Natural Foods Merchandiser

Retailers Making Money Despite Competitive Pressure

The New Year begins with natural products retailers:

  • Making money, though their businesses are growing more slowly than in past years;
  • Competing fiercely via price discounts, while offering improved services and gourmet products to retain customers;
  • Eager for the next hot-selling supplement, although miffed at certain manufacturers' sales practices;
  • Agreeing that organic produce will remain strong, even if most are unclear about how the new federal organic standards rules coming in October will affect them;
  • Optimistic about the months ahead, with "cautiously" a common qualification;
  • And at least one is hoping that loose-necked turtles will become all the rage.

These are the conclusions drawn from a series of interviews conducted late last year with six naturals retailers. All but one—a seven-store chain—had noticed a sales slow-down immediately after the terrorist attacks last September. Only one had laid people off during 2001, though most were not hiring replacements when employees left. Perhaps the central question on retailers' minds involved how to compete against mainstream discounters and the influx of chain-store VMS outlets. Each also expressed his own from-the-trenches insights about industry issues and practices.

Alex Brensike, Richardson's Health Foods, Fort Worth, Texas
Basics: 2,600 square feet, in business 15 years, four employees

Owner Alex Brensike works 85 hours a week. He says customers are "slimming down" their purchases, so he's responded by cutting expenses—he didn't replace two employees who left—and by adding services that include massage, sports nutrition counseling, iridology and mail-order. Tuesdays, when all supplements are 20 percent off, are Richardson's best sales days.

"I match every price out there; I have no choice," Brensike says. "I might lose a dollar, but when someone says to me, 'Where is your store? I want to get this [particular] product because you match prices,' why, that's beautiful, because it only cost me a dollar to get a new customer."

Along with customers expecting the lowest prices, "Our own industry is killing us," Brensike says. "Most manufacturers" take a reading of what's selling in smaller stores like his, then "go to mass marketers and tell them, 'Here's what you want to put in [your store].' Boy, that's dirty pool," he says. "But if I want a product Walgreens has [such as] aspirin or shark cartilage, manufacturers won't sell it to me." In response, he's eliminated certain manufacturers' products from his shelves "because down the street they're giving them away, and I can't afford to keep them anymore. I can go to Target right now and buy [leading brands] cheaper than I can from the warehouse." Similarly, "when people call up asking a lot of questions, I say, 'Ma'am, you'll have to come into the store.' When they slam down the phone, I know they're just soaking me for information before they go to a discounter."

Brensike is adamant that cutbacks at the store must also translate into his personal life. He's said goodbye to cable television, his cell phone, long-distance service and magazine subscriptions, and he seldom goes out to eat. "My dog died, so that's another 50 bucks a month I saved," he says, adding that he put a lock on the thermostat that controls his home air conditioning unit that "saved another $100 a month."

Then there are the loose-neck turtles—wooden toys crafted in Mexico with springs that make their heads bob. "I make $1.19 each sale. Take that times 365, and we've made $435 a year. You can pay the light bill with them." Overall, he says, he's "cautiously optimistic" about 2002 and plans to keep his store well-stocked "since you can't sell from an empty wagon." He'll also keep his 14-by-25-foot billboard that's positioned immediately above a competitor's store. "It's dog eat dog out there," Brensike says.

David Basham, Back to the Land, Brooklyn, N.Y.
Basics: Occupies three brownstone store fronts in the Park Slope neighborhood, celebrated its 30th anniversary in 2001, 40 employees

Everything here is on sale," owner David Basham says. "We've actually had a sales drop in grocery the last couple years—not significant, but some. We are a volume store, so we do lots of case stacks and pass along a lot of discounts. Customers are chagrined if you have to charge regular prices. The boundary of what is suggested retail is completely distorted; there's no suggested retail anymore.

"Competition is everywhere. Supermarkets are selling cheaper [and] there's the co-op around the corner. Any number of outlets in Manhattan are going to beat you on supplements discounts. There are chains of vitamin shops selling vitamins for nothing. There are greengrocers, small supermarkets, bodegas—everybody's got soy milk and they're all selling it cheap. To make money, you have to constantly pursue the best deal. Even then, customers don't think it's cheap enough."

