities of today's natural and organic foods retailing environment.

The FTC's chief argument in opposing the merger in a federal court was that it would create an anti-competitive situation in the supernatural food retailing category, allowing Whole Foods (combined with Wild Oats) to be able to raise its retail prices whenever the grocer desired.

(Although the U.S. Federal Court in Washington, D.C. denied the FTC's September, 2007 pre-acquisition legal challenge, and denied an appeal a short time after that--which allowed the merger to go forward and for Whole Foods to begin to integrate Wild Oats' operations into the Austin, Texas-based grocer's culture--the agency again filed a post-merger lawsuit last month, asking the same federal court to review the deal. To date, the court has avoided the FTC's request to give it another hearing on the merger.)

We argued then, and still do, that although acquiring Wild Oats and removing it as a competitor would provide Whole Foods with some near-to-medium-term competitive advantages, those advantages would not be all that significant--and would be rather short lived at best.

Boulder, Colorado-based Sunflower Farmers Markets is the other small format, no-frills, price-impact natural foods retailer we believe has the potential to create a serious impact in natural products retailing with its 20,000 to 25,000 square foot stores.

Why? First, huge supermarket chains like Safeway Stores, Inc., Kroger Co., Supervalu, Inc., Publix and others (all four mentioned have annual gross sales at least ten times that of Whole Foods), and smaller but big regional chains and multi-store independents throughout the country, have moved into the natural and organic products' retailing space in a big way--and it's getting even bigger.

For example, Safeway's Lifestyle stores are looking more and more like a hybrid upscale conventional supermarket/Whole Foods-like format these days. The same with many Publix, HEB and Wegmans' stores, to name just a handful rather than taking a couple paragraphs to list the many more doing the same. Further, dozens of large, regional grocers (Raley's in California, Giant Eagle, Rice Epicurean, Bristol Farms; the list goes on and on) are creating new stores that are going head-to-head with Whole Foods' stores in their market areas.

On top of all that, mass merchandisers Wal-Mart, Target, BJ's, and Costco Wholesale are offering more an more natural and organic items in their stores, as well as creating their own store branded organic grocery products.

Next, in terms of the Wild Oats' acquisition allowing Whole Foods to be able to raise its retail prices at will, we argue that is far from the case. First, Wild Oats' wasn't a big enough chain in terms of market share to even make that kind of difference. In other words, swallowing up Wild Oats did not make Whole Foods a monopoly in any real terms, even if John Mackey though it would.

Second, with its "Whole Paycheck" nickname (which company executives detest) firmly established in the food retailing lexicon (as well as in the minds of many consumers) Whole Foods has become hyper-cautious about its retail price structure, and about raising prices.

Lastly, if one really makes a close analysis, they will find Wild Oats Markets' wasn't even Whole Foods' chief competition. Most of their stores were too small, their merchandising practices were outdated in many aspects, and their in-store prepared foods programs were minimal compared to today's industry standards.

Rather, that chief--and growing--competition comes from the types of retail formats the grocers mentioned above, and others, are creating and growing rapidly. It also comes from mass merchandisers like Wal-Mart, Target, and Costco Wholesale, all who have moved aggressively into the natural and organic products retail space and continue to do so. It's a brave new natural and organic products retailing world folks, and with all do respect, Wild Oats was in many ways still living in the old world.

Part of this new natural and organic products retailing world (NOPR 2.0 we call it) is the successful creation, selling and growth of store brand organic grocery lines from the likes of Safeway, Kroger, Target and many others.

The store brand organics are proving wildly successful. For example, Safeway recently said its O' Organics store brand has been the most successful private label brand launch in the chain's history of developing store brands. In fact, Safeway plans to begin selling the O' Organics line to food retailers in other countries beginning early next year. Additionally, Giant foodservice distributor Sysco has started distributing a number of O' Organics items to some of it's customers, and plans to do so nationally.

Kroger's store brand organics line (as well as its all-natural brand) has been such a huge success that the chain is currently expanding it into more categories and adding scores of additional skus. Kroger's CEO has said his plan it to be the chain that sells organic groceries to the "masses' in the U.S.

The hundreds of millions of dollars in brand new sales from these store brand natural and organic grocery products has had to come from somewhere. It's not just from shoppers who have traded up from conventional groceries to organics. Rather, the new sales are coming from a variety of places: replacing and reducing sales of some manufacturer brands to be sure, some consumer trade up from conventional grocery items of course; but more significantly its also coming in large part from natural products retailers, especially Whole Foods. The supermarket store brands are taking share away from Whole Foods and other natural foods retailers in the grocery products segment.

