seeding THE MARKET

JEFF WELLS

For the past year, Supervalu's Sunflower Market has played the value-price hand from its place at the natural and organics table.

This would seem to be a sound approach, given the potential for Sunflower to distinguish itself in an increasingly crowded high-concept market, which includes Whole Foods Market and its “whole paycheck” image, as well as a host of other stores entering the fray with a format similar to the sector giant. Offering low-priced organics, Supervalu determined, will allow the company to capitalize on a trend that many consumers want to participate in, but perhaps can't afford.

“This has been a dream of ours for several years — opening a value-priced natural and organic market,” said Supervalu Chief Executive Officer Jeff Noddle at the opening of the first Sunflower Market, in Indianapolis, last year.

Loath to watch industry mavericks Whole Foods, Trader Joe's and Wild Oats Markets claim a quarter of the natural and organics market, some traditional supermarket operators, including Supervalu, have decided to rise to the competition — to try to play “The Big Three” at their own game by establishing stand-alone markets dedicated to the burgeoning trend, which analysts say will continue through at least the next five years.

With the distinction of being one of the first of the traditional supermarkets' all-natural banners, Sunflower and its performance hold implications and valuable insight for the entire supermarket industry.

Supervalu has remained mum regarding Sunflower's performance over the past year, and declined requests to comment for this story.

According to industry analysts, however, Sunflower has brought a unique concept to bear that holds strong growth potential. Fully realizing this potential, they say, will require that Sunflower maintain its course of distinction without compromising quality, execute on its principles and properly educate customers who are new to natural and organics.

‘Dual Challenge’

“Supervalu has a dual challenge with Sunflower,” said Neil Stern, senior partner with McMillan Doolittle, a Chicago-based retail consulting firm. “One is to convince people of why they would go to a natural and organics store as opposed to a conventional supermarket, and the second challenge is why go to a Sunflower vs. going to a Whole Foods or a Wild Oats.”

Currently, Sunflower operates four stores in three cities: one each in Indianapolis and Chicago, and two in Columbus, Ohio. Supervalu has stated that it would like to roll out 50 stores by 2011 — an outlook toward which many analysts are skeptical.

Much of Sunflower's competition remains entrenched and similarly ambitious. Whole Foods, which operates 193 stores in the U.S. and the United Kingdom, looks to increase overall sales to $12 billion by 2010; and Wild Oats, the second-largest player in the industry before its planned merger with Whole Foods, operated more than 100 stores and looked to open 16 more in 2006 and 2007, according to a report by Packaged Facts, the publishing division of MarketResearch.com. All this comes in addition to the growth of independent retailers in the sector and the birth of new natural and organics banners from the likes of Bashas', Giant Eagle and Publix Super Markets.

With the stiff competition, especially in cities that are hotbeds for young, sophisticated consumers who feed into natural and organic sales, proper store placement is crucial, analysts said. In Indianapolis' Broad Ripple area, where Supervalu placed its first Sunflower, local competition was minimal. With the expansion into Chicago and then Columbus, however, stores were right in the thick of things — within a block or two of competitors, in some cases.

This is not necessarily a bad move. Far from it, in fact, according to John Melaniphy, longtime retail location consultant and president of Chicago-based Melaniphy and Associates. He thinks Sunflower's Chicago location, on the near north side of town in Lincoln Park, taps into a large, cosmopolitan consumer segment that can support multiple natural and organic retailers.

Placing Sunflower right in with the competition is also a way to quickly test the store's capabilities.

“I think that Sunflower is in a great location,” said Melaniphy. “It's a great area. You have a high amount of singles and divorcees, both male and female, and they're all very health-oriented.”

Chris Boring, president of Boulevard Strategies, a retail consulting firm in Columbus that specializes in location consulting, holds similar praise for Sunflower's location choices in his city. One store sits adjacent to the Ohio State campus, while the other is a couple of miles north, on Bethel Road.

The campus location clearly serves the prized younger demographic. However, the Bethel Road location was a more nuanced choice, according to Boring, targeting consumers just out of college.

“I did a study a couple years ago, and one of the findings was that most kids in the city have cars now, and a lot of them don't live right there in the campus area anymore,” he said. “A lot of them live up on Bethel Road. There are a lot of apartments up there.”

Price Emphasis

Solid locations provide a foundation for Sunflower, but eventually value trickles down to differentiation and execution, analysts said. With its price emphasis, reportedly 10% to 15% below mainstream, Sunflower looks to set itself in contrast to the high-price image that Whole Foods has cultivated through the years. In doing so, Sunflower hopes to gain both consumers new to the market and those disillusioned with the industry's higher price points.

Sources agree that offering organics at a low price offers a clear distinction from much of the competition. But they question how effective the strategy is in drawing consumers, especially from the mainstream. After all, it stands to reason that much of the appeal in natural and organics comes from the cachet — and thus higher prices — that operators like Whole Foods have given the category.

Capturing sales, sources said, requires establishing price differentiation without sacrificing product quality. Provide a comparison, say, between the conventional bananas and the organic ones. Or compare them to prices at other natural and organic retailers.

“If there is a higher fee for food and the quality is superior, then the customer goes away satisfied,” said Chuck Cerankosky, retail analyst with FTN Midwest. “But if we're going to have a larger distribution of the product at a range of prices, some consumers can walk away disappointed because what they bought at a comparatively low price did not provide a superior dining experience.”

