Natural Foods Merchandiser

Growing requires careful consideration and instinct

Every successful natural products retailer must eventually confront the question of how to grow. Whether that involves remodeling and expanding an existing store, moving to a new location or opening a second location, it's best to look before you leap. Decisions on relocation and expansion involve demographic data, sales data, a clear vision for the future and, often, a trust in gut instincts. The challenge is even greater when moving into a new area or substantially increasing in size.

But there are many resources for retailers considering such a move, including the insight of industry consultants and the experiences of other retailers who've made the leap before.

"Retailers can build up to the right size for their stores by knowing what departments they plan to include and adding these up," said Jay Jacobowitz of Retail Insights, a natural foods consulting service in Brattleboro, Vt. "Each department has an equipment and fixture requirement based on the number of SKUs. Retailers can also use a top-down method, which estimates department sales on an annual basis and divides it by the number of square feet, to reach an acceptable revenue per square foot."

One of the factors in deciding whether a relocation or expansion is fiscally responsible is current sales per square foot. "Industry-average annual sales per square foot, divided by the total footprint or gross lease area, not just the retail area, are probably $300 to $400," Jacobowitz said. But he cautions that this number is variable depending on location; a retailer in New York City, for example, may need to average $1,000 per square foot, while one in a small town may be maxed out at $400 per square foot.

When expanding, it's possible to grow too much, even if sales data and demographic studies suggest a viable market. "It's always better to expand incrementally," Jacobowitz said. "As a general rule of thumb, we recommend no more than two times current size for stores 5,000 square feet or larger, and no more than three times for stores 4,000 square feet or smaller, based on total footprint. It's not a good idea to leap from, say, 8,000 square feet to 45,000 square feet. The learning curve is just too steep, and the organization so much more complex, that it becomes very high risk."

For smaller retailers, one decision is what departments to include when expanding or relocating. For example, will the new store support new departments, such as a fresh meat counter or a full-service deli? "The relationship between store size and number of departments is limited only by the imagination of the independent retailer," said David Livingston of DJL Research, a supermarket location research company in Pewaukee, Wis. "Some small stores will really emphasize their perimeter departments and leave center-store groceries to the competitors."

Jacobowitz believes if an average of 25 percent of customers purchase prepared foods from a deli or juice bar, a store needs at least 400 transactions per day to pay for labor. "Meat and seafood departments are much more risky," he said, and generally account for no more than 10 percent to 12 percent of total store sales, so paying for the skilled labor to run the department and still make a profit is very difficult."

Demographic research is one of the key tools retailers use when relocating or opening a second store, but figuring out just what the numbers are saying can be difficult. For example, Sacramento Natural Foods Co-op recently opened a second location, in the Sacramento, Calif., suburb of Elk Grove. "Our established store downtown is 16,000 total square feet, with 12,000 square feet of retail space, and we do about $19.5 million in annual sales out of that space," said Paul Cultrera, the store's general manager. "It was pretty obvious that we were way over capacity, and we were handling 2,600 customers per day with only 50 parking spaces. We've known for a long time that it made sense to open another store."

The co-op selected Elk Grove based on community growth rate, and the age, income and education levels of local residents—"the standard natural foods shopper profile that market research is based on," said Cultrera. The new store, at 14,000 square feet retail space and with larger offices and classrooms on the mezzanine level, includes a full-service meat department and a larger deli. Its revenue was projected to start at $8.5 million a year and grow to $12 million, but that turned out to be an overly ambitious goal. Combined with delays and cost overruns on the green-building project, the store's slow start has been a difficult financial lesson.

"What research didn't look at," said Cultrera, "was lifestyles. Demographics give one picture, but lifestyles give another." Many Elk Grove residents are new to the area and busy with new families and long commutes. Few had an awareness of what a co-op is or how it operates. The co-op has worked diligently to improve its numbers, particularly through community outreach and education, and sales are beginning to pick up, Cultrera said. "But the words co-op and sustainable agriculture and organics aren't immediately resonant with the folks in Elk Grove. When you've created an identity that works in one area, you have to be very careful when moving into an area where people's mindsets are different."

The recent relocation of the Moscow Co-op in Moscow, Idaho, can be seen as the flip side of the coin. According to General Manager Kenna Eaton, there was talk of opening a second location in Pullman, Wash., a college town 10 miles away, but when the right location became available in Moscow, Eaton jumped at the opportunity. The new space is 15,000 square feet, about twice the size of the old store. "My numbers said I needed at least 40 percent growth, and we're doing it," Eaton said. "Sales have increased by more than 50 percent." The new store added a meat department—which Eaton felt was a safe bet in "meat and potatoes country"—and a larger bakery, and also increased its prepared-foods area with inside seating.

One benefit of a small town such as Moscow is that it's insular, making it much easier to understand the customer base. It also helps that a town of 20,000 is unlikely to have a Whole Foods or other large natural retailer move in. However, it's possible to be a successful niche store even with a giant neighbor. "Going to 40,000 square feet within two miles of a Whole Foods is probably suicide," Jacobowitz said. "But being a 10,000-square-foot store with particular strengths that set you apart—such as a terrific prepared-foods department or a deeply knowledgeable, credible and service-oriented nutrition staff—can be a sweet place to be. There really is no such thing as one-stop shopping."

So for retailers considering an expansion or relocation, there are, unfortunately, no hard and fast rules. Success depends on the population, the retailer's strengths and a hundred other variables. The best advice seems to be: Crunch your numbers, do your research and, finally, trust your gut instincts.

Click here to order a copy of Market Overview 2005.

Mitchell Clute is a freelance writer in Crestone, Colo.

Natural Foods Merchandiser volume XXVII/number 6/p. 22-23

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