Basham adds: "One bright spot the last few years has been the growth of organic produce" now that it's an established category. Customers don't want something that's "limp-looking," he says, "so we've had to invest money to keep it fresh and looking good. One of our strengths is that people view us as a place where they can get the best organic produce."

On the other hand, Basham says, supplements sales are off 9 percent, which is bad news for a typically high-profit category. "There's been no boon in sales from the media, no item of single merit that would attract mainstream customers. [Also] people are confused when they hear vitamin C or vitamin E does nothing—these are people who are mildly interested or would-be new customers, but are turned off." Concomitantly, "I think there's a definite trend of people using food in place of supplements. People perceive the right way to get good nutrition is in food. We tell people supplements are great, but you have to eat the best possible food you can. People's mentalities are more focused on the basics and the way things used to be. It's a return to the things that you know will give you comfort."

Basham says 2002 will be "a challenging year. I think the pattern we've seen since Sept. 11 will probably continue, in terms of a downturn in sales volume. It really feels like people are scrutinizing their purchases more carefully. [But] I do feel confident it won't go below the level it's dipped to."

Joel Landau, Joel's Natural Foods and Supplements, Greensboro, N.C.
Basics: 1,600 square feet, celebrated its 6th anniversary last year, five employees

Owner Joel Landau is also "cautiously optimistic" about his store's prospects for 2002. "The overall market for what we sell is going to keep growing. It's just a question of how many other stores are going to open up in our area and what size they are. If I have 100 customers a day, but start losing three or four a day to these new stores, it makes a big difference." He adds that "with the economy, price is more of an issue." That's why he offers volume discounts and monthly rebates. "A lot of customers buy supplements at Wal-Mart," Landau says. "Certain people are very strict about getting the cheapest price, but come to us for information. There's a conflict—if you want to have someone you can talk to, you have to be willing to support them."

He adds: "Some of our manufacturers won't sell direct [to consumers], but others do. [After] we introduced one customer to a product, the person mentioned they were getting it directly from the manufacturer. I understand manufacturers have to do it to stay in business, but it's a dicey thing. We can't afford to introduce people to products, then lose their business like that."

Landau doesn't believe that quality is that big a concern for large pharmaceutical companies when it comes to herbals. "People are buying product that's not going to do much for them, but that gives the whole natural products industry a bad name. I'm particularly concerned with how pervasive biogenetic engineering has become. I can't guarantee all my products are free of GMOs. Unfortunately, the government tends to suppress what isn't in accordance with what they're pushing at the moment, and right now they're pushing bio-tech and food irradiation."

Emil Mahler, Southtown Health Foods, Chicago
Basics: 4,500 square feet, 40 years at same location, 13 employees

"In November, business popped back with a vengeance," owner Emil Mahler says. "I'm planning on a resurgence, buying as best I can, stocking the store full and letting customers know I'm in business. We take steeper margins and pass discounts on to customers. We can compete handsomely with Whole Foods [Market] on price, as long as I can buy in quantity—we do that well enough, we increase volume."

Last year Mahler's store slowed from double-digit to single-digit growth, he says, "but it was growth." Mahler's merchandising strategy is "buy right, display it well and give customers what they want at good prices." As for supplements sales, Mahler says they're slowly coming back, "though we have a lot of fun educating customers about quality and why they should be buying from us rather than mass market." Still, "I'm seeing that supplements sales are being replaced by organic foods sales" in terms of dollars spent, he says. He notes the generally positive press about organics, contrasted to the usually bad press supplements have been getting. "I hope the DSEA [Dietary Supplements Education Alliance] can change that."

October's organic standards rule "is going to be a difficult implementation at the retail level," Mahler says, though he believes his store is in a much better position for enactment than his mass-market competitors. Mahler's store, which has sold organic produce more for than 25 years, always wraps it to keep it fresh instead of spraying it with water, as his competitors do. That water could be tap water, he says, "and we have no idea what [its] contamination is."

