Small May Be Big Part Of Whole Foods' Plans

MARK HAMSTRA

Austin, Texas — Whole Foods has apparently decided that good things can come in small packages.

While the company, based here, has in the last few years often boasted of the high volumes generated by many of its newer, larger locations — 50,000 square feet and more — it has recently signaled that it could be redirecting its energies toward smaller, more flexible store designs that analysts say could help it fill out some markets more easily.

Whole Foods' intentions may have been reflected in its announcement last week that it would close only 17 of the Wild Oats stores it acquired at the end of August, eight of which will be relocated to Whole Foods stores in development nearby. Analysts — and Whole Foods itself — previously thought the company would shutter more of the acquired locations. The announcement came as Whole Foods said it completed the sale of the Henry's Farmers Market and Sun Harvest banners to Smart & Final, Los Angeles, for $166 million, leaving Whole Foods with 74 Wild Oats and Capers stores before the planned closures and relocations.

Although the number of closures is fewer than analysts at first expected, Whole Foods had indicated in recent weeks that it was pleasantly surprised by the performance of the acquired stores once it was able to examine actual store-level performance. In a recent presentation at an analyst conference, Whole Foods also pointed out that although it has opened several very large stores in recent years, many of the stores it has in development are actually more moderate in size.

Analysts agree that with the emergence of such small-format players as The Fresh Market (see Page 12) and the anticipated U.S. debut next month of Tesco's compact Fresh & Easy Neighborhood Markets, Whole Foods may have decided that the smaller-format Wild Oats locations might be a more valuable weapon than many had first believed.

“We had always thought that one of Wild Oats' competitive advantages was the smaller footprint that they had, which allowed them to be a little bit more nimble when it came to a real estate strategy,” said Michael Krestell, an analyst with M Partners, Toronto. “There's certainly a place for the larger, 60,000- to 80,000-square-foot stores, but in a lot of places, a much smaller execution makes sense as well, where they can capture both ends of the market. Some consumers do prefer a smaller execution, because it is a little easier to shop — although the depth and breadth of the assortment may not be there, the convenience aspect more than outweighs that.

“If you are going to be successful in this highly specialized space, having a couple of format options gives you that much greater opportunity to capture the market share,” he added.

Wild Oats stores average about 23,000 square feet, vs. 35,000 square feet for Whole Foods. Sales per square foot at Whole Foods are estimated to be double those of Wild Oats — about $919.40 vs. $452.40, according to a J.P. Morgan Chase report issued earlier this year.

Whole Foods said it plans to convert nearly all the stores to the Whole Foods banner, although it also said it would convert one Wild Oats location in Boulder, Colo., where that chain was based, into a “grab-and-go” prepared-foods concept.

“They already have the prepared-food expertise to do that,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va. “It's not like they are going to have to reinvent the hardest part of that store — they can already supply their stores with prepared product for a grab-and-go concept.”

Wolf said Whole Foods may have discovered that although Wild Oats struggled to turn a profit as a company, many of its stores were indeed making money, and that Whole Foods could make the smaller and often less desirable locations work.

“I think more of the [acquired] stores had a positive contribution than what was anticipated going in,” he said.

“If you just put all that together, that they can still make money on a B or B-plus location, and add to that that more of these stores than they thought were in the black, then it kind of adds up to a rather easy decision to continue to run them,” he said.

According to reports, the stores Whole Foods will close are two in Oregon and one each in Colorado, Kansas, Maine, Nebraska, Kentucky, Massachusetts and Vancouver. The company could not be reached for further comment.

As far as the 35 Henry's and Sun Harvest stores, located in Southern California and Texas, respectively, a spokesman for Smart & Final told SN the company plans to continue to operate them under their current banners.

“The banners will be operated as distinct entities separate from Smart & Final,” said Randall Oliver, the Smart & Final spokesman. “They are looking to grow — the natural and organic area is a great niche to be in, and these stores perform well.”

As part of the deal, Smart & Final also acquired a 241,000-square-foot distribution center in Riverside, Calif., that specializes in perishables.

Whole Foods will continue to supply certain products and services to the stores for up to two years at an estimated break-even cost to Whole Foods.