Shoppers who shopped a supermarket and also Whole Foods, and bought all of their natural and organics at Whole Foods, are now finding they can get a large share of those same items at the supermarket, and generally at better prices. As such, Whole Food's "share of the stomach" in the natural and organic grocery category is getting eroded by these store brand Organic lines.

Whole Foods knows this, that's why the grocer keeps innovating, putting new types of restaurants in their stores, becoming a prepared foods guru, adding wine cellars, mini day spa's and other cutting-edge features in-store. The retailer's executives knows what's happening in terms of the natural and organic grocery sales environment, and they plan to be ahead of the retail curve in terms of not finding themselves overdependent on natural and organic grocery sales in the future.

Lastly, we argued this phenomenon--the growing number of big food retailers going after the natural products consumer--would also be met with a new one.

That new phenomenon is the emergence of a handful of food retailers (and formats) that have determined the natural and organic categories are ripe enough--and growing fast enough--to "pick off" by the creation of category killer formats designed to undercut Whole Foods (and others) significantly on price. That category growth is without a doubt here, with much more to come. Organic foods' category growth has been 25 to 30% per year in the last five years. Further, projected growth for the next five years is about 20 to 25% annually.

These retailers have realized the market is there to create a natural foods store format with the following characteristics: small format (or footprint), no frills design inside and out, limited category assortment and--the major positioning point-- everyday low-price, price-impact across all product categories and sectors. These stores offer more than just bare bones departments and selections, but do so in a no-frills but attractive, small format box.

These elements not only tap into the desire by a growing number of consumers to be able to buy natural and organic products for less, it also opens the category to new shoppers. It's an expansionistic format all around. Further, the format taps into the growing desire by many shoppers to be able to buy groceries in a more convenient way. Rather than spending lots of time in a huge store, they want to get in and get out--but still be able to get the natural and specialty products they want. Convenient, in-and-out shopping, a good product selection, and low prices--does anybody really believe the natural products consumer isn't ready for that combination?

Natural-Born category killers: Sunflower Farmers Market and Sunflower Market

In previous pieces on this topic (but in less detail) we identified two natural foods retailers--Boulder, Colorado-based Sunflower Farmers Market and Supervalu, Inc.'s Sunflower Market--as the most likely candidates to create a category killer application (format) in the natural and organic foods retailing space in the U.S. Further, we suggest these two retailers are the two best candidates to provide a retail one-two punch to Whole Foods in terms of taking market share from the supernatural grocer. (By the way, don't be confused by both having Sunflower as the major part of there names. It happens to many. In fact, it happens so often that Supervalu has a link on its Sunflower Market website that says, "Looking for the other Sunflower Market? Click here.)

Based on a couple of recent developments, one just this week, it looks like we might have been right four months ago. First, Supervalu recently announced that their Sunflower Market stores, a format which is only a little over a year old, have exceeded the company's expectations. And as a result of that, the grocer said its going to aggressively increase its new store opening time- table for the stores, building 50-60 new Sunflower markets in the next 4-5 years.

As part of this growth plan, Supervalu also said it plans to open stores in states it currently isn't in with the stores. Sunflower Market stores (five so far) are currently located in Illinois, Ohio and Indiana. Plans include expanding eastward. The small format stores are only 15,000 square feet and offer a limited assortment of natural and organic foods, non-foods, fresh produce, meats, fish/seafoods and perishables. They also have a fresh-baked bakery/cafe in-store, a health and wellness department and full wine and craft beer departments. (read more about the format here.)

The small format stores are no-frills but also offer a slightly upscale look to them in both design and style, do to the in-store bakery/cafe and attractive health and wellness departments. (It's important to note the assortment is limited relative to Whole Foods and other large supermarkets. However, it isn't limited in terms of the industry standard, in which most independent natural foods stores still aren't any bigger than 15,000 square feet.) Numerous market basket price checks have shown Sunflower Markets' overall everyday prices on natural and organic products to be 10-20% cheaper than the everyday prices on like items at Whole Foods' stores.

The other Sunflower, Arizona-based Sunflower Farmers Market, also is a small format, no-frills, price-impact, natural and organic category killer format like Supervalu's Sunflower Market. Sunflower Farmers Market also has something else in common with it's namesake natural foods retailer--its expanding dramatically as well.

