HEALTHY COMPETITION 1994-11-21

ELLIOT ZWIEBACH

Natural food stores -- those purveyors of everything from organic produce to natural cereals to preservative-free dry groceries -- may present more opportunity than direct competitive challenge to conventional supermarkets.

At least that's the current thinking of a number of supermarket operators who have gone head-to-head with the natural food stores and are now beginning to see some of that business flow back their way -- provided they can tailor their mix properly to win back the business.

The leading natural food supermarkets that face off against conventional operators include Whole Foods Market, Austin, Texas, (and its subsidiaries Bread & Circus and Mrs. Gooch's) and Fresh Fields, Rockville, Md.

Stuart Rosenthal, president of Big V Supermarkets, Florida, N.Y., is among the executives who think such natural food stores are training customers about what to look for in conventional stores, and that the training eventually may equal opportunity.

"With consumers exploring chains like Whole Foods, Bread & Circus and Mrs. Gooch's and being exposed to product lines many of them are unfamiliar with, they're beginning to seek out these items at our stores. "We think natural foods is a business that more supermarkets will get serious about in the next few years. And that should generate significant sales, because one thing supermarkets know how to do is merchandise and sign products and tell their story." Indeed, executives from a wide range of supermarkets -- including Randalls Food Markets, Big Y Foods and Farm Fresh -- said the success of natural foods specialists is helping the conventional business by educating consumers about categories that supermarkets can then exploit, assuming the mix is proper and well merchandised. For instance, some supermarket executives are mulling whether to display such items separately or as part of the overall store mix. Others are looking at demographics to determine which units in their chains should get the biggest natural foods play.

According to Claire D'Amour, vice president of corporate affairs at Big Y, Springfield, Mass., "The growth of natural food stores has helped create an awareness and a market for an increasing variety of natural foods in the supermarket. "Every time a food safety issue gets publicized -- whether it's Alar on apples, E. coli in meat or BST in milk -- natural foods stores experience a surge of business, which exposes consumers to additional products that they subsequently seek out when they come back to us." R. Randall Onstead, president and chief operating officer of Randalls, Houston, told SN, "Many customers shop our stores as well as natural food stores, and if they see something elsewhere that they would like us to carry, they let us know. As a result, the number of natural foods shoppers coming to Randalls is growing." Michael Julian, chairman, president and chief executive officer of Farm Fresh, Norfolk, Va., said his company experienced a similar response when Fresh Fields opened a natural food store in Richmond, Va. "We saw a clear increase in sales of certain items in our stores after Fresh Fields began advertising, because it generated a lot more consumer awareness," he noted. Randalls approaches the competitive challenge posed by natural food stores as it would any other specialty operator, Onstead told SN. "The way the food business is changing, if a customer wants organic produce or free-range chicken or any other environmentally friendly food product, it's our job to address that request through our regular core stores," he explained. "Certain segments of the population are more in tune with shopping for natural foods at a specialty store, so when we have a Randalls near one of those kinds of population centers, we are very sensitive to local needs and merchandise aggressively to that segment by bringing more natural products into our stores.

"And because the number of people going through our stores is so large, we probably sell more organic produce in Houston than Whole Foods sells in the entire state of Texas," Onstead said.

According to Farm Fresh's Julian, "There clearly is a consumer out there looking for some of these products, but a traditional supermarket with a good variety will attract some of those customers." Julian said he believes there may not be enough volume in some medium-sized cities to support even a single natural food store.

Operators around the country are taking varied approaches to handling their natural foods business. Following are some examples:

Big Y is integrating natural foods with more traditional alternatives, rather than featuring them in a separate section -- a merchandising approach it initiated when it remodeled a store just one town over from a Bread & Circus that opened in Hadley, Mass. "When we remodeled our Northampton [Mass.] store last April, we decided to expand the number of stockkeeping units of natural foods," D'Amour said. "At the same time we decided to integrate what we already carried with traditional items in the same categories. "We originally had natural foods as a separate section, but the shelf allocation didn't always make sense because of the amount of overlap -- for example, some natural items are more diet-oriented, while others, like natural cereals, are not. "So we decided it would be easier for us and the customer if we put these products into general categories, along with gourmet foods, to give consumers all the food alternatives in each grouping. We also felt that approach would encourage trials. "So far, it has worked out well, and we've remerchandised subsequent remodels the same way, though they carry natural products to a lesser extent than the Northampton store."

