Grocery goes micro
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.”
While it helps validate the Whole Foods model, the goal of hitting 1,000 stores – approaching Safeway’s 1,678 locations, but far fewer than Kroger’s 3,500-plus – remains distant.
Likewise, Natural Grocers has a lot of ground to cover before it makes a dent that Walmart and company would notice. Wisconsin-based grocery analyst David Livingston says the chain is “not a major factor,” even in Colorado, where it has 31 locations.
“Globally and nationally, local is a huge thing,” says Tom Rich, executive coordinator of purchasing for Whole Foods in the Rocky Mountain region.
“As Kroger is trying to grow, they’re realizing that their opportunity for growth is where we live,” adds Rich. “They’re using us as a window as to what the opportunities are. The product mix is increasingly natural and organic.”
Rich defends Whole Foods’ prepared foods as serving its local-seeking customer base, not priming them as Lewis of Natural Grocers posits. “Market-made and made in-house are getting to be a big deal,” he says. “They’re making it in the front-of-the-house to show the customer, ‘We made it here, we made it fresh, and we made it with our people.’”
But it’s not just about messaging, he adds. “We think the As, Bs and Cs add up to revenue. It’s a winning combination.”
In Colorado, where annual grocery sales are in the $20 billion neighborhood, the trends toward local, healthy and small are even more pronounced. “This state aligns very well with our core values,” say Whole Foods’ Rich. “It’s one of the healthiest states.”
And it’s got a more diverse cast of grocers than most, with more on the way. Whole Foods has 19 Colorado stores, with three more in the works, and there are also the 33 Natural Grocers by Vitamin Cottage. Both Safeway and Kroger (King Soopers/City Market) have about 140 locations, and 74 of 94 Walmart stores in the state are Supercenters or Neighborhood Markets with grocery components. There are also 22 Albertsons stores in Colorado, down from 31 in 2009.
Parsing the numbers, Colorado has about as many Walmarts per capita as the average state, but it’s home to nearly 10 percent of Whole Foods locations, third only to California (78) and Massachusetts (21), and a full half of Natural Grocers stores.
With about 400 total stores, California-based Trader Joe’s is coming to Denver and Boulder – construction is underway at both locations – after a long aversion to the state thanks to strict liquor laws. The chain is known for stocking a smaller selection of products that overwhelmingly bear the Trader Joe’s brand.
Zeppelin Development is pushing the hyperlocal concept to its zenith with The Source in Denver’s River North neighborhood (a.k.a. RiNo) with a curated cast of local craft food and beverage makers. The first phase of the historic 26,000-square-foot ironworks building opened in July.
Traditional grocers are following the specialty grocers’ lead and looking at smaller footprints, natural and organic products, and more prepared foods. So are the discounters – Target has rolled out PFresh markets at about two-thirds of its 1,500 stores nationwide, offering fresh, frozen and refrigerated offerings in a 1,500-square-foot area. And based on sheer size, Walmart sells more organic food than any other retailer in the country.
Smaller stores are obviously a better fit for densely populated urban areas with expensive real estate. King Soopers will open a downtown Denver location in the Union Station redevelopment by 2015, and the chain has also moved into smaller stores with its Fresh Fare concept, the first being the 30,000-square-foot store at University Boulevard and Hampden Avenue in Denver. There is more focus on prepared foods than your typical King Soopers – an 8,000-square-foot mezzanine is dedicated to preparation.
Then there are the inescapable national trends added to the mix: More than 2,000 new Dollar stores were planned for the country for 2010, according to the ChainLinks Retail Advisors 2013 U.S. National Retail report. The report also highlighted an influx of grocery sections at drugstores and other retailers – even Big Lots is expanding into groceries this year.
“Colorado’s a pretty competitive market,” says Livingston, citing popularity of specialty retailers like Whole Foods as well as Hispanic-format grocers.
Livingston says WinCo, based in Boise, Idaho, is making inroads in Arizona and Nevada and could target Colorado soon. The company is approaching 90 total locations from Washington to Utah and outpacing average industry growth. “They’re employee-owned, have no debt and are price competitive,” says Livingston.
Livingston says same-store sales growth of 3 percent is actually the break-even point for a grocer. “If you’re not seeing 3 percent, you’re going backward.”
Walmart has struggled to keep its massive stores stocked and hit a rough patch in recent months. Same-store sales were down 1.4 percent during the first three months of 2013. Research shows customers have a far lower opinion of fresh produce at Walmart than traditional or specialty grocers.
On the other end of the spectrum, Whole Foods enjoyed 6.9 percent same-store sales growth during the same period and saw that healthy uptick increase even more in the spring. Natural Grocers by Vitamin Cottage was even more dynamic, with 10.6 percent same-store sales growth.
Traditional grocers didn’t fare as well as the specialty stores, but did much better than Walmart. Safeway’s same-store growth was moribund – 1.5 percent for January to March 2013 – while Kroger essentially broke even by Livingston’s metric, with 3 percent same-store increase during the same three-month period.
Who are the winners in Colorado’s recent grocery skirmishes? Specialty retailers, for one. Then there are the local food producers, enjoying an upsurge in demand from retail accounts large and small. But it’s hard to ignore the fact that the consumer is the biggest winner. All these salvos mean more options and more competition, translating to better products at lower prices.
And to think, people in Colorado once had to go to a grocery store to buy groceries.
King Soopers bringing bacon and a lot more to LoDo
The Nichols Partnership and Greystar Real Estate are developing downtown Denver’s first full-service grocery store. The 40,000-square-foot King Soopers, just west of Union Station at 20th and Chestnut streets, is slated to open in early 2015 under a 312-unit apartment building.
Nichols Partnership President Randy Nichols says downtown’s residential boom underpins the $82 million mixed-use development. “Downtown Denver over the last 20 years has been growing its 24-hour city status with lots of housing in the downtown core.”
King Soopers’ “typical 55,000 square feet on one level with 300 parking spaces out front” does not work in dense urban areas with expensive real estate, Nichols adds. “What took us the longest amount of time was to get Kroger to look at this differently and we spent a long time working on a model for a downtown store.”
The result: 47,000 square feet on two levels with an underground parking garage. Like the University and Hampden King Soopers, it is a Fresh Fare store, with more prepared foods and a heightened focus on local and organic products. “They’re moving towards a Whole Foods clientele in the downtown buyer,” explains Nichols.