Earlier this week, the small format, price-impact natural products' grocer announced it has received a $30 million investment from California-based PCB Capital Partners to build new stores and expand into other states. The company currently has 13 stores in Arizona, Nevada, Colorado and New Mexico. With the $30 million in hand, Sunflower Farmers Market plans to have a total of 50 stores in the Western U.S. in five years, including expansion into Utah and Texas, which is where Whole Foods Market, Inc.'s corporate headquarters is located. The retailer will open about 13 new stores next year.

Sunflower Farmers Market was founded in 2002 by Mike Gilliland, who also is the founder of Wild Oats Markets. He left Wild Oats a number of years ago. This time around Gilliland and company are taking a price-impact, value approach to natural and organic foods retailing. In fact, the grocer's motto is: "Serious Food at Silly Prices." That should tell you much about its positioning.

The stores, similar to Supervalu's Sunflower Market, are fairly no-frills. They also offer a limited assortment of natural and organic products across all categories. The selection is ample though, and looks far from bare bones. The centerpiece of the stores, which are about 20,000 to 25,000 square feet, are its produce departments, the one place the natural grocer departs from its limited assortment merchandising philosophy and offers an extensive selection, including lots of organic produce items. The farmers' market-style produce departments, which are placed in the center of the stores, represent about a third of total store sales, according to Gilliland.

In fact, he says when fresh meat is added to produce in terms of sales, both represent about 50% ot total store sales. Groceries, health and body care, nonfoods and vitamins/supplements comprise the other 50% of total store sales.

Gilliland says he's set Sunflower Farmers Market's pricing structure so that shoppers will pay 20% to 30% less on natural and organic groceries, perishables and the other items featured in the stores than they would pay at Whole Foods and other natural foods stores. Produce prices are particulary hot, do in large part to the fact that the grocer self-distributes all of its own produce, cutting out the middle man and distributors.

With 50 stores in the Western U.S. in five years, the natural products category killer should be a major force in natural foods retailing, and its pricing structure, which is considerably lower than Whole Foods across the board, could position it well to take market share from Whole Foods and others in its market regions.

As a category grows, its logical that competition will follow, and formats will morph

We aren't suggesting Whole Foods Market, Inc. is in any imminent--or even long-term for that matter--danger of failure. What we are suggesting is that we're seeing the beginnings of a small format, price-impact movement in the natural and organic food retailing niche similar to what is happening in conventional food retailing. The scale is much smaller, the players fewer and they're not nearly as large in size and scope overall. However, we believe the natural and organic foods category killer concept and format is real. And, with 100-plus stores combined between the two "Sunflower" chains in as little as five years, they're going to take a nice chunk of category market share.

The prime drivers of this phenomenon are the super growth of the natural and organic categories, a lack of price reductions by existing retailers to reflect that growth, and a desire on the part of many consumers for faster, more convenient stores to shop in. If you combine these key trends, a small format, no frills, price-impact store focusing on the natural and organic categories makes much sense--and has huge growth potential.

Obviously, Supervalu's Sunflower Market and Sunflower Farmers Market are both betting on that concept. Along side them are numerous conventional supermarket operators like those we mentioned in this piece and many others who are betting on the categories growth to drive their sales and profits. That's why they're investing in upscale, "Whole Foods-style" stores, creating and marketing extensive store brand natural and organic grocery lines, and positioning their stores more and more towards the natural products consumer.

Taken along with what's occurring in the small format revolution being led on the high-low end by Tesco--with it's Fresh & Easy Neighborhood Markets chain which has already opened about 30 stores in one month, with 200 to be opened by the end of next year--and German food retailer ALDI--which is opening up 100 of its small format, no-frills, price-impact stores a year for the next few years (on top of the 850 small format stores it already operates in the U.S.)--what Supervalu and Sunflower Farmers Markets are doing with small format store rapid growth plans further solidifies the reality of the small format food retailing revolution across all product retailing categories and types of positioning.

In fact, Whole Foods itself is getting into the small format food retailing game. Early next year it will open a prototype Whole Foods Express store in an old Wild Oats store building in Boulder, Colorado. The store will be about 15,000 to 20,000 square feet, and is said to offer a mix of grab-and-go prepared foods, a limited assortment of natural and organic groceries and perishables, and other convenient offerings.

By the way, we don't believe the Whole Foods Express format will be a natural/organic category killer, but stranger things can happen. And, if the grocer's new Whole Foods Express format did turn out to be a natural and organic foods category killer, that would make things really interesting.