The Capital of Crunch

MARK HAMSTRA

Mike Gilliland has returned to ground zero of the organic and natural movement.

The founder of Wild Oats Markets is preparing to open his first Sunflower Farmers Market in Boulder, Colo., this month, where 21 years ago he founded Wild Oats.

His return as an operator to this college town, tucked up against the foothills of the Rocky Mountains northwest of Denver, comes just as Whole Foods Market is removing the last vestiges of Wild Oats from the region. Most of the 300 or so Wild Oats headquarters personnel who had been based here have left the company following its acquisition last year by Whole Foods, and plans have been made to convert most of the Wild Oats stores in the area to the Whole Foods banner. Only two Wild Oats-owned stores, the Ideal Market in Boulder and another store there that will carry the Alfalfa's banner, will not be rebranded as Whole Foods.

The city's long tradition as a mecca for the natural and organic lifestyle remains, however. Boulder's 100,000-plus residents, above the national average in terms of income and education, support at least six natural and organic food stores, not including the Sunflower Farmers Market that is set to open this month. The city is also home to two conventional stores that have a strong offering in natural and organic products.

In addition to Sunflower opening, Boulder is about to see an expansion of the Whole Foods Market in the downtown area that will nearly double the store's size to 73,000 square feet. Boulder also is home to an outlet of Lakeland, Colo.-based Vitamin Cottage Natural Grocers, which observers said has increasingly emphasized the grocery portion of its low-priced offering. And on the north side of town, Lucky's Market, a single-store independent, remains one of the city's locally owned options for organic and natural food offerings.

“It's a fairly competitive market, because it's an early-adopter market for natural food,” said Edward Aaron, an analyst at RBC Capital Markets, Denver. “It's the industry's Silicon Valley.”

Gilliland, who lives in Boulder and considers it the headquarters for his Sunflower chain, said he had been looking for a site in the Boulder market for about five years before he found a suitable location in a former movie theater not far from the city's new 29th Street Mall. He said he thinks the market will be receptive to his format's small, more price-oriented presentation.

“Boulder's a huge natural foods market, and we've got a slightly different niche, a slightly different take on things,” he told SN. “I think there's a lot of interest in natural foods, but I think even in Boulder there are a fair amount of cost-conscious consumers that hopefully will shop with us.”

He describes the Sunflower concept as being more “Middle America” than Whole Foods.

“Our customers are maybe a little more price conscious, maybe more family and less yuppie, maybe we have a bigger basket size and maybe our customers are a little more ethnic,” Gilliland said. “The cars you see in our lot are certainly not as fancy as the cars you see in Whole Foods' lot.”

He also said the fact that his will be a smaller store — about 25,000 square feet — than the expanding Whole Foods store nearby could help in attracting some customers.

“We think there's a convenience factor,” he said. “We don't have near the selection, and we don't have all the foodservice. We're pretty much back to basics, so I am hoping people shop us week in and week out for their needs, but I know they will still shop in Whole Foods occasionally for their high-end, specialty stuff.”

Sunflower, in the midst of an aggressive expansion push backed by a $30 million investment from La Jolla, Calif.-based PCG Capital Partners, already has three locations in Denver and one in Fort Collins, Colo., all of which are located near Whole Foods stores, Gilliland said.

“We don't necessarily like being right across the street from a Whole Foods, but where they are successful, we are successful,” he told SN.

Sunflower's first Denver location, he said, suffered a loss of about 10% in sales when a Whole Foods opened nearby, but the concept recovered to post “double-digit comps” within a month. Sunflower, Gilliland said, with its focus on competitively priced perishables, seems to recover better than Wild Oats stores did when they faced competitive Whole Foods openings, he explained.

“When I was running Wild Oats, when Whole Foods would open nearby, they would take a pretty good chunk of our business — sometimes 30% to 40% — and we might never get it back,” he explained.

