Fresh & Easy Opening Countdown

Anaheim Fresh & Easy Store Will Be One of First Six in Southern California to Open

Earlier this week we reported that Tesco announced six of their Fresh & Easy Neighborhood Market stores in Southern California would be the first to open, all on November 8, 2007. Those stores are in Orange, Los Angeles, San Bernardino and Riverside counties.

Today we learned from sources in Southern California that a Fresh & Easy store in Anahiem (in Orange County) located at the corner of Lincoln and Western Avenues near Buena Park will be one of the first of the six outlets to open on November 8. The Anaheim store will open on November 8 at 10AM. Tesco has confirmed this with Natural~Specialty Foods memo (NSFM).

The Lincoln and Western Avenue Fresh & Easy (number 4 on the map above) is one of nine stores currently being built in Orange County. Tesco says it has 100 stores currently either being built or in the construction pipeline for Southern California, Arizona and Nevada. Many more are being planned to follow. Tesco also said it plans to enter Northern California with Fresh & Easy stores sometime next year.

Fresh & Easy Neighborhood Market stores are about 10,000 square-feet and feature upscale, fresh prepared foods (including grab-and-go items), basic groceries, specialty and natural foods and other offerings. The focus is on fresh and specialty-oriented foods in a smaller, faster format than the traditional supermarket in the U.S.

(Fresh & Easy store location map courtesy of the Orange County Register.)

Thursday Talking Points Memo

Category Marketing Dominance: How Whole Foods Market, Inc. Became King of the Supernatural Retail Grocery Category and Why it Will Continue to Reign For Some Time

The ultimate purpose of any marketing strategy is not to just build a brand but to dominate a category. For example, Google dominates the search category, Campbell's the canned soup category, Starbucks the premium coffee category and Whole Foods Market Inc. the supernatural retail grocery category. Among the many things these category kings have in common is they also have built strong brands. To paraphrase an old saying: "Dominate your category and the brand equity will follow."

Our discussion today is about Whole Foods Market, Inc. and how it's positioned itself as the supernatural retail grocery category king. In fact, it's become more than the dominant category leader--it's now the category's only real member.

How did this happen? Whole Foods has employed seven key marketing strategies in the mere two decades it's been in existence to take it from an entrepreneurial one-store start-up to the sole player of any significance in the supernatural grocery category.

These seven key strategies are: The creation of a corporate retail purpose/mission and the building of a culture to advance and sustain it, development of innovative, lifestyle-oriented retail merchandising methods, shrewd buying practices, competitor acquisitions, alliance building, 24/7 communication and community relations practices, and rapid new store growth. These aren't the exclusive strategies the grocer has used to get where it is today but they are the primary and key marketing strategies which have made Whole Foods the category owner it is today.

Let's examine each of these marketing strategies briefly. First, from its early entrepreneurial beginnings under CEO John Mackey, Whole Foods saw the importance of creating and building a unique culture based on a purpose and a mission other than merely being a natural foods retailer. These precepts have been refined throughout the years and infuse everything the grocer and its associates do in the stores.

Second, Whole Foods is a perfect example of "continuous improvement" when it comes to its merchandising philosophies and practices. Observing the grocer over the years shows a progression from an orthodox, food co-op type of retail merchandising philosophy to today's mix of upscale, natural foods/lifestyle-oriented merchandising in its stores. Retail as theatre is a good description of retail merchandising in today's Whole Foods stores. Food is clearly at the center but it's much more, including social aspects, fun, creativity and the creation of good feelings for store shoppers.

The third marketing strategy, shrewd buying practices, is less sexy but no less important than the other five. Whole Foods has developed, from it corporate buying headquarters to its stores, a policy and practice of getting the absolute best cost of goods it can from its distributors, suppliers and vendors. Store-level associates are rewarded economically for doing this--and even more importantly they take great personal pride in cutting a better deal (some vendors say too much pride) than the guy or gal at the Whole Foods store down the street. These buying practices from the top down to store-level have helped the supernatural grocer obtain the highest gross margins among food retailers anywhere in the world.

Whole Foods' strategy of acquiring competitors in the natural foods retailing sector is no less brilliant. From the grocer's early acquisitions of Mrs. Gooch's in Southern California and Bread & Circus in the Eastern U.S., to its recent acquisition of rival Wild Oats (and many other acquisitions in between), Whole Foods has used acquisitions as a two-pronged marketing strategy not only to grow more rapidly and enter markets with a critical mass of stores but also as a way of eliminating competitors (and potential competitors) in the supernatural retail grocery category.

The fifth key marketing strategy, alliance building, has and continues to serve Whole Foods well. The grocer builds alliances with a vast network of stakeholders ranging from farmers and chefs to non-profit, environmental, consumer and non-governmental organizations in the U.S. and globally. Whole Foods' sixth strategy, 24/7 communications and community relations, ties into alliance building. The grocer conducts a very comprehensive marketing communications program both from its headquarters and at store-level, telling its story to the media and other constituents. Most impressive, Whole Foods makes sure its core purpose, mission and culture is weaved into these stories which constantly reinforces its clear leadership and dominance in its category.