David Bennett, Mollie Stone's Markets, Mill Valley, Calif.
Basics: seven stores, started in 1986, about 800 employees and still hiring

Co-founders David Bennett and Michael Stone have added a new store in and around San Francisco every other year since the naturals supermarket chain was established in 1985. Three years later, Mollie's began carrying both mainstream and natural products; four years ago, it changed its focus to what Bennett calls "necessity shopping and passion shopping. Go into Safeway or Whole Foods, and you'll get the same mix as in our store. But instead of having one or two garden burgers in the freezer, we might have a dozen. But you can still buy Tide and Frosted Flakes. We compete with extra-wide variety." In other words, necessity shopping implies product convenience and selection, while passion shopping means items for a particular purpose, including organic and health foods, plus gourmet, ethnic and exotic foods.

Bennett continues: "We have separate organic and separate commercial produce, so we don't imply we're all-organic. The chain natural foods supermarkets we compete with are all integrated. One day they'll have organic red lettuce, but if you buy the green, it's commercial, even though the perception is that everything is organic. We have actual separate sections." Bennett says, "We're not that heavy on the supplements side. Only three stores have staffed departments."

Bennett, unlike other retailers, says 2001 "was our best year in many years. We're seeing sales growth and dollar-per-customer growth, plus a little more center-store sales. We're also seeing a lot more food-service sales than we have in the past. More of our customers are using us to pick up meals to take home, as opposed to going to restaurants." Bennett says that his business hasn't followed Silicon Valley's boom-bust cycle. "It's been slow, steady growth over the years. I'm very optimistic for 2002. My partner and I just put our heads down and go every day."

Michael Chase, Oregon Natural Market, Ontario, Ore.
Basics: 1,700 square feet, 38 years in same location, three employees

"What I've seen," says owner Michael Chase, "is a decrease in sales [for 2001] but an increase in profits." He believes 2002 will repeat this pattern, with annual sales of $750,000 and higher profits. The key has been reduced expenses. Chase eliminated two full-time positions—now he and his wife work more hours—and put a clamp on inventory. "Manufacturers and brokers are more willing to deal [because of] more competition and a soft economy. I'm ordering less items that might not sell, not venturing into an exploratory area. I'm mainly sticking to grocery and supplements." These include "staples" such as apple cider, liquid aminos, organic canned soups and breads, he says.

Unlike consumers in most urban areas, Ontario shoppers haven't really taken to organic produce, Chase says. "Organics in [nearby] Boise [Idaho] is exploding, but not in rural communities like ours. Farm families say, 'We've been spraying for generations, and no one's died, so why stop?'"

Instead, 78 percent of Chase's business comes from supplements. Sales got a big boost when a local medical doctor began recommending them to his patients. "In a small community, people talk," Chase says. "If one person starts taking a supplement, 12 more will come in."

That doctor's impact showed Chase, "We need to start educating doctors and promoting natural healing arts at the university level. A lot of the medical community thinks of us as charlatans and [of] supplements as these wild things. We need to have some very important, outspoken supplements advocates in the federal government. [Sen. Orrin] Hatch [R-Utah] has been OK, but he could do more. [Sen. Tom] Harkin [D-Iowa], too. They need to say, 'People need to start preventing these problems, and here's how you do it.' If a group of politicians and doctors came to me and said we're going to have print and television campaigns, spend money to make a change, I'd fork over the cash." Chase says he "only heard" of the DSEA, a group formed last year to launch a public relations campaign for supplements.

Oregon Natural Market is "lucky," Chase says, that there are no other naturals stores in Ontario, just a Wal-Mart that has swiped "5 [percent] to 8 percent" of his vitamin sales. "We're in a small town that doesn't change, and we haven't really changed our business. But eventually we're going to get run over. You try to be a savvy businessman, but competing with the mainstream stores is difficult—that's why there are hundreds of independent stores for sale all over the country. The industry is becoming too mainstream and 'corporate-ized.' It was an industry started by purist hippies—and it was a beautiful thing."

Natural Foods Merchandiser volume XXIII/number 1/p. 14, 16-17

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