A PROFITABLE LURE

MARK HAMSTRA

When it comes to deciding whether to create a separate area for organic food products, it appears Bashas' Markets made the right choice.

Bashas' Natural Choice departments, which the Chandler, Ariz.-based chain has rolled out to 32 of its Bashas' Market supermarkets, testify to the viability of the store-within-a-store approach to merchandising natural and organic products in a segregated area.

In today's sluggish sales environment, the success of Bashas' Natural Choice sections also serves to illustrate that traditional grocers can garner incremental revenues through the addition of new offerings that serve consumers' evolving lifestyles.

Bashas' began retrofitting the 1,500-square-foot departments into its stores about three years ago, and is now focusing primarily on incorporating them into new stores located in areas with suitable demographic profiles.

"Our sales are strong," said Paul Howland, buyer/merchandiser, Natural Choice. "We've had 20-plus percent same-store sales growth for the last two years."

By keeping prices in line, maintaining high levels of service, creating a distinct ambiance and executing marketing initiatives that target "cross-over" natural foods consumers, Bashas' has developed Natural Choice into a significant revenue generator and traffic-builder for the privately owned company.

Bashas', which has 128 of its 130 supermarkets in Arizona, has focused largely on attracting mainstream consumers, but it strives to have a thorough selection that also appeals to heavy users of natural and organic products. The annual market for organic foods alone is estimated at $9 billion in the United States, and sales of other natural products, depending how they are defined, can be significantly incremental to that total.

Bashas' retrofitted the Natural Choice departments into stores that serve consumers with above-average levels of income and education, and new stores built in areas serving that demographic group will include Natural Choice departments.

Although the percentage of total store sales generated by the Natural Choice departments varies by location, it exceeds 6% at some stores, according to George Fiscus, vice president, general merchandise, who spearheaded the launch of the departments at the request of Eddie Basha, chairman and chief executive officer.

According to Food Marketing Institute's Trends 2002 report on the supermarket industry, consumers are becoming increasingly concerned about the healthfulness of the grocery products they buy. The report found that 36% of consumers almost always look at health claims when deciding whether to buy a product for the first time, vs. 29% who almost always did so in 2000. Likewise, 38% said they almost always look at preservatives and additives, vs. 28% in 2000, and 20% said they almost always look at organic claims, vs. 13% who did so in 2000.

The report also found that consumers "overwhelmingly" prefer that organic items be located in a separate section within the traditional grocery store.

A Long-Standing Debate

Some retailers and observers argue for the integration of natural and organic foods with mainstream products, but others say that traditional stores can attract more cross-over customers with a segregated assortment of natural products that don't vie for attention with name brands on the main shelves.

Howland maintains that a strategy of natural product integration with the main assortments tends to work best in upscale specialty stores, but not in mainstream supermarkets like Bashas' where the company is trying to win over traditional consumers.

At Bashas' Natural Choice departments, the sections are set off with distinctive lighting, flooring and signage, and the managers of the Natural Choice departments wear unique uniforms to distinguish them from the rest of Bashas' personnel.

"We try to make this a store-within-a-store concept with our merchandising," Howland said. "When people enter Bashas' Natural Choice, they know they are in a different area."

Laurie Demeritt, president, The Hartman Group, a natural food research firm in Bellevue, Wash., said she thinks segregated, store-within-a-store departments can be somewhat ostracizing to mainstream consumers, however.

"It kind of gives off the impression of being the expensive section of the store," she said, although she noted that consumers' willingness to experiment with natural food products varies widely by product category, customer demographic profile and geographic location.

Howland said offering attractive prices on natural foods has been a primary objective in operating the departments.

"One of the most important factors in the plan that you have to keep working on all the time is to have competitive pricing," he said. "So often when a supermarket enters into the natural foods arena, their pricing is much higher than the natural food competition, so we've made a lot of strides to make sure that we're competitively priced."

Choosing the right wholesaler plays an important role in obtaining good prices, he noted. Bashas' primary wholesaler for the Natural Choice section is Mountain People's Warehouse, a division of United Natural Foods, Dayville, Conn. He said he also buys directly from vendors for some items, including locally produced honey and many of the nutritional supplements.