Lastly, coupled with its aggressive acquisition strategy, Whole Foods pursues a super-aggressive new store building program. What's most important about this besides the sheer growth it is providing is that the grocer continues to "up the anti" with its new stores. Rather than build similar size and format stores like most food retailers do Whole Foods stores keep (generally) getting bigger and more lifestyle-oriented. They also continue to incorporate new concepts (like a day-spa in the recently opened Campbell, California store) and formats (like the European food hall store just opened in Oakland, California). Furthermore, since the grocer has a decentralized culture its able to localize its stores in ways other large food retailers have yet to duplicate.

These seven marketing strategies form the core of the process Whole Foods has used to not only dominate its category, but now that its acquisition of Wild Oats has been finalized and is proceeding along well, position itself as the only real member of the supernatural retail grocery category.

This post Wild Oats acquisition category dominance can be evidenced by what has happened with Whole Foods' publicly traded stock in the little more than a month since the U.S. Federal Court gave the green light for the acquisition. As soon as the acquisition was approved Whole Foods stock went from a near all-time low in July, 2007 to a 33% jump in a week or so. Today the stock is up 48% over that July low.

MSN's popular "Top Stocks" columnist and investment expert Robert Walberg believes Whole Foods' stock will rise even more in the coming months--much more in fact. Walberg says "what makes Whole Foods such an exciting long-term investment is that it has changed how we perceive the supermarket experience, much like Starbucks changed coffee retailing 20 years ago. The produce, meat, specialty food and wine/cheese areas provide a feast for the senses. Meanwhile the focus on natural and organic products throughout the store gives consumers a place to shop where they can find an abundance of healthy and nutritious food choices for their families," he says. "Toss in a knowledgeable staff that prides itself on being friendly and helpful and you have a winning mix of product and service."

We couldn't agree more with Walberg in terms of Whole Foods' current positioning. Further, the supernatural grocer's category dominance which it has achieved using the marketing strategies we've discussed is what we believe will enable the grocer's stock share value to grow even more in the near term. Even more importantly though it's this category dominance which will allow the supernatural grocer to grow aggressively as a formidable food retailer for some time without any major competition in its category.

Whole Foods' major competition will come as the lines between natural foods super retailing and supermarkets and mass merchandisers continue to blur. As more retailers like Safeway, with its Lifestyle format and H.E.B with its City Market format for example, continue to "up their respective anti's" in terms of increased upscale natural foods-oriented and lifestyle merchandising, Whole Foods will find itself under increasing competition--not in its category but from a new, blurred category.

An analogy or similar example to this is where long-time carbonated beverage category king Coca Cola currently is. It remains the most recognized brand in the world according to most research, however since the carbonated beverage category has blurred so much (waters, new-age beverages) ,Coke is having to reinvent itself as its category melts away. That's why Coca Cola calls itself a "hydration" company today. Soda pop remains its flagship product but is being overtaken by bottled waters, juices and new-age brands within the company.

Whole Foods won't find itself in this situation for a long time however--and perhaps its next challenge won't even be from a Safeway, H.E.B or the other numerous supermarket chains that seem to be moving more and more into a Whole-Foods type niche with many of their retail banners. In fact, the history of category dominance tends to be led by entrepreneurial rather than established companies. Google, Starbucks, Microsoft and Whole Foods all began as fairly recent entrepreneurial companies and today own their respective categories. As such, it's quite probable that Whole Foods' is as likely to face a category challenge down the road from something and someone new in addition to a more established retailer. Of course with Whole Foods' track record as a dynamic, innovative company, if and when that time comes the grocer just may have already intentionally morphed itself into something different than it is today.

Mid-Week Roundup

Wal-Mart Holds Live Better Sustainability Summit Today

Wal-Mart stores is holding a full-day environmental sustainability conference today in Arkansas. The "Live-Better Sustainability Summit" is part of the mega-retailer's ongoing green initiative and features 2,000 representatives from Wal-Mart's supplier-companies along with representatives from environmental groups like the World Wildlife Fund, Rainforest Alliance and many other non-profit groups, green businesses, academics, non-governmental organizations and others. The full-day conference is hosted by Wal-Mart CEO Lee Scott who plans to talk about the need for sustainability, transparency, efficiency and environmental accountability up and down the entire supply chain.

The summit is to include talks and presentations by Scott and others, breakout study sessions and an environmental sustainability resource fair (trade show) where hundreds of green businesses and organizations will have booths set up showing what they are doing in the sustainability realm throughout the supply chain. Wal-Mart has invited a diverse list of exhibitors for the sustainability trade show in addition to a diverse mix of groups to participate overall in the day-long summit.

Among the topics of discussion at the green conference will be: Driving Business Through Sustainability, Engaging Your Business in Sustainability, Sustainability and Product Innovation and others. You can read a summary of the session topics and presenters here.

Natural~Specialty Foods Memo (NSFM) will have a report from the summit tomorrow or on Friday in our Weekly Green Report environmental feature section.

Research: Two New Studies Shine Light on Organic Foods Consumers

Two new surveys, one conducted by Harris Interactive Research and the other by Scarborough Research, provide some new and important insight into today's organic foods consumers.

The Harris Interactive Organic Poll:

The first study, an online survey of 2,392 U.S. adults conducted by Harris Interactive between September 11-18, found those who identified themselves as organic food shoppers view the category as safer, better for the environment, and healthier--but more expensive. The majority said however they feel the extra cost is worth it even though they aren't particularly happy with paying more.

Only 7% of the 2,392 poll respondents said they purchase organic food "all or most of the time." Many more--31%--said they purchase organic "on occasion." The study then breaks these folks down into consumer segments. The consumer segments most likely to buy organic foods on a regular basis are college graduates (11%), political Liberals (11%), Western U.S. residents (10%), echo boomers, age 18-30 (10%), and Gen Xers, age 31-42 (9%).

