Whole Foods' New Market

GLYNN DAVIS

Such is the interest among British retail executives ahead of the opening in June of the first Whole Foods Market store in London that they alone could probably fill the store during its first few weeks of trading.

They are licking their lips in anticipation of what is expected to be an exciting addition to the U.K. food scene, and one from which they will seek to learn a lot about how to be successful at merchandising and selling upscale, healthful foods.

Ben Miller, program manager of international food at food and grocery experts IGD, London, said, “It will be more about U.K. retailers learning from Whole Foods than from them capitalizing on any weakness here. Although British retailers do a passable impression of Whole Foods' offer in certain [product] areas, they will learn a lot from them about merchandising.”

Austin, Texas-based Whole Foods, which has about 200 stores in the U.S. and Canada, has been studying the U.K. market since 2004, when it bought the Fresh & Wild chain of six specialist organic food shops there (it has since closed one).

“It was very much an acquisition to explore the market and to build knowledge, as well as finding the right locations and [to] work on the supply chain,” explained Miller.

While this all sounds very sensible, the decision to take the gargantuan 80,000-square-foot site for its first Whole Foods store on the upmarket High Street Kensington in West London took the market by surprise, as the average Fresh & Wild store covers only 5,000 square feet.

“Fresh & Wild's stores are like food boutiques compared with the big department store [in Kensington],” said Mark Husson, a New York-based supermarket equity analyst at HSBC Securities and a former U.K. resident. “I wonder if the concept has been broadly developed enough to justify this square footage. How much will be food sales and how much will be food service?”

Such questions about Whole Foods are commonplace in the U.K., as many experts, including Husson, have few doubts that the store will be successful in terms of attracting swaths of customers — but they wonder how the company will achieve a return on its investment.

No Pushover

Whole Foods' research with Fresh & Wild will undoubtedly have shown it that the U.K. market will not be a pushover. Bryan Roberts, global retail research manager at Planet Retail, said, “It's only in the last two years that Wal-Mart, Kroger and Target have entered Whole Foods' part of the market in the U.S., but in the U.K. it will face a lot more instantaneous competition, as the major supermarkets have 10 years of expertise and sourcing [Whole Foods-type products], and they are now all well established.”

There has been an increase in exposure by pretty much all the major retailers in the U.K. to not only organic and natural products, but also premium upscale foods (see box). This is attributable to a combination of a greater willingness by consumers to spend more on food and from an increased desire to eat ethically.

Recent data from British research firm TNS Worldpanel shows sales of organic products were up by 30% for the 12 weeks to mid-February, with Tesco leading the way. In fact, this year the company is looking to sell $2 billion of organic foods in the U.K. alone. It also craftily copyrighted the Wholefoods brand name in the U.K. for private label.

In addition, the other major operators — Waitrose, Marks & Spencer and Sainsbury's — have been upping their focus on healthy and organic foods in recent years. There are also the growing specialist chains such as Planet Organic and Julian Graves, as well as a growing number of organic home-delivery schemes and farmers' markets.

Even the more downmarket players Morrisons and Wal-Mart-owned Asda have been piling into organic and upscale ranges. If any further evidence were needed of this flight to ethical and high-end foods, it is the actions of the traditionally price-led hard discounters. The German-based Aldi has hugely increased its premium ranges, while compatriot Lidl recently stated that it is aiming to derive 20% of its sales from organic produce.

Michael Poynor, senior retail advisor to PriceWaterhouseCoopers in London, suggested the U.K. market is a lot more sophisticated and aware nowadays of the issues of traceability and sustainability than the U.S., and that this will make it harder for Whole Foods to differentiate its offer.

“The point of difference of Whole Foods in the U.K. is less than it has been in the U.S. Although there are some excellent upscale chains in the U.S., healthy and upscale is at the heart of the mainstream offer here,” he explained.

Jonathan Pritchard, food analyst at London-based Oriel Securities, agrees. “If they'd come two years ago, then the time was right, but they didn't, and the majors have now cut them off at the pass, so to speak. It will now be very difficult to get sites and build up critical mass.”

Part of the problem, according to Poynor, is that Whole Foods will find it tough to position its offer at a significant price premium to the existing high-end private-label ready-meal ranges of the U.K. grocers, such as Tesco's “Finest” and Sainsbury's “Taste the Difference.”

A failure to achieve this would make it very difficult for the company to get the numbers to stack up. While the well-heeled denizens of Kensington will not balk at paying super-premium prices, there will certainly be limits to how far this can be extended into other parts of the U.K. — and even slightly less affluent areas of London.

Higher Costs

It is understood that Whole Foods manages to accrue $800 average sales per square foot in the U.S., which is double that of other national players, but this is still only a fraction of the $2,000 that Tesco achieves.

Such figures are a necessity because of the much higher costs associated with operating a store in the U.K. than in the U.S. According to one analyst, Whole Foods is believed to achieve a gross margin of 36%, whereas 26% would be a decent figure in the U.K.

To address this issue, Whole Foods may have to consider using a reduced employee head count in its London store, as well as carefully managing the levels of waste, in order to reduce costs, as these impact heavily on margins, the analyst said.

