The heyday for medium-sized natural retailers is unbounded—so far

The natural products retail landscape has undergone seismic shifts in the last five years. As in all retail sectors, e-commerce has continued to suck sales from brick-and-mortar grocers, forcing natural chains, independents and co-ops alike to step up their game in order to keep shoppers’ dollars. More significantly, though, in response to raging consumer demand for natural and organic, everyone from supermarkets to warehouse clubs to convenience stores now carries these products, angling to get a piece of this booming market.

And then, of course, came the news that rocked the entire industry in August 2017: Amazon acquired Whole Foods Market. While this unprecedented merger instantly propped up the recently slumping chain with bottomless pockets and unfathomable reach, it also centralized Whole Foods’ operations, leaving many local and regional producers in the lurch. Also, in some shoppers’ eyes, these changes eroded Whole Foods’ market-maker reputation as a natural and organic standard-bearer.

Perhaps surprisingly against the backdrop of these forces, a crop of mid-size natural chains has emerged as strong players, growing at lightning pace and moving into markets not penetrated by Whole Foods. This rising force, representing both established retailers and new banners, includes Fresh Thyme Farmers Market, Lucky’s Market, Earth Fare, Natural Grocers by Vitamin Cottage and Sprouts Farmers Market. While each company differs in mission and execution, generally speaking, they all aim to bring fresh, healthy, high-quality foods to a broader swath of consumers. They may accomplish this via lower prices, easy-to-navigate stores, broad assortments of local brands, or knowledgeable staffs—or, as is the case for many of these retailers, all of the above.

Growth by the numbers

By all measures, the mid-size natural chains appear to be thriving. For the two public companies in the mix. Natural Grocers and Sprouts, success is shown clearly in recent earnings reports. For the 152 stores operated by Natural Grocers, net sales increased 9.4% to $221.4 million, during the first quarter of fiscal 2019, compared to Q1 2-18. the company attributes these gains to an $11.1 million boost in comparable store sale and an $8.3 million increase in new store sales. 

Meanwhile, Sprouts’ just-released full-year 2018 results show $5.2 billion in net sales, a 12% jump from 2017. Comparable store sales growth for the 313-location chain was 2.1%, while two-year comparable store sales grew 5%. As further evidence of prosperity, both Natural Grocers and Sprouts have continued opening new stores: eight for Natural Grocers and 30 for Sprouts in each respective company’s FY 2018. 

Since the rest of the mid-size retailers are private, “the best data we have to go by is their growth,” says Neil Stern, senior partner at retail strategy firm McMillan Doolittle. “If they are still growing and adding new stores, they are probably doing well. By that measure, in general, most seem to be very successful.”

For example, Earth Fare has accelerated its new store launches, celebrating its 50th location in January and planning a handful of additional openings this spring. Lucky’s Market has done the same, recently expanding beyond its Colorado roots, aided by an April 2016 investment by conventional grocery giant Kroger. “It helps to have a big brother,” Stern says. “It gives them deeper pockets and probably enables them to grow faster than if they were simply trying to grow by their own earnings or ability to get loans from banks.”

Make no mistake, though: Kroger is certainly benefitting from its beneficiary. “Kroger will use Lucky’s as a pawn in the chess game to block competition,” says Jay Jacobowitz, president of Retail Insights. “With the equity stake by Kroger, a controlling interest, all of a sudden Lucky’s is infiltrating Florida, which is probably the biggest opportunity for Kroger where it didn’t have a presence. This puts Kroger in a proxy war against Publix, yet Kroger doesn’t have to find 80,000-square-foot boxes—they can put up 30,000-square-foot boxes with the Lucky’s banner.”

Fresh Thyme’s flourish

Perhaps the most impressive growth trajectory belongs to the newest company in this set. Launched as a single store in suburban Chicago in 2014, Fresh Thyme, with financial backing from conventional grocery chain Meijer, now boasts 75 locations, with upwards of 20 more stores expected to open by 2020. “As Kroger is to Lucky’s, Meijer is to Fresh Thyme,” Jacobowitz says. “They don’t need a huge box; they can expand into many more trade areas with a 30,000-square-foot box and, along with that, really pump up the focus on fresh and tip their hat to natural and organic.”