All of the survey respondents who buy organics said their purchases have increased (32%) over the last couple years rather then decreased(5%). This finding mirrors the fast annual rate of growth in the organic category over the last few years.

The survey found some additional findings of key interest to organic food marketers and retailers. For example, a large majority (79%) of all poll respondents said they believe organic food is better for the environment. Further, 76% said organic foods are healthier. Among those who say they purchase organic foods frequently 98% said it's healthier and better for the environment. One finding demonstrates a major difference between those who said they buy organics frequently and all the others. Most (86%) of frequent buyers said organic foods taste better than conventionally-produced, while only 39% of all adults feel the same way.

Nearly everyone in the poll (95% of all adults and 88% of frequent organic buyers) believes organic foods are higher prices than conventional. In terms of a cost vs. benefit analysis, a third (36%) believe organics are "better for you" (91% of the frequent buyers do), while 29% of all adults believe organics are "a waste of money, as it's no better for you then conventional," according to Harris Interactive's data analysis.

Harris says overall the polls results show that with so many of the respondents positive attitudes towards organic foods category consumption and thus sales is likely to grow. The firm expects the category to continue to make up a greater share of the overall food market over the next few years.

In our analysis of the study, price does seem to be a bit of a barrier with all adults and as retails on organic food products come down more consumers should enter the category. Reduced retails--and a better perception of the price-value benefit of organics--is key we believe to bringing a larger consumer base into the regular purchase of organic foods. It's also key to generating new organic category trial purchases with the majority of consumers who don't yet buy organics at all.

The Scarborough Organic Research Study:

The second study, conducted by Scarborough Research, looked at organic foods consumers more on a geographical or regional basis. The study found that the U.S. West Coast is far and away the stronghold in terms of organic category consumers in the United States.

Scarborough measured 79 local markets in the U.S. Out of those 23 were found to be what the firm calls "organics markets," or those markets that have an above average percentage of organic foods consumers. Of these "organics markets" more than half (13 cities) are in the Western Census Region (West Coast). Six cities are in the Southern census region, three cities are in the Northeast, and one is in the Midwest (Minneapolis, Mn.).

Scarborough's study found the following city breakdown: San Francisco is the top city for organics users. In the past month 35% of San Francisco adults bought and used organic foods. Seattle, WA. is number two (32%), Portland, Or. is number three (27%), followed by Washington, D.C. and Denver, CO. (26% each) and San Diego at 24%. The six metro regions comprise the top organic foods markets in the U.S. according to the study.

Additionally, the study says in total about 17% of U.S. consumers are "organics" users, meaning they buy organic foods anywhere from regularly to sometimes. This leaves lots of room for growth in the category since, according to the study more than 80% of U.S. consumers aren't buying organic foods.

Among the study's other results, Scarborough says Whole Foods Markets leads all retailers in having the highest concentration of consumers/shoppers who buy organic foods. However, Wal-Mart is the total overall leader in terms of who sells the most dollar volume in the organic foods category, according to the study. Trader Joe's, Target, Safeway Stores, Inc. and Costco also have a higher concentration of organic foods consumers than all other food retailers. You can read more about the retail ranking of organics consumer concentration and some other general findings from the study here.

Natural~Specialty Foods Memo's Analysis:

Taken together these two studies of organic foods category consumers offer many positives but also some negatives--or rather opportunities. First, both studies demonstrate there is a solid and growing core of organic foods consumers in the U.S.--good news for manufacturers and retailers. However, both studies also show that there is a huge percentage of American consumers (about 75-80%) who haven't even purchased an organic foods product (or aren't aware they have) at all.

This is a huge opportunity for category marketers. Reaching these masses however will require work in communicating the price/value trade-off of organics over conventional products as well as (frankly) a reduction in retail price points on organic items. In other words, perhaps a little margin give on the part of organic category manufacturers and retailers is in order. Organic category margins are high all around and this is doable as Wal-Mart and a couple other retailers are demonstrating. We believe a 10-15% overall price reduction at retail could make a significant difference in reaching many of these 80% of consumers who are out in the shopping wilderness when it comes to buying organics. This 10-15% can be easily achieved with a combination of added efficiencies and slight margin reduction throughout the supply chain. For example, 3-4% from the manufacturer, 3-4% from the distributor and 3-4% from the retailer.

We aren't suggesting this retail price reduction will make the organic category a "mass market" one. But rather that it needs to be more "mass" than it currently is reaching only 17-20% of U.S. consumers. Further, this achievable reduction overall at retail will enable the category to be not only more competitive with conventional but will make telling the value/price story (better for you, better for the environment) much easier. When price points aren't out of consumers' mental range it makes it much easier for them to rationalize paying a bit more for items in a category that are better for them.

Grocery Marketing Research: The Come-Back of the Center-Store

A new study by Information Resources, Inc. (IRI) shows that after years of struggling sales "center store" (grocery) sales have stages a comeback, growing by 3.1% in the 52-week period ending August 12, 2007. The study, "Center Store Revival: Retailers and Manufacturers Stage a Come-back," found six key strategies food retailers and manufacturers have implemented to create excitement and invigerate center store grocery sales.