Low-Priced Produce

Gilliland said Sunflower generates about 25% to 30% of its sales in produce and another 15% to 20% in the meat department. The company self-distributes its produce and its Sunflower private label from a distribution center in Phoenix. It currently carries about 300 private-label SKUs but is expanding that significantly this year.

“We give the produce away, and that's our draw,” he said.

Gilliland said he thinks the Whole Foods-Wild Oats merger will be a net positive for his business because it will mean competing against one powerful chain rather than two.

Sunflower currently has 13 stores open in Colorado, Arizona, New Mexico and Nevada, but has eight more in development, including the Boulder location, four other stores in Colorado, two in Utah and one in Arizona.

Tim Kelleher, managing director at Sunflower's investment partner, PCG Capital Partners, which provides growth capital to emerging businesses, said he expects Sunflower to be able to double in size in a short period of time.

“They've got a great management team, and these guys have done it before,” he told SN. “Mike [Gilliland] has been successful rolling out a chain in the past, he's got some of the players from that old team back together, and they are going to do it again.”

He said Sunflower “addresses the needs of value-oriented customers,” which helps distinguish it from Whole Foods.

“We think that companies like Whole Foods and Wild Oats have created awareness of healthy living and organic and natural foods, and there's a percentage of the population that would like to eat more healthy, and doesn't feel like it's quite accessible through Whole Foods,” he said. “We think there's a pretty big unmet demand for value-oriented produce and fresh meats.”

Kelleher said all of Sunflower's stores are performing well, and he expects the Boulder store to be among the chain's best.

“Boulder is a great market,” he said. “There's a lot of interest in that market for natural living and healthy eating, so we think it's going to be a terrific store, and we're excited about it. We've been successful in other Colorado towns, and we think this will be every bit as successful as those.”

Vitamin Cottage Evolves

Observers also point to another bargain-priced competitor in the market that is undergoing some changes. Vitamin Cottage Natural Grocers, although it doesn't have the perishables offering of the other natural food specialists in the market, is increasing its commitment to natural and organic foods.

“Vitamin Cottage is a very interesting concept,” said Mark Dusza, founder of Organic Food Brokers, based in Boulder. “They started as a vitamin retailer, and have moved more into the food business. They work at much lower margins than most of the other retailers — they have very competitive, small-footprint stores. They have a limited selection, but they have all the big sellers in there.”

Vitamin Cottage executives could not be reached for comment.

In a description on Vitamin Cottage's website, the family-owned chain said it “developed a low-cost buying method” early in its history that it continues to use today to offer what it terms “everyday affordable prices.”

The chain was founded in 1955 by Margaret and Phillip Isely, who sold whole-grain bread door-to-door in Golden, Colo., and ran a mail-order vitamin business. They opened their first store within six months and established the Vitamin Cottage motif in 1963. Today the chain is run by the founders' children and grandchildren, Kemper, Heather, Liz and Zephyr Isely.

Steven Hoffman, Boulder-based managing director of the Organic Center, which seeks to promote organic food production, described founder Margaret Isely as a “longtime matron of natural and health food.”

“They have smaller stores, and they like to go into smaller-sized markets,” he said of Vitamin Cottage. “Some of the smaller independent stores out there — those are the ones that have Vitamin Cottage breathing down their necks a little bit.”

Vitamin Cottage stores measure only about 8,000 to 10,000 square feet, he estimated.

“In the smaller markets, where Wild Oats or Whole Foods might not go in, they can go in with a smaller store,” he said. “They have enough stores to have some scale with their purchasing, so they can be pretty competitive.”

In the chain's larger stores that offer a more complete grocery offering, Vitamin Cottage is often in many ways “more exclusively organic” than Whole Foods, Hoffman said.

“As a consumer, you don't even have to read the labels at Vitamin Cottage, whereas at Whole Foods you do have to read labels because they carry a lot of conventional [product].”

Vitamin Cottage has a store right next to Whole Foods in Boulder.