Thus far, Fresh Thyme has mainly targeted the Midwest. “We strategically place our stores in areas where we know the consumers are on a health journey, no matter what that may be,” says Dean Little, Fresh Thyme’s chief operations officer. “Largely, the Midwest has been underserved in terms of having affordable, fresh and healthy options, and we look to fill that gap—this is what drives our success.”

Stern believes Fresh Thyme is wise in its strategy of identifying and serving those hungry-for-natural customers not living on the West Coast or Colorado. “The hypothesis behind Fresh Thyme was: can we take the formula of Sprouts, which at the time was mainly a West Coast phenomenon, and move it into the Midwest?” he says. Fresh Thyme is proving that natural grocery is not so much about geography as it is about finding that customer who is educated and cares what they put in their body. “That customer exists all over the country,” Stern says, “but it’s a matter of finding where they exist in such concentrations that can support the economics of a store.”

Anatomy of the mid-size guys

Along with moving into areas that were either underserved by natural grocers or lacking an alternative to Whole Foods, many other factors are driving the success of Sprouts, Fresh Thyme, Lucky’s, Earth Fare and Natural Grocers. An obvious but critical one is the heightened consumer demand for natural and organic. “Natural products are becoming ubiquitous, with 98% of consumers buying at least one natural product over the course of the year,” says Kathryn Peters, executive vice president of business development at SPINS.

Beyond that, the mid-size naturals generally have smaller footprints than most supermarkets or even Whole Foods stores, an attribute that today’s consumers seem to favor. “The two biggest barriers consumers report in studies on health and wellness are accessibility and price [of natural products],” Peters says. “So many smart retailers are leaning in to fill the void of accessibility, especially those with smaller store footprints, which allows them to move into these markets with less risk.” Smaller stores also accelerate the shopping experience, making it easier for customers to run in, find what they need and run out.

As for the traditional cost barriers to natural and organic foods, some mid-size chains have made lower prices their primary draw. “Our mission is to make healthy organic food more affordable and obtainable for everyone,” says Fresh Thyme’s Little. “Our core customers want to eat healthy but take cost into consideration. So we pride ourselves in serving our communities with healthy food with the lowest prices possible.”

This is essentially the same strategy pioneered by Sprouts years before, although in western states. “Sprouts and Fresh Thyme have a very similar model of using low-price, good-value produce as the main driver of traffic and then getting customers to add on other natural foods and vitamins,” Stern says.

Other mid-size naturals have a slightly different value proposition. “To be very general, we could say Lucky’s and Earth Fare are more in line with the Whole Foods model in which other perishable departments—a strong deli, prepared foods and a bakery—are the big drivers to the store, and they may not be quite as value priced,” Stern says.

Differences aside, a key attribute that most mid-size guys share is excellent customer service. “I think a lot of their success has to do with the in-store experience,” says Brian Naylor, national vice president of Presence Marketing/Dynamic Presence. “These stores are a trusted information agent for a lot of customers, and they have staff that can guide consumers up and down the aisles and answer questions. That is a huge advantage in today’s marketplace, as not everyone shops for price. There is also a treasure hunt element of finding something new or learning something new.”

Also working in their favor, while they may be chains, they are small enough to be nimble and stay in sync with their communities. “Mid-size retailers can usually stay in touch with their local communities, keep their ears tuned to consumers’ evolving demands for wellness and react quickly to make changes—without being beholden to antiquated financial models, slotting fees, etc.,” SPINS’ Peters says.

The Whole Foods factor

Undoubtedly, the changing nature of Whole Foods in recent years, particularly post-Amazon acquisition, has made an impact on mid-size natural chains, mainly for the better. “Amazon buying Whole Foods has been a double-edged sword,” Stern says. “Yes, the merger was scary [for other retailers] because it gave Whole Foods a big corporate backer, but it has definitely impacted the culture within its stores and community and caused it to lose some of its edge.”

That lost edge includes cool factor, credibility and even the air of exclusivity, onetime hallmarks of the Whole Foods brand. “There definitely is a group out there that stopped shopping at Whole Foods or reduced the frequency or volume of their shops since the Amazon merger,” says Steve French, managing partner at NMI (Natural Marketing Institute). “Some think ‘Whole Foods sold out. I will never set foot in there again.’”