These six strategies are: a focus on health and wellness products and positioning, the growth of retailer private label offerings, especially organic and healthy grocery products, relevant and more localized grocery product assortments tailored to store neighborhoods, product and packaging innovations, with a particular focus on nutritious and healthy new product lines and "eco-friendly" packaging, merchandising innovation such as new displays the group like products together in the center-store but off the shelf, and pricing: the fact that price increases duo to higher ingredient costs have boosted dollar sales without compromising volume significantly.

The report says grocers and manufacturers have defended against center store share loss this year--a big win following a decade of share losses to supercenters, club stores and drug stores. Small format stores (like Tesco's new Fresh & Easy format opening in the Western U.S. next month) are the next frontier of competition grocery retailers will face, says IRI. High growth snack and beverage categories delivering wellness benefits are fueling center store momentum. Ready-to-drink tea, energy drinks and trail mixes, for example, are all enjoying double-digit growth, according to the study. You can download a copy of the full report here. You also can read an expanded summary of the study here.

Marketing: Think Category First, Brand Second

Marketing guru Al Ries has a piece in today's Advertising Age online that every food marketer should read. Ries says the relentless focus on brand marketing is fine but that category marketing is even more important. He says the objective of a marketing program isn't to merely to build a brand but rather to dominate a category. To do this Ries argues you must focus on the category you are in with your marketing efforts. He sights companies like Hellman's Mayonnaise (which owns its category), Campbell's in canned soup, Orville Redenbacher in popcorn and others as companies which understand category marketing (and ownership) in addition to brand marketing strategies. He also discusses companies like Coca Cola which have built a great brand but are in danger of losing the category--or having it slipped out from under them. Read more here.

Cause-Related Marketing: Safeway Promotes for Woman and Kids

Pleasanton, California-based Safeway Stores, Inc. has launched a major in-store and website cause-related promotion for Woman's breast cancer health and another for children's health in partnership with various manufacturers and suppliers. Both initiatives are being promoted all this month in Safeway-owned stores throughout the U.S., on the retailer's website and in other external media used by the chain.

The first cause-related promotion is for women's breast cancer. October is Breast Cancer Awareness Month and Safeway is promoting awareness of the disease through product promotions, public service announcements and financial donations. Safeway has enlisted singer Melissa Etheridge (a breast cancer survivor) as the spokesperson for a campaign which is encouraging woman to screen for breast cancer through self-examinations and mammograms

The retailer is merchandising the singer's new album, "The Awakening," in its 1,519 stores in the U.S. and donating all profits from the album sales to breast cancer causes. (Safeway participating retail banners include Safeway, Vons, Pavilions, Genuardi's, Dominicks, Randall's, Thom Thumb and Carr's.) Shoppers also can make a donation at every Safeway store checkout stand to the Safeway Foundation, which will give every cent collected to breast cancer research programs. Last year Safeway raised and donated $8.3 million to breast cancer research programs through a similar in-store promotion.

Safeway is featuring the breast cancer campaign in its weekly, mass-mailed advertising circulars throughout October in addition to on its website. In-store there are breast cancer awareness table displays, upfront stanchions, shelf signs, electronic POS screens at the checkouts and breast cancer awareness messages played over its in-store radio network.

Throughout the stores there are product displays featuring the pink breast cancer awareness month labels. Participating manufacturers include Colgate-Palmolive, Pepsico, Proctor & Gamble, Sun Chips, Kraft Foods and many more. In addition to the displays throughout the store every item participating (hundreds) has a pink shelf tag in front of it to designate that a donation is being made by the product's manufacturer and Safeway for every item sold in October. Safeway has pledged up to $2 million dollars in additional donations (in addition to the manufacturer donations) for pink product sales in October. Safeway also is donating 5% of sales (up to a total of $500,000) for all purchases of its Rancher's Reserve private label fresh meat line in October, which it's promoting in each store's meat department.

Safeway also is reaching out to kids with a cause-related promotion this month. In partnership with manufacturers like Del Monte Produce, Mariani Packing, Fresh Express, Washington State Apple Commission, NatureSweet Tomatoes and many other fresh produce companies, the retailer has launched "Sneak-a-Snack," a program designed to encourage kids to snack on fruits and vegetables rather than sweet treats. The healthy-snack promotion is centered in the stores' produce departments and features sports-themed signage and displays, posters, floor graphics and stand-up signs that offer temporary tattoos, activity booklets and other materials which appeal to kids. The theme is that it's "cool" to snack on fruits and vegetables. Safeway also has created a promotional website with recipes, snack ideas and nutritional information for parents and has fun produce facts, various activities and games for kids. (There is a link to the website here.)

Both these promotions are creating much activity in all 1,500-plus Safeway stores this month. Additionally the breast cancer awareness promotion will raise millions of dollars for breast cancer research and treatment programs. Safeway's share/donation is expected to be at least $10 million and the participating manufacturers will collectively end-up donating tens of millions more during the October promotion. Doing good while selling more is a win-win in this case we believe.

Product Marketing: Inside Tom's (of Maine) World

Natural products (toothpaste, personal care items) manufacturer and marketer Tom's of Maine is one of the pioneering companies in the natural products industry. Founded in 1970 by Tom and Kate Chappel the company has been on the cutting edge not only in terms of using all natural ingredients in its personal care products but also in the areas of ethical and environmental principles and marketing. Tom's products are biodegradable, packaged in recycled paper board with soy-based inks used in the printing, and the company does no testing on animals. The company uses wind power for most of its energy needs at its plant in Maine and donates 10 percent of its profits to charities.

