Natural Foods Merchandiser

Retailers Reflect On 2001 Challenges, Successes

Susan Parker's business experiences since the arrival of the new century appear to be typical of many in the natural products industry.

Two years ago, she battled her fears as competition swelled near her Susan's Natural World store in Cincinnati. The local Kroger stores began packing their shelves with supplements, organic produce and other natural products; and then Wild Oats Markets opened a new store a few miles away.

By comparison, her 5,000-square-foot shop appeared puny, and customers drifted off to sample new offerings at the big retailers. "I got sick to my stomach when I saw what was happening," Parker says. "We were frightened. We had to refocus our business."

Parker moved fast to evaluate her whole operation. She dropped the slow-sellers, gave more shelf space to the best-selling products, improved shelf displays, trimmed costs, and worked with her staff to improve customer service and product knowledge.

By the middle of 2001, Parker's strategy seemed to be paying off. Customer traffic increased, sales picked up and competitive pressures eased.

But just as her business plan began taking hold, the world was shaken by the events of Sept. 11, 2001. Business dropped off sharply for several weeks, then returned gradually as people got over the shock. Fortunately, for Parker, sales for the first half of 2002 have increased slightly, but she's not expecting a boom year.

Company officials at various levels of retail business tell similar stories: Most saw small sales increases in 2001 compared to 2000. So far in 2002, sales are increasing—but barely.

Overall, sales of organic and natural products continue to grow nationally, but increased competition among retailers, and the general economic slowdown, are squeezing the bottom line for many businesses. Industry observers expect the official implementation of the National Organic Program in the fall will help. Many organic products companies are gearing up for major promotional campaigns, and it's expected that national media will focus on the issue and bring a new wave of consumer awareness to the natural products industry.

Mike Cianciarulo, president and chief executive officer of Earth Fare, is optimistic about 2002. The Asheville, N.C.-based company operates five stores in the Southeast and is planning to open two more this year—locations undisclosed. Sales in 2001 increased nearly 15 percent, and Cianciarulo expects similar growth during 2002.

He says competition from the big chains hasn't affected Earth Fare—yet. But he is seeing more advertising for natural products by the major grocery chains. "Competition is always an issue; we're looking closely at our price points," he says.

Earth Fare is also taking a lesson from the majors and investing in products to build customer loyalty. During the past year, the company has made a big push into a private label program, putting its name on pasta, olive oil, chips, salsa and chicken products.

"We're building brand equity in our name," Cianciarulo says.

At Wild Oats, company officials expect the national chain to show a profit this summer. Pressured by expansion expenses during the last three years, the company lost $44 million in 2001, even though its sales increased by 6 percent to $893 million. Sales are expected to increase by about the same percentage this year, says Sonja Tuitele, spokeswoman for Wild Oats Markets.

Business dropped slightly for a month after the Sept. 11 events, but then recovered. Late in 2001 the company launched Fresh Look, a new merchandising program. The campaign includes new in-store displays, weekly advertising inserts in local papers, more customer-education efforts and "more aggressive" pricing. The pricing strategy is aimed at matching price points offered by the major grocery chains.

So far the program is paying off, Tuitele says, as overall store traffic is up. "We're getting more customers," she says. "We're turning a corner, and a lot of good things are starting to happen."

Wild Oats has also pared back on opening new stores. Back in 1998 the company opened 17. But the 103-store chain opened just two new outlets last year, and plans only four more by early 2003.

The slowdown in store openings is part of a national trend.

"I'm not aware of many new stores opening in our region," says Jesse Singerman, president of Blooming Prairie Cooperative Warehouse in Des Moines, Iowa. The company distributes natural and organic products to 700 stores in 13 states in the Midwest.

Blooming Prairie's distribution pattern illustrates an even more significant trend. Its sales to mainstream grocers have grown by 50 percent in each of the last two years. Overall, its business was up by 20 percent in 2001, but Singerman is expecting only 15 percent growth this year, mainly because of continued economic uncertainty.

Wild fluctuations in fuel prices have hit distributors who are dependent on shipping products by trucks. The higher fuel bills started to show up in retail store prices during the first quarter of the year. "It's hard because there is no way for us to plan what the price of fuel will be six months from now," Singerman says.

On the bright side, Singerman says that sales of frozen meals and health and beauty products have increased significantly.

