BOULDER, Colo. - Perry Odak, chief executive officer of Wild Oats Markets here, has long contended that growth of organic products in conventional supermarket chains is a positive sign for his company, arguing that conventionals are a "gateway" to the healthy lifestyle niche that is Wild Oats' specialty.
But if so, concern is developing in some circles that the news might be too good, too soon for Wild Oats. The chain earlier this month reported modest quarterly comparable-store sales gains of 1.3%, down from 5.4% growth a year ago, and attributed some of the sluggishness to aggressive promotions among conventional supermarket chains introducing new selections of natural and organic foods.
This phenomenon is putting Odak's theory to the test and will challenge the retailer to step up an aggressive real estate initiative, observers told SN last week. The acknowledgement that conventional stores caused sales drag at Wild Oats spotlighted what one analyst called "structural flaws" at the company - namely, stores not big enough to forge and maintain an edge over conventional supermarkets, like Safeway, that are rebuilding their own offerings around fresh foods and natural and organic products.
"Wild Oats is facing increasingly more direct competition. The small store sizes have left them vulnerable to the increasing mix of natural and organic products at chains like Safeway," Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va., told SN last week. "And as Safeway adds more natural and organic products, they're having a greater overlap in their assortment, and the differentiation between them is shrinking.
"They have to get bigger stores," Wolf added. "The sooner the better."
Whole Foods Market, Austin, Texas, tends to be less vulnerable, he said, because its larger stores and service advantages distance it from conventional stores.
Wild Oats stores average 23,000 square feet, although plans call for new stores of about 33,000 square feet.
The company has 20 stores in its development pipeline, targeting urban sites and strong natural-foods markets, including Northern California, and it has repeatedly expressed a desire to bid on former Albertsons stores.
With Wild Oats' newer stores outperforming the chain average in terms of sales, Odak argued that a younger and larger store base would drive comparable sales to the 7%-8% range - or about the annual growth of the natural products industry.
Wild Oats will raise money to pay for acquisitions through the capital markets, the company told analysts.
Michael Krestell, an analyst with investment advisory firm M Partners, Toronto, told SN he believes that growth forecast. "There is still lots of room left for growth, even if there are flare-ups and local market battles over the short term. Over the long term we still see great potential for the industry, and think that Wild Oats has a great ability to capitalize on it."
Krestell said he feels that attention paid to slow quarterly comps has overshadowed underlying improvements at Wild Oats, such as private-label development and growing sales in higher-margin departments.
In the meantime, the chain is facing some difficult market skirmishes, particularly in the Rocky Mountain region from Safeway and its new O Organics line, Odak said. A sales flier from Safeway's area stores last week included buy-one, get-one-free offers on O Organics-brand packaged salads and organic carrots.
"We've had a short-term hit, but a long-term impact trend moving in a favorable direction," Odak said, noting that he thinks Wild Oats is learning to compete.
Safeway's success in wrestling organic sales from Wild Oats required the same kind of heavy investment in its store base and attention to merchandising that is needed at Wild Oats, said Burt P. Flickinger III, managing director of Strategic Resource Group, New York.
"Wild Oats has been on a long-term roller-coaster ride of same store sales, without any consistency, and a big part of that is that the management groups running it have been more financially oriented than marketing and merchandising oriented," Flickinger told SN. "So they have competitors like Whole Foods and Trader Joe's and Safeway's lifestyle stores where the people running the business have grown up as operators and merchants."