“They get the customers who don't want to deal with the hustle and bustle of Whole Foods, and they are very good on price,” Hoffman said.

Conventional Stores

Boulder is also home to two conventional supermarkets — a Safeway and a King Soopers (a Kroger-owned banner), both of which cater heavily to the city's preference for natural and organic foods, observers said.

The Safeway in Boulder was one of the chain's first to convert to its “lifestyle” format featuring an expanded selection of perishables and natural and organic offerings, and has both a segregated natural-organic department measuring about 10,000 square feet or more, Hoffman estimated, and integrated organic offerings amid its conventional SKUs.

“That makes Safeway a big competitor to Whole Foods in this market,” Hoffman said.

Kroger's King Soopers also “has really made an effort to increase their natural and organic offerings,” he said.

Dusza of Organic Food Brokers also pointed out that the King Soopers in Boulder is strongly committed to local product offerings.

“They have a local, Colorado set, and we have all of our products in that set,” he said.

In nearby Denver, King Soopers and Safeway are market leaders. The Albertsons stores there are owned by Albertsons LLC, the entity formed by Cerberus Capital in 2006 to operate the Albertsons assets that were not acquired by Supervalu. Supervalu left the Denver market in 2003, selling some of its Cub locations and its warehouse to Kroger.

'Tribute' Store

Whole Foods' decision to return one Boulder store to the Alfalfa's nameplate reflects the significance of the city's contribution to the natural and organic industry. Whole Foods described the decision to change the store back to Alfalfa's as a “tribute” to a retailer that Whole Foods characterized as one of the pioneers in natural grocery and a store that at one time was the No. 1 natural food retail store in the country.

Alfalfa's was founded in 1978 by Hass Hassan, who now sits on Whole Foods' board of directors. After Alfalfa's was acquired by Wild Oats in 1995, and following a two-year stint as president of Wild Oats, Hassan left to launch the Fresh & Wild chain of natural and organic stores in the United Kingdom. Fresh & Wild was acquired by Whole Foods in 2004.

Another Wild Oats store located near the University of Colorado campus will be rebranded as Whole Foods Express, a new concept Whole Foods is planning to test, focusing on grab-and-go foods.

And Whole Foods' decision to retain the Ideal Market banner on that location was wise, according to one local observer.

“There would be a mutiny if they changed Ideal Market to Whole Foods,” said Judy Wodell, a partner in the Denver office of executive search firm Austin-Michael and a former senior director of recruiting at Wild Oats. “People love that store the way it is. That's why Wild Oats never changed the name to Wild Oats.”

As previously reported, a much-ballyhooed, 40,000-square-foot Wild Oats prototype had been scheduled to open at Boulder's 29th Street Mall, but Whole Foods put a stop to development and has been seeking a nonfood retailer to fill the space. The developer of the property, Macerich Twenty Ninth Street LLC, and Whole Foods have filed suits against each other over that location, as the developer claims the Wild Oats prototype was promised as a major draw to the mall for the other tenants, according to reports.

The new store was to have been about 100 yards from where Sunflower is opening its first Boulder location, Gilliland said.

Keeping Talent

Despite the disappearance of Wild Oats' headquarters from the market — Whole Foods already had a headquarters in the region — many observers said they believe Boulder will continue to be an epicenter of natural and organic intellectual capital.

“I am a big admirer of Whole Foods' innovation in fostering leadership,” said Hoffman of the Organic Center. “They have been innovators in human resources. They have brought in that talent, kept that talent and retained that talent. They like to promote from within — they really foster their own intellectual capital.”

Several observers pointed out that Whole Foods' efforts in retraining store-level staff have been evident among the changes the chain has implemented in its acquired Wild Oats stores thus far.

Only one store in the Boulder area, in the town of Superior, has changed its name to Whole Foods (another store closer to Denver has changed its nameplate as well). The other Boulder stores have undergone some initial changes, however, such as the addition of Whole Foods' 365 brand private-label products and some improvements in perishable offerings.