Another major factor in the general slowdown of sales growth is the shrinking popularity of supplements. "Supplement sales are flat," Singerman says. "There's been a lot of bad press about supplements and not a lot of positives. People are being more cautious."

Enzymatic Therapy, a supplements manufacturer based in Green Bay, Wis., confirms that its sales have slowed significantly. The company, which distributes to 6,500 stores, would not give sales figures. "In 2001 we had a tough operating environment; it was a year of modest growth," says Matt Schueller, senior vice president of business development. "We continue to see herbal products decline. There's a lot of skepticism about herbal products."

Schueller repeats the mantra that's resounded throughout the supplements industry for the past three years: "The herbal market will come back as companies introduce well-studied, proven products. That's what consumers want."

The key to building growth again in the supplements business is new products, Schueller says. So far this year, Enzymatic has introduced two new products: Heartburn Free helps relieve heartburn, and Fiber Delights is a chewable fiber that comes in chocolate and vanilla flavors.

"It's very important to develop new products that we can differentiate in the marketplace. Retailers love new products, just like in any industry," Schueller says.

Retailers have struggled for more than two years with the slowdown in supplements sales, explains Steve Lankford, who owns two Family Nutrition Center stores in Green Bay, Wis.

Besides the supplements industry's credibility problems, retail competition has grown fierce. During the past five years, more specialty stores have opened, and every retailer—from Wal-Mart to the neighborhood gas station—has started carrying supplements.

"The pie has been divided into a lot more slices. You have to deal with that reality," Lankford says. "Everyone's challenged. Competitors are cutting prices, and that creates problems for themselves and for everyone else."

In business for 26 years, Lankford has learned to survive recessions by managing his expenses closely, continuing promotions and advertising, and redoubling efforts to provide customer service. "I can't counteract the trend, so I work to maintain my market position," he says. "We've been through recessions before, and every time that happens, our sales reflect the mood of the country. But when it rebounds, we're positioned to rebound with it."

Fourth quarter sales in 2001 registered solid gains at his stores, and the trend is continuing.

He's also taking advantage of manufacturer price slashing. "There are a lot more supplements makers than there were five years ago, and they're all trying to build market share." So Lankford is taking the discounts but holding steady on his retail prices. It's service, not price, he says, that maintains his customer base.

"We decided that we're not going to play [the price-cutting] game. We've invested too much in our employees and in our knowledge to do that. We're a high-touch store. We'll maintain our high-service model."

While growing competition has made the natural products business tougher for everyone, national trends will continue to fuel overall growth in the industry, says Paddy Spence, CEO of SPINS, the San Francisco-based market research company. "The momentum in the industry was not affected by 9/11," Spence says. "People interested in these products are driven by lifestyle, and they are passionate."

National publicity about the healthy effects of organic products has not gone unnoticed by consumers. "More manufacturers are coming out with innovative products," Spence says, "and there is greater awareness of these products, more distribution, and more consumers who are able to buy them."

Major retailers are moving to take advantage of these trends, but small businesses can, too. "Small stores must focus on being the best in a specific area. It might be prepared foods, juice bars or sports nutrition," Spence says. "You must focus and connect with customers, and make sure you listen to what your customers want."

That's exactly what Susan Parker is trying to do at her Cincinnati store. "When business got down, we worked harder. We focused on what we do best," Parker says.

During the tough times, she's continued to sponsor radio and TV shows that focus on natural products. It took a couple of years and a lot of money, but her long-term investment in the programs has paid off. On local television, she sponsors segments that feature a knowledgeable medical doctor who talks three times a week about health, natural remedies and products.

"When she talks about dandelion root, the next day I run out," Parker says.

She's also re-evaluated how competition affects her store. The majors are advertising natural and organic products heavily, but customers are coming to Susan's Natural World for education. "[The major grocery chains] are making more customers for me. [Customers] are coming to me when they want to learn more. We're the experts, and we're taking advantage of what we do best."

And looking beyond the hard, cold facts of business, Parker has even better news to report about consumers: "I think people overall are taking better care of themselves. People are going inside and building from the inside out. They're working on getting their immune systems healthy, dealing with stress. I see them stocking up on supplements. People are recommitted to putting their health first."

Natural Foods Merchandiser volume XXIII/number 6/p. 20-22, 24

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