Natural Foods Merchandiser

2002: The Year in Natural Retail

Retail Focus

As the economy continued to slump and unemployment increased, natural products retailers endured—many even thrived—in 2002. Fortune 500 companies faced layoffs, major airlines filed for bankruptcy and four-star restaurants shuttered their doors, all while some naturals retailers expanded their stores, opened new locations and increased sales.

On average, 79 percent of natural products stores saw sales increase in 2002, up from 68 percent in 2001 when the economy first turned. Natural products stores averaged 9.2 percent growth last year. (See Average Sales chart on page 25.)

Jimbo Someck, owner of two Jimbo's Naturally stores in Del Mar and Escondido, Calif., saw more than 10 percent growth in both stores last year and plans to open a third location in Carlsbad, Calif., despite the poor economy. Someck said his sales continue to increase because natural foods shoppers who have decided to switch to organic foods won't go back to conventional no matter what happens to them financially.

"It's the last thing they're willing to give up. They'll give up going out to restaurants or buying big-ticket items before they stop eating healthfully," Someck said. "This is especially true for families who have made this choice for their kids. They won't sacrifice their children's health."

Herman Mobley, owner of Tri-Health Foods in Houston, home of the wilted Enron Corp., sees unemployed customers turning to natural foods to sustain health and keep medical bills down. "As the economy dropped off, more and more people became more health conscious," Mobley said. "Many who've lost their jobs had to find some alternate ways to stay healthy without medical insurance."

Sundance Natural Foods in the counterculture enclave of Eugene, Ore., had a better 2002 than 2001. Sundance's sales decreased 5 percent from 2000 to 2001 when a naturals chain bought out Sundance's biggest competition. But by last year, locals opposed to corporate retailers had returned to Sundance, resulting in 7.3 percent growth in 2002.

"People shop here for Sundance's community vibe where the cashier knows their name," said Renee Kempka, manager of the 5,230-square-foot store. Recently, another local independent retailer closed, bringing more business back to Sundance.

Sundance also remodeled and changed some personnel in the deli, beer and cheese departments. It developed new recipes for the hot bar; added more dips, ready-made sandwiches, raw foods and desserts to the grab-and-go case; expanded the cheese selection; and doubled beer cooler space. These changes increased department sales 21 percent. Seventeen percent of independent retailers also went through a remodel in 2002, as did Jackson, Wyo., Harvest Organic Foods, Bakery and Café. (See Expansion 2002 chart on page 28.)

Owner Sophia Wakefield replaced all the center-of-the-store shelving with sustainable wooden shelves. "The $20,000 remodel paid for itself 10 times over because we were able to make room to increase inventory 15 percent," said Wakefield, who added that the remodel contributed to Harvest's 9 percent sales increase last year.

Another store that saw strong growth was Roots Market in Clarksville, Md., which increased sales 30 percent. Co-owner Jeff Kaufman attributes Roots' growth to the store's youth. He said new customers are still discovering the three-year-old Roots, but come back because "we listen to customers and accommodate their requests. We started out as a vegetarian market but customers demanded clean, antibiotic-free meat products, so we increased our meat selection."

Kaufman also said Clarksville, a wealthy suburb of Baltimore and Washington, D.C., wasn't hit hard by the economic downturn. But not all retailers in affluent areas can say the same.

Belt-tightening Strategies
"2002 was a year I'd rather forget. Sales were flat—compared to 2001, 2002 was a carbon copy," said Paul Kralyevich, chief operating officer of LifeThyme Complete Natural Market, an 8,000-square-foot store in New York City's West Village neighborhood only 20 blocks north of the World Trade Center site. But Kralyevich felt New York's economy beginning to slip before Sept. 11.

In 2000, LifeThyme's sales were strong, but by the second quarter of 2001, sales had begun slowing and continued on a downturn throughout the summer. "Sept. 11 was the straw that broke the camel's back," Kralyevich said.

Many LifeThyme customers worked on Wall Street, which has lost 22,000 high-paying jobs since 2001, according to the Securities Industry Association. Those who kept their jobs did not bring home the salaries they had in the past.

