Natural Foods Merchandiser

Retailers report mostly good news last year

Independent natural products retailers held their own in 2004 against encroaching competition by doing the things they?ve always done: knowing their products, taking good care of customers and selling the elements of clean eating and healthy living.

In the process, they battled the usual forces of retail darkness: fickle shoppers, flaky employees, lousy weather, computer snafus, rising costs and road construction.

More than 500 retailers took the time to complete the detailed, four-page Market Overview survey whose results form the backbone of The Natural Foods Merchandiser?s Market Overview edition every year.

Behind every survey is a story of another year in the grocery business.

?Our town decided to tear up the Main Street bridge,? cutting off downtown businesses from a major state highway, said Alex Gyori, manager of the Brattleboro, Vt., Food Co-op. Sales fell 8 percent for the six-month construction period, the first time Gyori had seen a down quarter in his 23 years at the co-op.

But the 30-year-old store rallied to finish 2004 up 6 percent in total sales, ?better than we expected,? Gyori said.

In 2004, same-store net sales in the naturals industry rose an average of 4.8 percent. Seven out of 10 stores said their sales increased between 2003 and 2004.

The number of stores reporting flat or declining sales grew to 29.3 percent last year. In every store format—natural food, health food and vitamin stores—sales grew more slowly in 2004 than 2003, with small stores hit particularly hard.

In Hawaii, Damian Paul posted zero growth at his store, The Source Natural Foods in Kailua, a suburb of Honolulu, for the first time ever. ?We?ve enjoyed double-digit growth for 19 years, and then wham, all of a sudden, things go flat on you,? he said.

?I have three Safeways selling health food, a Food Town, a Longs [Drugs],? he said. ?Five years ago, I was the only one in Kailua.?

To jump-start store sales, Paul and his wife, Karen, a nutritionist who is studying to become a naturopathic doctor, took the steps to become the first certified organic store in Hawaii. Supplements now make up 60 percent of store business, ?as we?ve lost food to supermarkets,? he said.

A nutrition show on local talk radio and an e-mail newsletter promote the store. A growing mail-order business ships an average of three orders a day to people ?all over the state,? Paul said.

Competition changes
At the Durango Natural Foods co-op in Durango, Colo., the opening of the community?s third naturals store, down the road in Bayfield, doesn?t worry staffer Ron Englander. ?It?s a healthy enough market for the three of us,? he said. ?And because we?re here, Wild Oats or Whole Foods won?t come in.?

Durango Natural Foods reported $2 million in gross sales last year from just 4,000 square feet. Not everyone is thriving, however. ?I just don?t know where everyone?s at right now,? said Susan Riddle, owner of Simply Natural Health Market in Newport, Wash., a small town an hour away from Spokane.

Riddle?s second year in business was slower than her first, and ?the last six weeks have been extremely slow,? she said. ?I?m selling less of everything.?

She opened the 1,000-square-foot store next to a Subway sandwich shop because existing stores in Newport didn?t offer the organic and natural products she liked to buy. But the local Safeway now offers a greater selection. And as people in the former lumber town commute in increasing numbers to Spokane, they are more likely to buy groceries there.

?I can no longer carry organic milk, because Safeway does,? Riddle lamented. Produce has been ?a difficult category,? supplements sales are flat and books have not done as well as she had hoped. Simply Natural attracts an average of 15 customers a day and grossed just $60,000 in 2004.

Still, Riddle enjoys providing good customer service and loves it when someone tells her that a recommended product did the trick. ?Once they?re here, I?m fine,? she said, ?but it?s just getting them here that?s the hard part.?

Meanwhile, Matt August of The LoCarb Sensation in Simi Valley, Calif., posted a 15 percent increase in sales despite the fact that low-carb diets have the reputation of being yesterday?s news, ?which is not true,? he pointed out.

?Every day I have two to six customers who have never seen the products we have in here,? he said. They come in looking for foods for diabetic, hypoglycemic, thyroid and post-gastric-bypass surgery diets, and they buy, he said.

?Just today I had a customer from the San Fernando Valley. They couldn?t believe how much sugar-free and how many different things I had.?

The store advertises in bulk mailers and local newspapers. August?s family also owns the Vitamin Station, a 23-year-old store that?s four doors down. They opened LoCarb Sensation, which stocks about 1,750 items, in December 2003.

A low-price approach has worked well at Ashland, Ore.-based Ashland Shopping Kart, which store manager Eric Chaddock described as ?a crossover hybrid.? A competitor bought one of Shopping Kart?s two locations, giving Chaddock and his owners the capital to do a $300,000 remodel on the Ashland store and position it as a ?box store? with great deals on items from Newman?s Own, Small Planet, Seventh Generation and other suppliers.

Half of the store?s 50,000 SKUs are natural, but they account for 70 percent of sales. Nearly half of Shopping Kart?s merchandise is sourced directly from the manufacturer at warehouse costs. The combination boosted gross sales 13 percent last year, the fifth year of double-digit growth.

?We?re going to market with price,? Chaddock said. ?Overall, we are winning more and more of the conventional customer over to natural foods.?

For example, in April the store offered 25-ounce cans of Muir Glen tomatoes for 99 cents, while the same sized Del Monte version was $1.49. ?We?ve attacked every commodity like that,? Chaddock said. ?Not to destroy the gross completely, but you trade that customer up to a higher dollar ring and you make the competition look like fools.?