Last year the Chappel's sold the majority of the company to consumer products giant Colgate-Palmolive. The husband and wife retain 14% ownership in the company and still run the business for Colgate-Palmolive. Today's San Francisco Chronicle has an interview with the Chappel's about life in "Tom's World" after selling majority ownership in the company as well as what the future holds for the company and its minority owners. You can read the interesting interview with these two natural products industry pioneers here.

Mid-Week Roundup Ender:

Survey: In the UK You Are Where You Shop

A new survey in Great Britain has found where consumers shop has emerged as an indication of a person's social standing. more than half (56%) of Brits surveyed by the food firm Ginsters, which conducted the survey, said they feel their choice of supermarket reflects their place on the social ladder. Even more interesting one in eight Brits surveyed said they believe shopping at certain stores can make a person appear wealthier and higher in social standing than they actually are. We will refer to this finding from now on as "aspirational shopping" and believe it warrants further research.

One in ten Brits surveyed admits to having been embarrased when spotted by someone they know while shopping in a supermarket with a more downscale image. In fact so important is the image of the supermarket they shop in for many of the Brits surveyed that nearly half of the 1,631 people surveyed thought the "right" grocery shopping bag from the "right" supermarket was a more important social status icon than carrying a fashionable handbag. And the most elite grocery bag to be seen toting ones groceries in is the one from Waitrose, Britian's most upscale of all supermarket chains.

"According to out study, the carrier bag is the accessory of 2007," said Larry File, the marketing director for Gingsters, the firm which conducted the survey. "Among the fashionable crowd, you need to be seen with the right supermarket bag to make an impression. In fact, a proportion of consumers felt that people would pay more attention to their shopping bag than to the design of their handbag," File says. "Knowing this might have saved someone like Victoria Beckham a fortune."

The survey didn't rank British supermarkets on a social cachet scale. However, industry experts have weighed in and a general agreement goes something like this on the supermarket social scale: number one is Waitrose, followed by Sainsbury's, Tesco, Asda and Morrison's. The Lidl, Aldi and Netto chains fill out the bottom tear.

Here is a rank-ordered summary on the "social snobbery scale" of Britian's top supermarket's put together by a group of retail food industry researchers and experts in the UK and published in the This is London Entertainment Guide.

~Waitrose: The supermarket to be seen in. Frequented by career professionals and the well educated, according to research conducted by the firm Experian.

~Sainsbury's: Broad appeal but particularly favored by young, well-educated shoppers who are cosmopolitan in their tastes, liberal in their outlooks and unlikely to have children.

~Tesco: Very broad appeal, attracting families, the more price conscious, and profesionals as one might expect of the supermarket chain that tops the UK retail food market share list at about 32%.

~ASDA: More down to earth type shoppers. Research firm Experian classifies ASDA shopperss as the "ties of the community" group, typically from former coalfield regions, old steel and shipbuilding towns and places with docks and chemical plants. Mingled with these consumer types are younger families living in newer homes, according to Experian.

~Morrisons: This chain attracts those from close-knit, inner-city manufacturing town communities which is a factor primarily of store location. Since Morrisons integrated Safeway Stores into the company, the chain has gain broader consumer appeal.

~Netto: Netto is rated at the bottom of the social status pile. The chain draws families with low incomes who often live on large council estates of the type found in the outer suburbs of provinvial cities. The distinct lack of truffle oil on the shelves means Waitrose shoppers wouldn't be caught dead there--if they even admit to have heard of Netto that is.

Although the survey is humorous in many ways, it also offers some interesting consumer research in terms of the strong affect institutions like supermarkets have on human behavior. The aspirational shopping aspect (consumers saying shopping at a more upscale supermarket can make them feel they have higher social status and wealth) also is very interesting. A consumer may be of modest means but doing some shopping at a Waitrose in the UK or a Whole Foods market in the U.S. can provide some psychological upward mobility. This is important data for retailers in terms of targeting shoppers and the messages (like shopping bags) they use as the marketing symbols of their retail brand.

NSFM Breaking News

Tesco Announces First Fresh & Easy Neighborhood Market Store Openings

Pictured above: Construction workers test the sign lights at this completed Fresh & Easy Neighborhood Market store in Los Angeles County on September 22, 2007. The store will be one of the first six to open on November 8, 2007.

A drum roll please. British-based retailer Tesco has just announced the grand opening date for the first of its Fresh & Easy Neighborhood Market stores. Six of the stores will open on Thursday, November 8, 2007, all in Southern California. The stores opening on November 8 are in Los Angeles, Orange, Riverside and San Bernardino counties.

Following the November 8 opening of these six stores Tesco says it will open additional stores in San Diego, Phoenix, Arizona and Las Vegas, Nevada by the end of the year (2007).

Natural~Specialty Foods Memo's Retail Whispers column predicted a few weeks ago the first Fresh & Easy stores to open would be in Southern California when one of our Retail Whispers' Southern California sources spotted construction workers cleaning up and testing the store sign lights at what they said was a completed store in Los Angeles County. This store will be one of the first six to open on Thursday, November 8. You can read the September 22, 2007 Retail Whispers item here.

You can read the full press release announcement from Tesco here.

Tuesday Talking Points Memo

Billionaire Investor Warren Buffet is Betting Big on Tesco and the Success of its Fresh & Easy Neighborhood Markets in the U.S.