Winning Through Trial

Although Bashas' is facing increasing competition from natural foods specialty stores, Howland said he thinks Bashas' has a better shot of encouraging trial of natural and organic products simply because he's already got customers in his store.

Bashas' uses passive product demonstrations, direct-mail advertising and some cross merchandising to entice shoppers from its mainstream aisles into the Natural Choice departments.

"Most people who use natural foods are cross-over customers," Howland said. "It's a very small percentage who are exclusively natural foods customers.

"For the customer that would never go into a Whole Foods or Wild Oats, we have a chance of selling that customer who has a small interest in natural foods but doesn't have enough interest to go into a natural store," he added. "With Whole Foods and Wild Oats, they have to somehow get that customer to get out of their car and get their heads in the door. At Bashas', we've already got their heads in the door. We've just got to move them about 10 feet."

Howland said the passive demonstrations are an important part of the merchandising process because they can be used to help consumers overcome perceptions about the taste of natural and organic foods.

"We always have a passive demo table set up, so they can try some natural chips or natural cereals, or some soy milk or rice milk, so they can see that natural foods are not just rice cakes any more," he said. "There are some great-tasting cereals. If we can get them to try it, they are right there walking by our department."

The company also continually experiments with cross merchandising different categories of natural and organic foods in the main product aisles, a process Howland refers to as "reaching out." To cross promote the Natural Choice offerings, Bashas' places natural or organic products in the mainstream departments along with signage that directs customers to the Natural Choice section. Some of the categories he's had success with include natural cereals and dairy products.

"You have to do it very selectively, though," he cautioned. "To make it successful, you've got to be careful that you are using the top-of-the-category item that you are reaching out with."

Bashas' also mails custom literature once a month to 200,000 homes around stores that house the Natural Choice departments.

Natural Mix

The Natural Choice sections include about 2,000 stockkeeping units of products, down from closer to 2,500 when the departments first launched. Among the cut-backs, Howland said he reduced the number of brands of vitamins and supplements to make the department easier to shop.

"We just cleaned it up a little bit," Howland said of the SKU reduction in the vitamin aisle. "We didn't need to have quite that breadth of product."

Howland pared down the original offering to five anchor brands of vitamins, with several smaller companies filling in with specialty products. The products also were reorganized to be displayed by brand rather than by function, which was the original design.

Fiscus said he examined a variety of other channels when planning the original design of the Natural Choice departments.

"When developing the original concept, we looked closely at health-food stores, whole health supermarkets and traditional health-food sections," Fiscus told SN. "Our goal was to create a separate destination within the walls of a Bashas' that would attract new customers curious about the category while serving the existing natural/organic customer with a full variety of their favorite selections."

Mountain People's Warehouse, he said, was "a huge asset" in helping Bashas' stock the department with additional offerings beyond the top sellers.

He said Natural Choice gives Bashas' a point of differentiation to help it compete against other traditional rivals in Arizona, which include Albertsons, Safeway and Fry's. Although the store-within-a-store concept was slow to be embraced by store-level management, he said stores have since learned to appreciate the new revenue centers, and some have asked for expansions.

Natural Choice has about 120 base linear feet for dry groceries, supplements and health and beauty care products, with additional space for freezers and refrigerators.

HBC products occupy about 10% of the space, and vitamins and supplements occupy another 20%, with the balance of the dry shelving devoted to grocery products. Bulk coffee and other bulk food items are displayed in customized bins.

In the refrigerated section, Natural Choice offers milk, meat substitutes and ready-to-drink items, while the freezers include about 10 varieties of frozen natural meats. Organic produce is handled by the produce department of each store and is not offered within the Natural Choice sections.

Howland said that in order for products to be included in the section, they need to be "clean," meaning that they contain no artificial colors or flavors. He said he also generally avoids products with sugars and hydrogenated oils.

Bashas' positions the sections either right in front of pharmacy or between the produce area and the bread aisle in newer stores.

"It's a natural tie-in with produce," Howland said.

The company's strategy appears to be working.

"We are thrilled with the success of the Bashas' Natural Choice departments," said Fiscus. "With strong double-digit, same-store sales growth for the third consecutive year, our customers have embraced the store-within-a-store concept and made healthy alternatives an ever-increasing part of their lifestyle."