However, it is quite likely that the fixed costs and pricing structure of the London outlet will be nearer that of Whole Foods' Columbus Circle store in New York, on which it is modeled.

What this means is that Londoners can expect a stunning proposition that will take merchandising and service levels up another notch. Although the U.K. has its high-end food ranges in many superstores, what it has not yet had is the “indulgence” element, according to Roberts, who said, “We have it in the Harrods and Selfridges food halls, but this will be an everyday supermarket — with bells and whistles.”

Like these two famous U.K. outlets, there will be a large element of food service in the Whole Foods store, which Lyndon Gee, director of Slow Food U.K., says might not deliver high sales densities but is a great driver of traffic, and often these people also buy goods to take away.

Gee said Selfridges has approximately 100,000 square feet of restaurant and bar space that brings in between $30 million and $40 million per year, so if 50% of the Whole Foods London store is given over to food service, this could bring in a healthy $10 million to $20 million per annum, depending on the store's hours of operation.

Although it has limited space allotted to food service in its stores, Waitrose is the most like-minded U.K. player, of any scale, to Whole Foods, and it is therefore watching Whole Foods' move into the U.K. very closely.

An executive at Waitrose parent company John Lewis Partnership, who did not wish to be named, said, “We're worried, as they are spectacular stores, really cool. Waitrose dominates on food and differentiates on service, and Whole Foods is a threat to that. Since we operate in a niche — high-end, provenance and organic — it would be foolish not to look at them.”

However, he said one of Waitrose's major advantages is its strong relationship with organic suppliers, and since supplies of such goods are limited in the U.K., he questions the ability of Whole Foods to source sufficient products.

Although he does not believe this will be a problem for the first store, he predicts it could be an issue further down the line if and when Whole Foods expands its estate.

Gee agrees. “They'll be able to source a lot of products within the U.K. — especially cheese and dairy products, and vegetables when in season — when the volumes are for only one shop.”

What the store will not have a problem sourcing, he says, are herbal remedies — already stocked in Fresh & Wild — which enjoy high margins. However, like the Columbus Circle store, the London Whole Foods is expected to be skewed away from an overabundance of vitamins and supplements, and in favor of food, especially as there is simply less demand for those items in the U.K.

Further Expansion

It is the success of the New York store that is giving confidence to John Mackey, chairman and chief executive officer of Whole Foods, that his concept can be replicated in the U.K. In a recent National Public Radio interview in the U.S., he said, “If it does really well — say, as good as our New York stores do — then we're going to do a lot more stores in the U.K., and we'll probably try to do one in another capital in Europe.”

Although Husson said the cost of the infrastructure to support the first store is so great that it will need to be leveraged to further outlets, he suggested that it will be possible to open Whole Foods outlets only in specific city locations, such as Oxford and Birmingham. And, he added, “If they had big plans [for the U.K.], then I think they would have secured more property deals by now.”

The closest the company came to acquiring a second unit was at a new West London shopping center development, White City, but it pulled out of negotiations. Whole Foods may have found it much harder to negotiate a decent deal for White City than it has achieved in the U.S., where developers now seek to sign it up on favorable terms, according to Miller, as an anchor tenant in malls.

Roberts agreed. “They are banking on the first store being such a success that property developers will invite them in [to malls], just as they do in the U.S. They are fairly confident that they'll do sufficiently well for this to be the case.”

Having the property industry as a friend would undoubtedly help Whole Foods if it is to successfully roll out a group of stores across the U.K., because property and its high price represent one of the most serious obstacles to any aspirations it might have for this new market.

This issue cannot be underestimated, according to Miller, who recalls that this will be the biggest-name new food entrant into the U.K. since the hard discounters and Costco came to the country in the early 1990s, and they all had problems finding suitable sites.

What Whole Foods will also be introducing to the U.K. market is a unique marketing proposition, because it cannot rely on the big-name brands to help it promote its name, as do the other major supermarkets in the U.K.

“Because they cannot rely on the big consumer brands [to help promote them], it's all about education,” said Miller. “The model is about word-of-mouth through in-store communications, tasting sessions and cooking demonstrations.”

Ahead of the store's opening, the marketing activity has been limited to public relations with consumer publications and posters in its new store advertising the company's products and credentials. In addition, some localized poster advertising on the London subways and in magazines is due to begin soon.

Chris Friend, account director of Liquid Communications, which has been working with Whole Foods on its pre-opening advertising, said he worked hard to convince the company to “not transplant the U.S. into the U.K.,” and that although it took awhile to convince Whole Foods' officials, they ultimately recognized the need to use a tailored approach to breaking into the U.K. market.

As for Whole Foods' brand-building plans, Friend says, they are being kept close to the company's vest. “The question of brand-building is what I'd also like to know. I don't know what plans there are for the company — they could have a master plan to take over the world!”

If this is the case, then Whole Foods will initially have to create a solid platform for growth within the U.K. But it will clearly not be an easy task, even for a company that has enjoyed phenomenal success in its home market and looks set to attract every retail executive in the U.K. when it opens its doors.