The stores are now sourcing their product from Whole Foods' perishables distribution center in the Denver area.

“We've seen the merchandising change to look a lot more like Whole Foods,” said Dusza, whose company is a sales agent for products that are in both Whole Foods and Wild Oats as well as some conventional chains. “There hasn't been a whole lot of change on the product side other than the private label and the introduction of Whole Foods' everyday value items, but there have been changes in the merchandising, the displays, the signage — and they have been doing a lot of educating of the Wild Oats' line-level employees.”

Morale Improving

Morale in the Boulder office had been low for some time, observers said, but the acquisition has actually improved workers' outlook.

“There was quite a bit of a disgruntled attitude prior to the acquisition, and there was a period of time when nobody really knew what was going on,” said Dusza, citing the Federal Trade Commission's effort to block the merger. “It seemed to be getting worse and worse. Now it seems that Whole Foods has done a really good job of incorporating those people into their corporate culture, and they have got them on a very positive track.”

Many of Wild Oats' category managers and buyers have found jobs with local suppliers, he said, and a few have left the city to take jobs with Henry's and Sun Harvest, the chains formerly owned by Wild Oats that were acquired by Los Angles-based Smart & Final last year.

Wodell of Austin-Michael said some of the Whole Foods executives — including some in IT posts — were offered positions at Whole Foods' headquarters in Austin, Texas. Some others were reportedly kept on retainer in Boulder until last month to smooth the transition.

Efforts to contact Whole Foods for comment were not successful.

Whole Foods has taken over Wild Oats' former headquarters space as one of its 11 regional headquarters, although it is running the division with fewer personnel than Wild Oats had and is leasing out part of the space.

Jose Tamez, managing partner in the Denver office of Austin-Michael, said many of the former Whole Foods executives are too attached to the Boulder lifestyle to leave.

“With the segment growing so much and with increasing emphasis in [organic and natural products] by mainstream stores, people with that type of background are going to be pretty attractive to a lot of different companies,” he said. “The biggest challenge for them is not going to be their intellect — it is that they don't want to leave Boulder.”

Tamez said changes in the acquired Wild Oats stores can already be seen in the fresh departments, which he said now seem to offer better product and more variety, and in the increased level of service staff at the stores.

Dusza of Organic Food Brokers also noted that Whole Foods has been “very, very supportive” of some local vendors, although others will lose business in the transition.

“We think in the long run, the manufacturers we represent are going to win,” he added.

Decentralizing Wild Oats

In recent earnings conference calls with analysts, Whole Foods said it has been very methodical in its takeover of Wild Oats' operations.

“Wild Oats was a highly centralized company,” John Mackey, chairman and chief executive officer, Whole Foods, said in an earnings call in February. “Thus, we have taken a cautious approach to unplugging the stores from Boulder.”

He added that Whole Foods' regional managers have “done a great job of establishing trust and creating a connection” with former Wild Oats employees.

“This has resulted in very high morale within the stores, to a degree above what we have experienced relative to any of our past mergers,” Mackey said.

The company said it had converted 46 of the remaining 62 Wild Oats stores to Whole Foods' purchasing and information systems, and that it expects to complete the conversion of the rest of the stores within the coming weeks.

The company had changed nine of the stores to the Whole Foods banner by February, and said it expected to convert most of the remaining stores in the chain to Wild Oats by the end of the year. Stores converted so far include Glendale and Superior, Colo.; West Hartford and Westport, Conn.; Hinsdale, Ill.; Park City, Utah; Raintree, Ariz.; Long Beach, Calif.; and Andover, Mass.

“We are excited about the notable improvements we are seeing in the year-over-year sales increases following the rebranding,” Mackey said. “In just 25 weeks, our integration has gone faster, further and deeper than in any of our prior mergers, and we feel very positive about the results we have seen so far.”