WHEN WILD OATS ARE SOWN TOO THIN, A PROBLEM CROPS UP

David Merrefield

There are two major players in the business of natural- and organic-foods retailing, Whole Foods Markets and Wild Oats Markets. Can both succeed?

That's one of the issues taken up in this week's front-page news feature about Wild Oats, written by SN associate editor David Ghitelman. As you'll see in the news feature, the retailing segment governed by Whole Foods and Wild Oats has fallen heir to the good fortune of representing a growing product line. But that also presents a challenge.

Sales of organic products are exhibiting growth rates that outstrip virtually all others. In the past decade, they've grown by more than 20% each year. So, noticing that, many conventional supermarket chains have made some effort toward adding a selection of such products into their mix. Thus far, it seems, conventional stores haven't made too many inroads into natural stores' sales. That's because of the natural-supermarkets' customer base, which tends to demand high service levels and a manifestation of product expertise, and because of the limited energy put into the category by conventional stores. It's entirely possible, though, that conventional stores will learn the business, trimming growth possibilities for natural stores. But that problem has been nipping at the heels of the organic-retailing industry for some time. What of specific challenges being faced by these two operators?

The two aspects of these chains to consider is mass and density. Whole Foods has a top line of $2.3 billion, for its most recent full year, driven from 126 stores. Wild Oats generates a far slimmer $893 million on 109 stores. Both companies are spread across much ground, but Wild Oats' relatively low production per store, and a store base sown into two dozen separate markets, make its lack of density an acute problem.

"The company was build largely through acquisition," Ed Dunlap, Wild Oats' chief financial officer, told SN. "There was some organic growth, but its growth from 1997 through early 2000 was through acquisitions. Those acquisitions created a store base that is geographically thin. One of our strategic challenges now is to densify our store base." Wild Oats also operates under numerous banners, as does Whole Foods. That complicates the geographic issue since each marketing area must use unique promotional materials.

It's instructive to see that the problems facing Wild Oats are no more than a microcosm of those being faced by a number of recently consolidated retailers. For instance, Albertson's is looking at its many markets with an eye toward achieving critical mass in each. Earlier than that, and under a previous administration, it endeavored to rationalize its promotional efforts by shuttering the popular Lucky banner in Southern California in favor of raising the Albertson's flag. That move made a lot of sense from the business perspective, but it generated considerable shopper pushback.

But that cautionary note aside, many observers are of the opinion that Wild Oats has the financial and management capacity to solve many of its problems, and that the market is large enough to support both Whole Foods and Wild Oats as time goes on.