Big V Supermarkets expects to feature natural foods in a separate section as it expands its mix and moves into more affluent areas of Connecticut and New York state. "We have bits and pieces of natural foods now, primarily in areas with higher education and income levels," Rosenthal said. "Where the industry gets into a debate over natural foods, as it did with generics, is whether to integrate them or display them as a separate category. Do you take organics and sell them next to regular produce to appeal to the typical customer, or do you group all organics together to appeal only to the organic customer? There's no right or wrong. "My inclination is to treat natural foods as a category, because it gives you more of a presence, and you've got to make a statement. But this is an area in which we're all still learning."

Farm Fresh discovered it needed to make only minor adjustments to its selection when the Fresh Fields store opened across the parking lot from one of its Richmond, Va., stores. "With a category killer right next to us, we decided we needed to upgrade our offerings," Julian said. "So prior to the store's opening, we looked at a Fresh Fields in northern Virginia and identified products we didn't carry that we felt customers might have an interest in. "As it turned out we found we already carried a lot more of those products than we'd anticipated, and we enhanced that line with less than 100 additional items in both dry groceries and perishables. But we highlighted them with more signs. "We already had a specialty food area in the store, and we upgraded the racking and added the items. But our biggest opportunity came because we were selling the items for less than Fresh Fields was charging, simply because that's how our merchandising structure was already set up. "And the publicity Fresh Fields was getting enabled our sales to expand, in part because we highlighted the items more." The Fresh Fields store opened and closed within a year.

Harris Teeter, Charlotte, N.C., is expanding its natural food offerings to meet the needs of its typical customer base. "Natural food is a significant growth area," Ed Cook, a chain spokesman, told SN, "and it aligns itself with our typical customer profile, which is upscale, well informed and quality-oriented. "As a result, we have been devoting more space in our newer stores to natural food sections over the past year, and as we reset existing stores, we are increasing our commitment to the category where it's appropriate." Harris Teeter has been competing with Wellspring Grocery, part of the Whole Foods group, for about a decade, Cook pointed out. "But we don't regard them any differently than any other competitors," he said. "We're more likely to merchandise and operate a store consistent with what the local customers want, rather than basing what we do on the kind of competition that happens to be there." Harris Teeter carries organic produce "because it follows that customers interested in natural foods would also have an interest in organic produce," Cook noted. He said he was not sure if interest in natural foods has increased because of the presence of natural food operators or simply because of changing consumer tastes. "But it's clear the categories we compete in have gotten larger, so it would seem that the specialty stores have been more successful over the years," he said.

Raley's, West Sacramento, Calif., has been refining its merchandising of natural foods since becoming one of the supermarket pioneers in that category more than a decade ago. "We started offering natural food sections 15 years ago because we saw increasing demand for those products and an interest on the part of consumers for the type of produce sold at natural food stores," Chuck Collings, president and chief executive officer, told SN. "The natural food section started with typical bulk items like rice, beans, pasta and wheat, and we've added frozen items and milk products. And sales are growing as more people are showing an interest in what's termed 'natural,' though there's been some problem with the definition of that term. "We've had small sections of organic produce for years, but we found we couldn't get a constant supply so we've integrated them into the regular produce section. And our produce is all certified to be pesticide-free."

D&W Food Centers, Grand Rapids, Mich., has made some of its locations destination stores for pesticide-free produce. "Whether or not we compete with health food stores, we carry natural foods at several stores in middle- to upper-income areas where demand is high," Jeff Gietzen, president and chief executive officer, told SN. "We started carrying pesticide-free produce at a store in Grandville [Mich.] about three or four years ago in response to a customer's request, and since that customer has told others about it, that store has become a destination supermarket for pesticide-free produce. "In dry groceries we're starting to carry products that are processed by cottage-industry manufacturers -- foods without preservatives, artificial colors or other additives. "In addition, our central kitchen and deli have reformulated all recipes to get rid of additives and MSG. We don't see the concern for good quality foods going away."