Whole Foods last month announced plans to open a store
tailored to a growing population of posh-loft apartment dwellers
in downtown Los Angeles. The fresh and natural foods grocer also
announced a new flagship location in Brooklyn, complete with
rooftop gardens. At the other end of the spectrum, in June it
opened a store in an embattled section of Detroit, just a month
before the city filed for bankruptcy protection.
"The Detroit store is doing way beyond our expectations, doing
twice as many sales as we expected," said David Lannon, executive
vice president of operations atWhole Foods (
) . "We're in it for the long haul with the city. There is a
burgeoning foodie culture there that goes across all economic
groups and they all shop there."
Supermarket chains largely abandoned inner-city areas during
the 1980s and 1990s, leaving "food deserts" typically served only
by small corner markets. More than a decade of investment to
revive inner-city areas across the U.S. has spurred an uptick of
upwardly mobile residents in those areas.
As a result, major players like Whole Foods,Kroger (
) and nontraditional grocery stores likeTarget (
) are building new stores in urban centers.
But the grocery trade, driven by changing consumer demands and
rising competitors, is in flux. Traditional grocers are
consolidating and duking it out with big-box retailers, dollar
stores and even Internet retail sites, as well as smaller local
and regional chains, in a battle to lure customers through their
Price Isn't Everything
Grocery stores have always operated on tight margins. But
price pressure is growing even more intense asWal-Mart (
) continues to expand its produce and food selections.
Traditional grocers and big-box retailers alike also face a
potential threat from Internet-based challengers includingAmazon
) andGoogle (GOOG) .
Wal-Mart drew more than half its U.S. revenue from groceries
last year. In the second quarter, the retailer reported its food,
consumables, health and wellness categories gained 14 basis
points of market share.
Kroger, the largest chain of traditional groceries, has
successfully reduced its prices over the last 10 years to within
10% of Wal-Mart's. It has also gained market share systemically,
said Andrew Wolf, analyst for BB&T Capital Markets.
Kroger last month agreed to pay $2.5 billion to acquire Harris
Teeter supermarkets, a chain of 212 stores spread across the
Other chains have given up ground in the Wal-Mart fight. In
June,Safeway (SWY) inked a $5.8 billion deal to sell its 213
stores in Canada to Nova Scotia-based Sobeys.
Supervalue (SVU) has fought a losing battle to lower its
prices in order to compete with Wal-Mart. It had to divest most
of its conventional retail supermarkets to a private equity
But price isn't always everything to customers, particularly
as the economy starts to improve.
"Once you get within 10% of a store's pricing other factors
begin to shine, like a more pleasant store environment, fresher
produce, etc.," Wolf said.
According to a Market Force study released in late July, Whole
Foods, along with Trader Joe's and Publix Super Markets, were the
three favorite U.S. grocery store chains, based on customer
satisfaction. Wal-Mart received poor marks from the 6,600
Whole Foods' reputation for high prices once earned it the
nickname "Whole Paycheck" among many consumers. The chain has
worked to sharpen its price points, and works to keep its private
label brand prices comparable with other grocery chains.
Grocery store prices need to be price competitive, said Janet
Eden Harris, chief marketing officer for Market Force, but
shopping at the store shouldn't feel like a cheap experience.
Decor, selection and friendly staff are all second only to
Groceries As Growth Stocks?
While grocery stores are generally seen as slow growth stocks,
the industry has posted three long-term rallies in the past two
decades. The 25 stocks in IBD's Retail-Super/Mini Markets
industry group have collectively climbed 95% from a March 2009
low, and are up 40% so far this year. That's better than double
the S&P 500's 18% gain.
The group ranked No. 31 on Friday out of the 197 industries
tracked by IBD.
Brian Yarbrough, a consumer analyst with Edward Jones, said
the overall grocery store industry tends to grow in single
digits. Within that growth, traditional grocery stores have been
squeezed as high-end and low-end stores gain market share.
The industry's organic and natural foods segment has expanded
about 15% a year from 2005 to 2012, Yarbrough says. Natural-food
grocery stores account for $41 billion in revenue per year. The
total U.S. grocery store industry is $600 billion.
Discounters -- Wal-Mart, Target and a growing number of dollar
store chains -- have also swiped market share from traditional
grocery stores over the past 15 years.
"Wal-Mart is the biggest disrupter of the conventional
supermarket industry," Yarbrough said.
Still, the big box has its limits. Known for its sprawling
suburban stores, Wal-Mart faces resistance entering urban
Last year it backed out of opening a store in the East New
York section of Brooklyn against opposition from the community.
In July, the company stepped back from three of six stores
planned in Washington D.C., after local legislators raised the
city's minimum wage requirements.
Kale And The Cutting Edge
With the rise in obesity and health care costs, increasing
numbers of consumers are avoiding processed foods with lists of
ingredients they can't pronounce. Instead, health-conscious
consumers focus on fresh and natural foods. Organics and
gluten-free options are rapidly becoming more popular.
"You have to have a good produce department or else you are
going to go out of business," Wolf said.
Whole Foods has helped turned natural food options into
requirements for mainstream grocery stores. Kroger and Safeway
have boosted their organic offerings to compete with Whole Foods
and up-and-coming players includingSprouts Farmers Market
(SFM),The Fresh Market (TFM),Natural Grocers by Vitamin Cottage
(NGVC) and privately held Trader Joe's.
Investors have taken notice. Sprouts leapt 126% on its first
day of trading Aug. 1. The Fresh Market is up 145% from its
November 2010 IPO price. Natural Grocers has climbed 129% in the
13 months since its public launch.
To compete, Whole Foods has kept on the cutting edge of food
trends through a decentralized store model, Lannon explains.
"Each store is testing so many ideas, the best ones get
elevated and replicated across the company," he said. "We like to
think we started the kale trend. You now see kale at fancy
Seeing the success of Wal-Mart and Target in the grocery
trade, Google and Amazon also have expanded to include
Amazon Fresh is available in Los Angeles and Seattle, and
offers same-day delivery for items from fresh vegetables to
diapers. Google launched a test service of its Goo--gle Shopping
Express in the San Francisco area in March. It, like Amazon,
offers same-day delivery.
But Eden-Harris of Market Force doesn't see the Internet
giants as major rivals to traditional grocers yet.
"It's an urban trend, in places where a large number of the
population doesn't have automobiles," she said.
"Why don't we have milkmen any more?" Wolf asks. "Because home
delivery is an expensive process.
'Fresh' Means 'Expensive'
Natural- and fresh-food grocers are even less likely to feel
the pressure. While Amazon can easily get shelf food staples and
supplies people need in bulk -- like baby food and diapers --
fresh food is harder and more expensive to deliver.
"People want to pick their own peaches, seafood and meat,"
Lannon said. "You can't really get that online. There is nothing
like talking to an actual person in a store. Customers want that
connection to real people that know the products and can turn
them on to new trends."
Knowledgeable and experienced staff were key in helping Whole
Foods outrank other retailers in the Market Force survey. The
company has also begun to offer concierge services at over 40 of
its stores, allowing customers to email in their order and pick
it up at the store.
Yarbrough sees the overall grocery industry continuing to grow
in the low single digits, 2%-3%. For the next few years, he says,
the organic food industry will continue to see double digit
growth, but at some point that will slow.
Wolf sees Whole Foods and other natural grocery stores
dominating urban centers as more baby boomers and empty nesters
continue moving to the city.
For lower-income areas, he sees Supervalu's Save-A-Lot stores
doing well as they run prices lower than Wal-Mart and don't face
the same community backlash Wal-Mart does.