Greater demand, competition ahead for biggest US organic grocery chain

Washington

THE organic grocery business is expected to explode in the next several years as Americans become increasingly focused on healthy diets and fresh ingredients. Interest in free-range meat, sustainable seafood and locally grown fruits and vegetables is likely to propel sales in this category by 92 per cent by 2018, according to forecasters at consultancy Jones Lang LaSalle.

And that's both good and bad news for Whole Foods Market, which has long reigned as the nation's largest organic grocery chain. While it means there's increasing demand for the kind of products the Austin, Texas-based grocer is peddling, it also means Whole Foods is facing more competition than ever from the likes of Sprouts and Fresh Market and from major retailers such as Kroger and Walmart that are taking note of the category's big growth opportunities.

"They were for the longest time the only game in town for a natural, organic experience, and that's not really the case anymore," said Jim Hertel, managing partner at food retail consultancy Willard Bishop.

So far, the company has struggled to fend off these newcomers. Sales growth has slowed, and investors have taken it out on the company's stock, dragging it down about 30 per cent this year.

Whole Foods reported fourth-quarter net income of US$128 million, or 35 US cents per share, on Wednesday, beating analysts' estimates. Sales at stores open more than a year rose 3.1 per cent.

In the previous quarter, Whole Foods saw a 3.9 per cent increase in sales at stores open more than a year. For many retailers, that kind of growth would be satisfying to investors. But for Whole Foods, it marks a slowdown from the impressive 7.5 per cent uptick in comparable sales in the same quarter a year earlier.

Whole Foods is fighting back with aggressive expansion. It has opened 33 stores in the last four quarters in small cities such as Albany, New York, and Colleyville, Texas, bringing its store count in the United States to 386. It has 116 more stores in its development pipeline and believes there is long-term demand for about 1,200 stores nationwide.

The company launched its first national advertising campaign in October, an effort to build brand recognition in new markets where the company can't count on word-of-mouth buzz. The campaign includes commercials during TV programmes such as Modern Family and Scandal and print ads in The New York Times and other major news outlets. The company has said that its budget for the initiative was about US$15 million to US$20 million.

Whole Foods also plans to renovate about 70 per cent of its older stores over the next year, which it believes will boost sales in those locations. But many of the older Whole Foods stores face challenges that a decor refresh cannot fix: Some of the smaller stores are more limited in the volume of shoppers they can handle. Many also have very limited parking capacity, which can be a turn-off to prospective customers. WP