Warren Buffet is pictured above with his close friend Microsoft founder Bill Gates. Buffet, the world's second richest person (Gates is number one), is giving his $40-plus billion fortune to Gate's foundation to be used for global good.

Warren Buffet, America's most famous investor and the second richest man in the world, has been buying an increasing amount of stock in UK-based mega-retailer Tesco (parent company of Fresh & Easy Neighborhood Markets in the U.S.) over the past year. Buffet's Berkshire Hathaway investment firm now holds about 3% ownership in Tesco, an investment valued at a little over $1 billion. Buffet currently holds about 230 million shares.

Omaha, Nebraska-based Buffet, know as "The Oracle of Omaha" for his magic touch as a long-term investor, began buying Tesco stock last year at about the time the retailer announced it was planning to enter the U.S. retail food market with its upscale, convenience-type food stores called Fresh & Easy Neighborhood Markets. The Fresh & Easy format features stores of about 10,000 square-feet which specialize in fresh, prepared foods, specialty groceries and related upscale offerings.

The first Fresh & Easy markets are to open in Southern California on November 8, 2007, with other stores to follow in Arizona and Las Vegas, Nevada before the end of the year. Tesco currently says it has at least 100 Fresh & Easy stores in the pipeline, either under construction or in the planning stage. More will follow that, first throughout the Western U.S. and then elsewhere, according to Tesco. It's estimated Tesco could have 1,000 Fresh & Easy stores in the U.S. in 10-12 years with estimated sales of over $7 billion.

Having Buffet betting on Tesco and the Fresh & Easy format should be a vote of confidence to the retailer--and something competing supermarket chains and other food retailers should keep their eyes on. Buffet is a long-term investor and seldom if ever picks losers. His fund, Berkshire Hathaway, turned in a 29% profit last year. Fund profits in 2006 totaled $11 billion, up from $8.5 billion in 2005. The homespun but savvy Buffet tends to turn in similar profits most years. He still works out of his Omaha office with partner Charlie Munger and a small staff. At 76 Buffet is the junior of the two. Munger is in his early 80's.

Wall Street is watching Tesco's upcoming launch of its Fresh & Easy stores and also has taken notice of Buffet's substantial investment in Tesco. For example, right after Buffet's announced in March of this year that he was buying another substantial chunk of Tesco shares, the retailer's stock went up by 5%.

Patricia Baker, a supermarket industry analyst at Merill Lynch believes Tesco's Fresh & Easy format will be a "formidable competitor to U.S. supermarkets." She recently told her investors she believes Safeway Stores, Inc. will be the most susceptible to a drop in share price because of Tesco's focus on the Western U.S. where Safeway has major operations. About 30% of Safeway stores are located in the Western U.S. Safeway's stock has dropped about 3.5% this year, even as the Standard & Poor's 500 Food Retail Index has risen 8.1%. Baker may be on to something although it's important to note that no Fresh & Easy stores have yet to open.

Safeway isn't sitting still though. Although it doesn't have Buffet as a major investor, CEO Steve Burd recently said the chain has studied what Tesco is doing with the Fresh & Easy format inside and out--and is tracking where their stores will be. Burd says Safeway is prepared to enter the market in the Western U.S. with a similar small format, convenience-type store should they deem the Fresh & Easy stores a success in the market. If they do Burd says Safeway can do it better since they are a known brand name in the U.S.

Meanwhile "The Oracle of Omaha" Buffet is sitting on ownership of 3% of Tesco, which had 2006 sales of $85.5 billion and is the world's third largest retailer. Being a long-term, value investor Buffet is more likely to buy more Tesco stock rather then sell anytime soon. In addition to its Fresh & Easy Neighborhood Market initiative in the U.S. Tesco is building similar stores all over Europe and East Asia. Additionally, the retailer operates huge superstores throughout the world, selling everything from food to clothes, and everything in between. It's the grocery market share leader in the UK and a major player globally.

We're told Buffet is watching the upcoming Fresh & Easy store launch closely just like Wall Street is. And Wall Street is watching Buffet to see if he increases his holdings in Tesco. Buffet spends much time in California (Berkshire owns California-based See's Candies among the many firms in its portfolio) and we expect him to drop in and check out a Fresh & Easy store in Southern California when they start opening next month.

Perhaps if he likes what he sees he will increase his stake in Tesco? We aren't sure however if Buffet will personally go for Fresh & Easy's upscale prepared foods offerings. Among the companies Berkshire Hathaway owns is the Dairy Queen hamburger chain and Buffet is know for eating at a Dairy Queen when in California. A note to Fresh & Easy management: Buffet's favorite beverage is Cherry Coke. We suggest making sure you have it in the cold case when the Southern California stores open in a month. It's good investor relations.

Resources:

You can read Warren Buffet's autobiography here.

You can view Buffet's Berkshire Hathaway company website here.

You can view Tesco's website here.

You can view the Fresh & Easy Neighborhood Markets Website here.

Monday Marketing Memo

Iowa County Creates New Marketing Program Designed to Make the Heartland Region an Organic Foods Capital of the U.S.

Woodbury County, Iowa is best known for its conventional agriculture--acres upon acres of corn and wheat crops and huge livestock raising operations--all grown using modern mass agricultural methods which include liberal use of pesticides, herbicides and genetically-altered seeds and plants. This Midwestern farm-belt county, with Sioux City as its county seat, has made its mark on agriculture and food processing by producing large quantities of commodity products which are processed into many foods designed to feed the masses globally. It's been as conventional as conventional agriculture gets. Until now that is.

