Natural Foods Merchandiser

Wild Oats Experiments With Two New Partners

Wild Oats Markets Inc. plans to sell its 700-item private label line outside its own stores, setting up pilot programs with Northeastern supermarketer Stop & Shop and online grocer Peapod.

The Boulder, Colo., supernatural announced a test of store-within-a-store departments selling Wild Oats brand grocery items and holistic health products in Boston-based Stop & Shop, the largest supermarket chain in New England with 343 stores.

A separate initiative, also due to launch this fall, will sell Wild Oats private label food products through Peapod?s Internet grocery service in Chicago. Wild Oats has two suburban stores in Evanston and Hinsdale, Ill.

?I think they?ve got a great product, and it?ll go over really well with our customers,? said Scott DeGraeve, Peapod?s senior vice president and general manager in Chicago.

Skokie, Ill.-based Peapod will begin by stocking items from Wild Oats? 400-SKU shelf-stable and grocery line for customers in the Chicago area. If that works, DeGraeve said, the program could be expanded to include Wild Oats-brand supplements and some of Peapod?s other cities.

?We?ll learn how to do it together over time,? he said.

Wild Oats will devote a new business development team to these initiatives, Chief Executive Officer Perry Odak said in a conference call with investors Aug. 4.

Odak pointed to these projects? ability to add sales volume without increasing capital expense as bright spots in a disappointing quarter. Odak told analysts he didn?t expect the Stop & Shop experiment to harm Wild Oats? New England stores, which include Westport and West Hartford, Conn.; Portland, Maine; and three Boston suburbs: Andover, Medford and Saugus.

?We know we are a secondary shop for many customers,? he said. ?This allows our products to be available in more than one location.?

Store-within-a-store concepts often fail to deliver, but Wild Oats could be the exception to that rule, said Ben Ball, senior vice president at Dechert-Hampe & Co., a marketing consulting firm in Northbrook, Ill.

Grafting one kind of store onto another kind of store, like an office supply center in a supermarket, dilutes both brands because ?nine times out of 10, they wind up giving the customer an inferior experience,? Ball said.

One partnership that makes sense, he said, placed GNC sections in Rite-Aid pharmacies. ?There?s a drugstore reaching out toward holistic wellness,? Ball said. Similarly, by placing Wild Oats products in Stop & Shop, ?You?re talking about a different level of food in a food store. ? Those folks have tremendous credibility within the natural arena.?

The news came during Wild Oats? quarterly earnings announcement Aug. 4. Comp store sales rose 1.5 percent, while net sales rose 3.9 percent to $251.7 million, but higher costs and lower margins drove earnings to a penny a share.

Wild Oats executives blamed the poor showing on competitive pressures and the high costs of opening new stores and implementing various supply chain improvements. They pointed to such bright spots as an accelerated pace of new store openings and a $115 million convertible debt offering to pay for growth.

But Wall Street?s reaction was swift, sending Wild Oats stock down 41 percent in three days, in heavy trading volume. Stock analysts were likewise unimpressed with the store-in-store concept. ?They?re aligning themselves with a very poor partner,? said Gary Giblen, research director at CL King & Associates.

Both Stop & Shop and Peapod are units of Ahold USA. Wild Oats executives said that?s a coincidence, that negotiations with the two companies proceeded separately.

?The hot rumor over the past few years has been that Ahold was a likely buyer if Wild Oats were available for sale,? said Kevin Coupe, a consultant and commentator at ?While it is hard to imagine Ahold buying Wild Oats at the moment, there?s no reason that in a year or two, if the company is able to get its act together, this couldn?t happen.?

Ball said Wild Oats should be careful not to dilute its ability to transform trial of the brand into trial of the Wild Oats store. ?That?s what happened with A&P and Eight O?Clock Coffee,? he noted. ?I?d proceed only in markets where they don?t have a presence.?

Store locations and timing for the three- to five-store trial are yet to be determined, said Stop & Shop spokesman Peter Hamilton. Odak said the Stop & Shop natural products set will resemble the newly redesigned Holistic Health Center at Wild Oats? Superior, Colo., store.

Wild Oats sells 300 private-label vitamins and supplements, including a value-priced line and a premium food-based line. Organic cotton clothing, natural personal care products, fitness products, books and DVDs are featured in the section, designed with low-profile shelving for what Wild Oats calls ?a more European market shopping experience.?

Stop & Shop may put up some of the capital needed to build the store-in-store displays, while Wild Oats will furnish products, signage and literature. Trained personnel should be a part of the offering too, Ball advised.

Peapod approached Wild Oats about carrying its private label products after ruling out launching its own organic house brand, said DeGraeve. ?We felt a need to improve our overall offering in that category.? He expects Wild Oats products to appear in Peapod?s 8,000-item online storefront before the end of 2004.

Founded in 1989, Peapod stayed afloat through the Internet boom and bust and served more than 147,000 customers in 2003.

Peapod?s customers have very similar demographics to Wild Oats shoppers, with 60 percent of Peapod shoppers buying natural and organic items. DeGraeve added that the basket size of customers who buy natural and organic products is $10 to $15 higher than the $143 order placed by an average Peapod customer.

Natural Foods Merchandiser volume XXV/number 9/p. 9, 17

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