"The question my customers face is, 'Do I need to pay $1.89 for organic broccoli or just 89 cents for conventional broccoli at the A&P?' " Kralyevich said. "When you're worried about your job or you don't get your bonus on Wall Street, either head of broccoli will fill your belly."

So, faced with the possibility of declining growth last year, Kralyevich kept down fixed costs like payroll by cutting out all overtime and asking his staff to contribute an extra $5 a week for medical insurance.

Kralyevich didn't have to lay off anyone but when staff left, he didn't fill positions. "I couldn't lay anyone off for morale reasons, not after we saw what happened down the street on Sept. 11," said Kralyevich, who trimmed payroll by about 15 percent.

Kralyevich implemented other strategies such as renegotiating sanitation pickup and linen cleaning contracts, which he could negotiate, unlike rent or electric. He also shopped around for new vendors to service store equipment.

"I kept us in the black, but our profits were not as great as compared to 2000 and 1999," Kralyevich said. "I hope we've seen the bottom [of this downturn], but I was saying that a year and a half ago."

Even during one of his most challenging years in business, Kralyevich experienced some successes in 2002. "The quality of help has gone up with the unemployment rate," he said. In 1999 and 2000, he couldn't find reliable, intelligent staff. Now turnover is down, and staff doesn't demand extras like dental insurance.

Where Everyone Knows Your Health Condition
Some stores specializing in supplements also saw flat sales or a drop in growth in 2002. On average, vitamin/mineral/supplements stores experienced 4.9 percent growth. (See Average Sales chart at right.)

But a bulk supplements store near Myrtle Beach, S.C., was able to increase sales 15 percent and triple its square footage with the addition of organic groceries and personal care products. Owner Julie Brannon relocated Bailey's Naturals from a 600-square-foot-shop in a health club to a stand-alone 1,800-square-foot store.

Brannon fends off competition from discount chains by focusing on education and customer service. She knows the name and health condition of almost everyone who walks into her store. "A lot of my customers were Wal-Mart shoppers, but my shop offers a level of education they're never going to get at Wal-Mart, and education builds loyalty," Brannon said. She keeps prices competitive but believes regular customers would still come to Bailey's even if she raised prices, because her regulars appreciate the extra service her store offers.

Other retailers facing competition from big-box discounters emphasize customer service because they can't compete on price. Brent Borchardt, owner of the 1,760-square-foot Stone Mill Natural Foods in Washington, Iowa, thinks that sometimes customers need to shop at competitors' stores to appreciate his store's service.

"There's always the challenge of people who will look at the same two supplements and say, 'Why don't I just get it for $5 at Wal-Mart?' " Borchardt said. "But I've seen people who've been taking the cheap Wal-Mart stuff come into my store for MSM/glucosamine/chondroitin because a friend says that they should come here and try a certain brand we've recommended. Then they get hooked on a good-quality product because they get pain relief."

Richard Pearl, owner of Simply Natural, a VMS store in Sunrise, Fla., agrees. "Make people realize the difference between value and price, and also the difference between the qualities of nutrients. People know the price of everything and the value of nothing."

Slaying The Goliaths
Naturals retailers also faced increasing competition from natural supermarket chains, conventional grocers and other independent natural foods stores in 2002.

Jimbo's competes by remaining a strong force in San Diego. It supports local farmers, raises funds for schools, contributes to local charities and promotes area environmental groups.

At his suburban Maryland Roots Markets, Kaufman competes on price with three natural superstores within 30 minutes of Roots. "We beat them on price and overall quality and service," he said. "In an 11,200-square-foot store, we're able to pay attention to the details better than [in] a 35,000-square-foot store. We can offer a 100 percent organic produce section while their department is only 40 percent."

Kaufman has his sights set on opening a second, larger Roots Market. The new store will have room for a kitchen so he can add grab-and-go food cases to both stores.

He's not alone. An average of 9.3 percent of retailers plan to open a new store this year. (See Expansion 2002 chart above.)

The 17,000-square-foot Jimbo's Naturally store that's slated to open in Carlsbad in October will also be larger than the two current locations.

"We have spent the last few years laying the groundwork for growth, so now we're in a position to grow financially strong," said Someck, who expects the store to be the highest-grossing Jimbo's.

Additional reporting by Bryce Edmonds

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