Just as conventional agriculture is changing to more of a mixed methodology--with sustainable and organic growing methods becoming increasingly popular--Woodbury County, Iowa is changing as well---and big time.

A partnership between the city of Sioux City, the county of Woodbury and a group called the Siouxland Initiative has just launched a marketing initiative with the aim to promote the region as the U.S. leader in organic food production and processing. The government agencies and the Siouxland Initiative group have created a series of organic foods policies which they say makes them a perfect place for organic foods companies to locate. They call the marketing plan the Organic Market Project. In addition to the organic policies the project includes numerous economic and other incentives all designed to lure organic food processing companies to America's heartland--Woodbury County, Iowa.

Some of the marketing incentives for existing and potential organic farmers and food companies include:

>A county policy that gives tax rebates to farmers who convert their land from conventional to organic production.

>The creation of a local organic foods brand called "Sioux City Sue," which these farmers and processors can use for marketing locally-produced foods. The brand's marketing program will be based on a combination of organic and locally-produced to be marketed throughout the Midwest and eventaully nationally.

>The creation of an organic foods business park with large tracts of land ready for organic food processing companies to use.

>The creation of economic development packages for prospective organic food companies via the Siouxland Initiative, which is an arm of the Sioux City Chamber of Commerce's economic development department.

"Recruiting organic food businesses capitalizes on the area's history in the food production industry," said Marty Dougherty, Sioux City's economic development director. Dougherty was joined last week by Sioux City, Woodbury County and other coalition leaders in together announcing the Organic Market Project marketing initiative. "We didn't invent local food, didn't invent the organic food movement, but we used local government to get control of what happens," says Rob Marqusee, the Woodbury County rural economic development director who is coordinating the initiative, explaining why the coalition is launching the marketing program to become "Organic County USA."

Woodburry County is the first--and perhaps the only--U.S. county which has to date created economic incentives specifically designed to lure organic farmers and organic food companies according to Debi Durham, president of the Sioux City Chamber of Commerce's Siouxland Initiative. And it's currently the only county in the U.S. to specifically offer tax breaks to organic growers and producers. Durham studied economic development all over the U.S. prior to the launch of the initiative and says she couldn't find any other county that has created such economic incentives along with a comprehensive organic foods economic and marketing development program. "There's a culture here (organic farming and foods) that's emerging," Durham says. "It's important to these (organic foods) companies. they want to come where they are embraced."

Indeed Woodburry County and the public/private coalition is embracing existing farmers with their tax incentives to convert to organic farming and to organic food companies with the basket of tax breaks and other economic incentives available to them if they relocate to the region. and the coalition already is reaching out. Last week they mailed colorful postcards to over 1,500 organic foods companies in the U.S. telling them about the initiative and asking them to read more about it at their new website here. This is just the first of many marketing outreach efforts the coalition is planning.

Natural~Specialty Foods Memo (NSFM) believes the Organic Market Project group is on to something key here. First, the group is a "first mover" in creating a program to encourage existing local farmers to convert to organic by using tax and other economic incentives. This has yet to be tried elsewhere in the U.S. and provides an added incentive--along with the more important market-based reasons--for the region's farmers to go organic.

Second, by creating the marketing program to lure organic foods processing companies to the region with economic and other incentives the group is creating synergies between organic farming and food production. This ultimately will benefit farmers and processors as over time the region can become an incubator for the organic industry in the Midwest.

Lastly, by creating a public/private coalition the group also is creating an "organic foods culture" in the region. The initiative will energize consumers as well as business people which will be key in the development of the "Sioux City Sue" organic brand both locally and nationwide. Even more importantly a partnership such as this creates numerous stakeholders which tend to ensure greater success for such marketing initiatives.

Those folks who still think the organic foods movement isn't becoming mainstream, despite all the evidence showing it is, can ask themselves then why a county in the U.S. heartland--the center of conventional U.S. agriculture--is putting so much effort and money into a long-term marketing program to create an organic foods culture and industry smack in the center of commodity corn and wheat country. The answer we believe is the Iowa folks see the future of agriculture, which will be a mix of conventional, sustainable and organic farming and food marketing, with organic and sustainable being where the growth is. That future is hear today in part and will only accelerate. The Iowa initiative is an interesting testament to organic food production and marketing and should be watched closely as a leader in public and private farm/food policy and marketing.

NOTE: You can view a video featuring organic farmers, initiative organizers, food manufacturers, retailers and others here. The video describes the marketing initiative as well as what's currently going on in Woodbury County and Sioux City, Iowa in the organic foods industry.

Monday Morning Java

News, facts and information to start your week off with a jolt

UNFI-Millbrook Merger: More Natural~Specialty Foods Convergence

The announcement on Friday (October 5) that natural foods distributor United Natural Foods, Inc. (UNFI) and specialty foods/general merchandise distributor Millbrook Distribution Services are merging demonstrates the further convergence between the natural and specialty foods industries.