Perishable strategies As packaged, refrigerated and frozen products penetrate into the most conventional of mass-market stores, expanded perishables departments have given many small naturals retailers a way to differentiate themselves from competitors.

Earthlight Natural Foods, a three-store chain in the Pocono Mountains of Pennsylvania, expanded its Stroudsburg store to feature more organic produce and meat, a lavish organic cheese case and raw milk, said Saundra Gleisberg, manager of Earthlight?s store in nearby Tannersville.

?If we can carry it organically, we do,? Gleisberg said. Although some local supermarkets stock natural meat and organic produce on occasion, ?we?re consistent, whereas they are not.?

The Tannersville store increased sales 25 percent last year, in part because of its commitment to organic food. All the coffee and almost all the dairy products the store sells are organic, and Gleisberg estimates that 80 percent of its frozen and refrigerated products and bulk, 70 percent of grocery and half of its snack foods are organic.

As Brattleboro Food Co-op has grown, its perishable departments have grown too. The 17,000-square-foot store, now located in a former conventional supermarket, offers a full line of meat, a 40-seat caf? and a large wine section overseen by an expert. Its natural living department, which includes supplements, showed ?immediate impact? when it was expanded and fully staffed for the first time, Gyori said.

Emily Huppert, store manager at Spiral Food Co-op in Hastings, Minn., knows she wants to add a meat case and more prepared and grab-and-go food in the co-op?s next location. Hastings is a suburb of the Twin Cities with a rural feel and lots of two-income families.

?I would like to sell a 9-by-9 pan of lasagna, and they?d come and buy it with a loaf of bread and a bag of salad, and that?s dinner,? she said. ?Right now we just do soup.?

The next location is coming soon because Spiral Co-op?s existing building has been sold to a developer who plans to demolish it. Huppert opted to put in a new point-of-sale system now, so that employees would be comfortable with it before the move disrupts everything.

?It?s just phenomenal how much it costs to move a store,? Huppert said. ?Refrigeration alone is about $50,000.?

Being different
At the Earth Fare store in Athens, Ga., store manager Gere Warrick believes that a strong stance on standards sets her company apart.

Based in Asheville, N.C., Earth Fare is a natural supermarket chain with 11 outlets in the southeast and three more in development. The 17,000-square-foot Athens store, open six years, saw sales rise 12 percent.

?As of last December, we got rid of all items with high fructose corn syrup,? she said. ?That was a big step.? Earth Fare switched from plastic deli containers to compostable corn-based packaging in 2004 and has long banned an extensive list of artificial ingredients, hydrogenated and cottonseed oils, growth hormones and antibiotics, bleached white flour and irradiated products.

As conventional stores and manufacturers adopt sustainable practices, Warrick said, ?it?ll just kind of click? for customers—?Oh yeah, Earth Fare already does that.?

For Julie Trillo, owner of the Great Earth Vitamin Store franchise in San Anselmo, Calif., differentiating her 1,000-square-foot store means ?trying to focus on brands not readily available in other stores.?

Trillo?s gross sales dropped 9 percent in 2004, mostly because competition increased. A Vitamin Shoppe is five miles away, while a string of close-by conventional stores—Safeway, Longs Drugs and Walgreens—are increasing their supplements sections. Costco and Trader Joe?s attract customers with big bottles of inexpensive private-label nutrition products.

Trillo relies on quality products, including Great Earth?s own private-label lines, to explain why her merchandise is worth the higher price. ?If I can explain, I can usually make the sale,? she said. Great Earth, based in Ontario, Calif., gives its franchise owners more leeway than they used to have to customize their merchandise selection. Trillo added lines from NOW Foods, Megafood, Nature?s Plus, Enzymatic Therapy and Olympian Labs.

Business this spring might be ?a smidge higher,? she said.

Focus on people
Strong sales have given some retailers the ability to expand the notion of sustainability to the compensation they provide their employees.

Brattleboro Food Co-op offers a ?liveable wage? program and a full slate of benefits to both full- and part-time workers. The co-op reported payroll costs between 20 percent and 24 percent of its $12 million in gross sales in 2004, far above the industry average of 16.3 percent in 2004.

That year, the Brattleboro store increased its entry-level wage from $6.50 to $9.47, while continuing its long-term policy of hiring mostly full-time workers. ?We thought, ?This is going out on a limb a little bit,? ? Gyori recalled. ?But people at other co-ops told us that your labor percentage goes up and then comes back down.? Meanwhile, productivity went up and stayed up, as both workers and managers took their jobs more seriously.

Personal service and knowledge of products are frequently cited points of pride among naturals stores of all formats and sizes. ?If a customer needs a half hour of our time,? said Earthlight?s Gleisberg, ?we give it to them.?

At Earth Fare in Georgia, Warrick notices more people reading labels and paying attention to ingredients. And in Hawaii, Damian Paul takes pride in being ?one of the last ma and pa stores? in his corner of Oahu. ?We started when it was mandatory to have a ponytail and Birkenstocks,? he said. ?I actually cut my hair about three years ago.?

Click here to order a copy of Market Overview 2004.

Natural Foods Merchandiser volume XXVI/number 6/p. 14-16, 18, 32

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