But the natural giant has lost its edge in another way, too: since merging with Amazon, it is much less friendly to small and local brands. French says that by eliminating many of the regional brands it once carried, Whole Foods has all but invited the mid-size chains to scoop these lines up.

Startup brands will also likely find more success with mid-size naturals than with Whole Foods, which used to be the kingmaker for new products. “Because Whole Foods has centralized more of its operations around buying since the merger, it is not as attractive of a place for small brands to gain entry,” Stern says. “That is opening the door to the mid-size chains to be more localized and community-oriented as it is easier for small brands to get into these stores.”

Sustaining success

While business may be booming now, can the mid-size naturals maintain their momentum? “I think they will continue to succeed because of the customer experience they offer,” Naylor says. “Online shopping is way overblown when you look at the estimated dollars generated from internet sales—it’s nowhere near what was projected. Instacart and delivery service will likely be the way these retailers continue to thrive.”

That said, rates of new store openings will probably plateau somewhat. One reason, says Jacobowitz, is capital will be diverted away from store openings and toward beefing up delivery and click-and-collect services. But also, many markets will eventually become saturated, and the mid-size chains will start bumping up against one another.

“As of right now, there hasn’t been a lot of competition between them, in part because they are all relatively young,” Stern says. “At this point, they are likely saying, ‘Why go into each other’s backyards when much of the country doesn’t have any of these stores?’ But over time, that will change.”

To illustrate, he points to wholesale membership clubs like Costco, Sam’s Club and BJ’s, as well as office supply stores such as Staples, Office Depot and OfficeMax. “These companies all developed in different places regionally, but eventually they started competing against each other,” Stern says. “Fresh Thyme and Sprouts, for example, are very similar, so if they end up going against each other, each will need to define what areas it is strongest in. But at this point, they don’t need to do that.”

French raises one potential concern the mid-size guys could run into: “Longer-term, we all know what can happen in terms of being stuck in middle—you may be better off being an independent serving the local community or being Whole Foods,” he says. “Take Sears, which used to be the nation’s biggest retailer, or JCPenney. Now these companies are not known for anything—they are stuck in the middle. You’ve got the big guys and the little guys, high and low in terms of price and merchandising, and you never want to be in the middle.”

M and A on the way?

As the mid-size chains expand their reach and prominence, the potential for mergers and acquisitions invariably rises. “It feels inevitable that continued consolidation can be expected, going forward, to help retailers successfully navigate the competitive landscape,” Peters says.

Specifically, Sprouts has been rumored as an acquisition target by large conventional grocers. “Albertson’s, which owns Jewel, has been rumored to be looking at it,” Stern says. “Sprouts would be an attractive acquisition because it is growing faster than traditional grocers. If a big grocery chain were to buy Sprouts as a growth vehicle, it would not be a surprise. Or, Sprouts and Fresh Thyme could very well merge since they are doing similar things in different geographies.”

Jacobowitz could also envision a Sprouts–Fresh Thyme future. “Fresh Thyme has tailored itself after Sprouts, filling in the Midwest as fast as they can. So, I could absolutely see Sprouts making an offer,” he says. “Or maybe Hy-Vee would buy Fresh Thyme, but I think its synergies are greatest with Sprouts.”

Whatever M and As end up happening, however, Stern doesn’t believe they will take place for a while. “Any number of scenarios could happen, but importantly, they don’t have to happen right now,” says Stern. “We tend to see mergers and acquisitions as one chain falters or two chains start competing too heavily against each other, but neither of those conditions exists currently. So, for now these companies should all be able to grow independently without too much pressure to merge or be acquired.”

Earth Fare
Launched: 1975
Based: Asheville, North Carolina
Stores: 54 in 10 states

Fresh Thyme Farmers Market

Launched: 2014

Based: Downers Grove, Illinois

Stores: 75 in 10 states

Lucky’s Market
Launched: 2003
Based: Boulder, Colorado
Stores: 35 in 11 states

Natural Grocers by Vitamin Cottage
Launched: 1955
Based: Lakewood, Colorado 
Stores: 152 in 19 states

Sprouts Farmers Market
Launched: 2002
Based: Phoenix, Arizona
Stores: 313 in 19 states

This story was published in the Nutrition Business Journal's retail issue and is featured in the NBJ Sales Channel Report.