UNFI, the larger of the two distributors with 2006 sales of $2.4 billion, is the acquirer of Millbrook despite the use of the term merger to describe the deal. UNFI has set up a wholly-owned subsidiary called UNFI Merger Sub, Inc. which will acquire all of the outstanding shares of Distribution Holdings, Inc., which is a privately-held subsidiary of Millbrook Distribution Services. Millbrook had 2006 sales of about $300 million U.S. and distributes specialty and natural foods along with health & beauty care and general merchandise items to retailers in 48 states in the U.S. It's customers are supermarkets, mass merchandisers, drug chains and independent grocers.

The acquisition is a big win for UNFI in a number of ways. First, as we discuss often here, the natural and specialty foods industries are converging more and more across all classes of trade. Supermarkets and mass merchandisers are dramatically increasing their selections of natural and organic products (UNFI's niche) while natural foods grocers like Whole Foods Market, Inc. (UNFI's largest customer) and others are offering an increasing selection of specialty, gourmet and ethnic foods (Millbrook's niche) that fit their lifestyle retailing formats.

By acquiring Millbrook, UNFI not only brings a solid supermarket and mass merchandiser account base into its fold (Millbrook has about 9,000 retail customers) , it also gains an existing specialty foods infrastructure and product inventory. This gives UNFI a one-two-punch: The acquisition gets the distributor deeper into the supermarket and mass merchandiser retail segment than it currently is (and in a big way) while also giving it a ready-made product arsenal in the specialty foods category so it can service it's existing customers more fully in the specialty category.

Additionally, The acquisition better positions UNFI with its largest customer, Whole Foods Market, Inc. Whole Foods, which represents about 30% of UNFI's total gross sales, has become an upscale, lifestyle-oriented retailer which offers specialty and gourmet foods in its stores alongside its natural and organic offerings. Although UNFI distributed many specialty foods prior to the Millbrook acquisition it didn't have the depth of offerings to fully-service Whole Foods' stores in the category. Having the Millbrook infrastructure will allow UNFI to offer much more in the specialty foods category to Whole Foods' stores as the supernatural grocer's primary distributor. This is a big win for UNFI in terms of added sales and gross margin opportunities. It's also a win for Whole Foods in that it will allow the retailer to consolidate some specialty foods vendor purchases as well as likely achieve a reduction in its cost of goods under its contract with UNFI.

Lastly, the Millbrook acquisition gives UNFI a strategic buffer should its number one customer Whole Foods decide to become a self-distributing chain in the natural foods category. While this isn't likely anytime soon--NFFI currently has a multi-year contract--Whole Foods' rapid growth could result in the supernatural grocer seriously considering self distribution as a way to leverage its size and increase overall gross margins.

Unlike the conventional grocery industry, the natural foods industry distribution chain still puts a major focus on third-party distributors like UNFI and others. However, Whole Foods is an exception as a retailer due to its size and at some point it will seriously consider self-distribution of at least the top-selling natural foods categories. Therefore, by acquiring Millbrook, UNFI provides itself a strategic buffer if and when Whole Foods makes this decision by positioning itself deeper in the specialty foods category and increasing its overall business with supermarkets and mass merchandisers in both the specialty and natural products categories.

Industry wide, the acquisition will offer other UNFI customers increased opportunity on the specialty foods side as well. It also will give UNFI opportunities with supermarket and mass-merchandiser chains and independents it currently isn't serving. The natural-specialty foods convergence at retail has many chains and independents wanting to consolidate vendors as much as possible. As such those with the most "cross-over" potential stand to gain the most in the long run. This positions UNFI well as the leader in both segments if the distributor is able to integrate Millbrook into its operations smoothly. Such integration is where the synergies lie in the long run rather than in operating Millbrook as a stand-alone operation.

This seamless integration of Millbrook into UNFI is key. Other distributors like Tree of Life, Inc. have learned this lesson the hard way. Florida-based Tree of Life made a series of specialty foods distribution company acquisitions in the mid-1990's (Gourmet Award Foods, Hagemeyer, A-1 International Foods and others). Tree of Life struggled with these integrations and is only today beginning to integrate its natural and specialty foods distribution business nationally.

UNFI has a few things going for it in terms of integrating Millbrook that Tree of Life didn't have in the mid-1990's however.

First, Tree of Life acquired numerous independently-owned and operated specialty foods distributors in a short period of time which made it difficult to fully integrate those cultures and operations into one another properly. Second, UNFI has a much more substantial natural foods base (2.4 billion in sales) than Tree of Life had at the time. Third, UNFI has Whole Foods as a customer. The fast growing grocer provides UNFI with guaranteed organic growth while it focuses on integrating Millbrook and investing in growing its supermarket and mass merchandiser retail format business.

Lastly, UNFI is only integrating one company into its overall operations. Additionally it is doing so by first operating it as a wholly-owned subsidiary and keeping Millbrook's management team in place--at least for now. This will allow time for cultural and operations integration. Millbrook also already has a national distribution network in place so unlike the mid-1990's experience for Tree of Life--where the distributor was building a national network one piece at a time--UNFI merely needs to find the synergies between its exiting supply chain and Millbrook's rather than create them.

UNFI's acquisition of Millbrook points up how the natural and specialty foods convergence is occurring across all classes of trade--retail, manufacturing, distribution--in the natural and specialty foods industries. As the lines blur (Wal-Mart being a major organics player, Whole Foods being a lifestyle retailer, for example) we will continue to see similar mergers and acquisitions across the board. The changes at retail, where natural foods retailers are becoming more upscale and supermarkets are becoming more natural and organic oriented, are what is driving this convergence. Distributors and manufacturers should watch this closely as it portends how they will operate in the future.