To keep prices down, Sunflower refrains from much of the costly in-store theatricality that competitors like Whole Foods provide. More than one of the analysts interviewed for this story who had been to a Sunflower Market commented that the retailer was fairly “bare bones” in its presentation.

Sunflower also helps reduce costs by emphasizing its stable of self-checkout lanes.

“I think their shopper is a really smart shopper, who is health-conscious but is not necessarily turned off by the lack of bells and whistles in the store,” said Natalie Berg, a retail analyst who covers Supervalu for Planet Retail, London. “They recognize that using the self-checkouts is saving the store money, and thus saving them money. So it has to be, in many ways, a shopper who understands the economics of the store.”

Indeed, sources say Sunflower's efficient, no-frills format simplifies the shopping experience, potentially helping consumers make an easier transition from mainstream supermarkets to this niche category. Additionally, it can draw shoppers who prize convenience.

“Sunflower is a bit of a throwback to more of a conventional natural food store,” said Stern of McMillan Doolittle. “To their customer base, that's going to have appeal. Whole Foods is becoming more of a show, and as it becomes more of a show, it becomes tougher to shop if you're just looking for that weekly grocery experience.”

Analysts believe that enhancing this concept of convenience will also help Sunflower differentiate and compete. Luckily for the company, the ability to meet this goal is already woven into the fabric of the format.

Sunflower must make sure, however, that its efficiency focus feeds in-store convenience rather than overshadowing it.

Small Footprint

With an average size of 10,000 to 12,000 square feet, Sunflower stores are considerably smaller than competitors like Whole Foods and H.E. Butt's Central Market, whose store sizes average four to five times that of a Sunflower location. Most notably, this smaller footprint allows Sunflower versatility in placing its stores, especially in urban markets, which tend to be high in density but low in available space. Chicago's Melaniphy noted this fact, recommending that Sunflower add one or two more locations on the city's north side, then move out to the suburbs.

According to Berg, the smaller format can also make for a refreshingly uncomplicated shopping trip, provided the stores also maintain a fresh focus.

“I think if they can position themselves as a smaller Whole Foods, and position themselves as fresh, that really provides a point of differentiation,” she said.

Extending the convenience theme further involves offering an array of prepared foods and private-label products, which have become an increasingly profitable component of natural and organics retailing. To coincide with the Sunflower format, Supervalu released its own line of organic goods in April, labeled Nature's Best. As of September, Sunflower offered 140 SKUs under this label; the company eventually hopes to release more than 200 Nature's Best items.

Katia Wilson, a retail analyst with Columbus-based Retail Forward, wrote a recent report on Sunflower Market that synergized market research and local store visits. She noted that the campus location is “bright and cheery, utilizing an orange and yellow color palette with flowers as accents.” She also explained that Sunflower's comparatively smaller size and focus add to its appeal.

“There is a place for it in the marketplace without making it a huge threat to competitors,” Wilson said. “It has its own niche. Its size and limited selection with a strong organic focus makes it an easy and convenient shopping location.”

However, Wilson observed that the Sunflower store she visited needed to have a larger presence in prepared foods and convenience-pegged items.

“A stronger selection of prepared foods and grab-and-go items could give Sunflower Market a significant competitive edge,” she wrote in the report. “Items from local suppliers and restaurateurs could provide added appeal and more differentiation.”

Education

Something that cannot be forgotten amid the plethora of marketing strategies, sources note, is the need to educate consumers. This is crucial for any natural and organics retailer, given the esoteric nature of the category. It is especially important for an operator like Sunflower, though, because it looks to draw in consumers from the mainstream — consumers who are often curious but uninitiated into specialty retailing of this kind.

Tools for education can include signage that defines key terms and highlights sourcing outlets, knowledgeable employees and supplemental newsletters. Currently, Sunflower distributes a monthly newsletter titled Good Natured News.

“Consumers aren't entirely sure what ‘organic’ means, and I think a lot of them might still believe this is just a fad or a marketing gimmick,” said Berg. “The retailer or manufacturer who helps consumers understand what organic really means can really drive up sales and gain new customers.”

At the same time, staff and other resources need to be prepared to answer more in-depth questions coming from the natural and organics devotees who will visit the store for its value. Retail Forward's Wilson found the staff she interacted with to be friendly and knowledgeable, but she found some shelf signage to be missing or incomplete.

“Customers who will take advantage of a store like Sunflower Market on a regular basis possibly will have special needs and desires, and a rather in-depth knowledge of nutrition,” she said.

Supervalu can also leverage its marketing range and numerous locations to educate consumers about Sunflower's focus. One way this is already happening is through Supervalu's placement of items from the Nature's Best line in stores throughout its chain.

In this largely uphill battle to stake a claim in the natural and organics landscape, it is this marketing and financial leverage from parent company Supervalu that is Sunflower's most readily available advantage. But even that doesn't make for easy success, as Supervalu's natural/organics supply chain pales in comparison to that of industry leaders such as Whole Foods.

“They [Supervalu] have no scale,” said Andrew Wolf, retail analyst for BB&T Capital Markets, Richmond, Va. “Traditional grocers, who have all the scale when it comes to Cheerios, Glad bags and other items, are actually small players in organics.”

With the cards stacked against it, then, it becomes all the more important that Sunflower excels at its chosen focus. By establishing itself as a high-quality, convenient, low-price natural and organics operator, Sunflower can become a major player in the industry and a potent weapon in the Supervalu portfolio.

“Ultimately, Sunflower's success is going to be built on, in a marketplace with a lot of competition: What do you do that is unique and better than the rest?” said Stern.