Posted: August 09, 2013

Grocery goes micro

Stores are getting smaller as specialty retailers control the conversation

Eric Peterson

Like the television audience, the beer market, and most everything else in the new economy, the grocery business is fragmenting.

Bigger is not better. Smaller is in vogue. And everybody from corner drugstores to massive supercenters are looking to nab a piece of this $1 trillion pie.

Take Natural Grocers by Vitamin Cottage. The Golden-based company went public last year on the back of an expansion plan centered on 10,000-square-foot stores instead of the traditional 40,000 square feet or more.

“I give tours here almost weekly to investors and analysts now that we’re public,” says Alan Lewis, the company’s director of special projects, as he strolls the aisles of the Natural Grocers at Colorado Boulevard and Evans Avenue in southeast Denver. “If they’re coming in from the East or West coasts, they don’t have a point of reference.”

The key to the Natural Grocers model is “no priming,” says Lewis. “You go into any other grocer, their job is to generate impulse buys.”

Not here. There’s no discounted produce up front, no colorfully packaged, kid-level candy at checkout, and no oversized displays of junk food. “We removed temptation and then you don’t activate the impulse,” says Lewis. “I think of it as a retail environment that supports thoughtful nutritional choices. We’re not pitching color and flavor and sugar.”

Instead, there are in-house “Nutritional Coaches” helping customers sort through the meticulously screened products, no back-of-house storage to promote freshness, and fridges stocked with staples like meat and ice cream as well as flour and nuts. “Walnuts start going rancid on the tree,” explains Lewis. “You have an entire generation of people who have grown up eating rancid nuts.”

Bad walnuts aside, Whole Foods’ prepared foods are a great example of priming, says Lewis. “It’s incredibly expensive food,” he says, citing high spoilage rates and sizable store footprints. And it’s not altogether healthy.

Natural Grocers makes up for the dearth of high-margin impulse buys with low prices, says Lewis. The strategy is somewhat counterintuitive, but has won plaudits from some analysts. Marc Courtenay of TheStreet recently called it “a viable form of competition to Whole Foods Market’s near-monopoly” in April.

Founded in Golden in 1955 by Margaret and Philip Isley, Vitamin Cottage now has 65 stores in 13 states. Of these, 22 locations offer the Natural Grocers’ format. Now helmed by Co-President Kemper Isley – Margaret and Philip’s son – the company often expands existing locations into abandoned, adjacent, big-box stores, as was the case at the Colorado and Evans site.

Raising $54 million last June, Natural Grocers by Vitamin Cottage’s initial public offering on the New York Stock Exchange came with an ambitious plan to expand to 1,100 stores, a tad higher than Whole Foods’ stated goal of 1,000. (There are currently about 350 Whole Foods in the U.S.)

Nationally, Walmart rules the grocery roost, with more than $250 billion, followed by Kroger and Safeway. Discounters, led by Walmart, more than doubled their market share from 2000 (8.2 percent) to 2010 (20.8 percent), according to U.S. Department of Agriculture data.

Traditional grocery stores account for roughly half of the grocery market, led by Kroger and Safeway.

But that number is in decline. Atlanta-based ChainLinks Retail Advisors forecasts as many as 300 traditional grocery stores shutting down in 2013. The good news? About the same number of new stores will open this year. The bad? Most of them will be half the size of the 60,000-square-foot retail fortresses that are closing.

This seems like a good omen for the small-time players, but they’ve got their work cut out for them. With 350 stores in the U.S., Whole Foods is a distant sixth, as specialty retailers control less than 3 percent of the national grocery market. Warehouse clubs like Costco control about 9 percent of the market and discount stores like Family Dollar account for about 2 percent of grocery sales.

However, it’s easier to claw sales from the big boys when you’re a small potato than it is to maintain huge swaths of the market as one of the aforementioned gorillas.

That’s part of the reason smaller stores are the rage, from Natural Grocers to Walmart’s Neighborhood Market and Xpress concepts to Whole Foods. The last of the three has moved from 50,000-square-foot stores in dense urban areas to 35,000-square-foot stores in places like Basalt. Similarly sized stores in Frisco and Longmont are slated to open in 2014.

The strategy has allowed Whole Foods “to move into markets we wouldn’t have otherwise been able to get into,” explains Ben Friedland, the regional marketing director for Whole Foods.

The Basalt store “has been amazingly successful for us,” says Friedland, noting that many customers make the 110-mile trip from Grand Junction to get their Whole Foods fix. “It just proves there are some great opportunities.”

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Denver-based writer Eric Peterson is the author of Frommer's Colorado, Frommer's Montana & Wyoming, Frommer's Yellowstone & Grand Teton National Parks and the Ramble series of guidebooks, featuring first-person travelogues covering everything from atomic landmarks in New Mexico to celebrity gone wrong in Hollywood. Peterson has also recently written about backpacking in Yosemite, cross-country skiing in Yellowstone and downhill skiing in Colorado for such publications as Denver's Westword and The New York Daily News. He can be reached at Eptcb126@msn.com

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