Natural-Food Stores Going Gourmet

It takes more than granola and organic produce to survive in the hotly competitive natural foods business these days. Just ask the folks at Wild Oats Markets, the country’s second-largest natural-food retailer, which this week announced a string of store closures and a total repositioning of the chain in response to slipping sales.

By adding gourmet items such as premium wine, gifts, cookware and prepared meals, and supplementing its organic fare with the most popular supermarket brands, the 113-store company is hoping to lure shoppers away from supermarkets and compete more effectively with rival Whole Foods Market.

“We are just trying to eliminate reasons why someone would feel like they have to go somewhere else to do their shopping,” says Jim Lee, Wild Oats’ president.

In Southern California, where it has eight Wild Oats stores, the Boulder, Colo.-based chain also plans to open six new Henry’s Marketplace stores in the next year to bring in shoppers unwilling to pay the premium prices associated with organic products. Those stores sell conventional produce, meat and bulk foods in a farmers market-type setting.

By broadening its appeal, Wild Oats is hoping to catch up to Whole Foods, which posted almost 50% higher sales-per-square-foot in its stores last year by selling indulgent gourmet products like imported cheese, wines and prepared meals.

Soon, analysts say, there will be very little difference between natural-food chains such as Wild Oats and upscale supermarkets like Gelson’s and Bristol Farms.

“In the consumer’s mind the line [between natural foods and gourmet products] is blurring,” says analyst Bonnie Kramer Tonneson of Chase H&Q.; “What Wild Oats and Whole Foods are doing is catering to the evolution of the consumer palate.”

Both companies credit the homogenizing effects of supermarket consolidation for opening up this niche for them. By stocking premium items, whether it’s $12 imported olive oil or organic strawberries, they hope to lay claim to customers alienated by the lack of selection in mainstream stores.

But by broadening their appeal and allowing in such big manufacturers as Kellogg’s and Procter & Gamble, they could also alienate their loyal customers who started shopping there because of its social consciousness and strict product standards, including the large selection of organic products.

Lee says they don’t plan to reduce the number of organic products they carry. Instead, he says, they will expand their stores from an average of 19,000 square feet to almost 30,000, adding more gourmet items and a bigger selection of fresh-cooked meals for time-pressed consumers.

As part of the restructuring, Wild Oats will shut eight smaller stores in undisclosed locations and slow its rapid-fire expansion, which analysts say had contributed to its weak identity.

The weakness has been reflected in the company’s stock, which, after trading as high as $28.50 this year on the Nasdaq National Market, plunged this week to a new 52-week low of $8.81 Friday morning before rebounding slightly to close at $9.31, up 38 cents.

Beginning in the first quarter of this year, sales flattened or dipped at many of its stores, as they faced increased competition from rivals and in many cases from its own stores, which were too close to one another, Lee says.

Wild Oats won’t pursue any more acquisitions, but it will press on with plans for 12 openings in the next year, including locations in Long Beach, Irvine, Laguna Niguel and San Diego.

Accordingly, revenue growth at the company is supposed to slow from the 50% it has averaged the past few years to 18% to 20%. And Wild Oats, which posted sales of $721 million last year, will take a charge of $15 million to $20 million related to the store closings.

Tonneson applauded the move, saying the chain needed to rethink its operations now rather than continuing to expand without a strong identity and cohesive store base.

And it was forced to concede that maybe Austin, Texas-based Whole Foods, which posted $1.6 billion in sales last year with fewer stores, had been right about the whole gourmet business.

“Clearly we have learned something from our competitors,” Lee says. “There is truly a convergence between natural and gourmet foods.”

While Whole Foods, which has 17 stores in Southern California, whipped up gourmet prepared meals, added popular brands such as Pepperidge Farm cookies and hired wine and cheese experts, Wild Oats had stuck to organic or healthy products, items which aren’t cheap but carry slimmer margins than their gourmet counterparts, industry observers say.

Although that won them the respect of consumers, it did little to boost the chain’s profitability. While sales at Whole Foods average about $660 a square foot annually, the average Wild Oats store did about $450 a foot, according to Lee.

In its new West Hollywood store, for example, Whole Foods now carries a wide variety of cheeses from around the globe, a fresh olive bar and an expanded selection of meals to go, including seared ahi and a meatloaf platter.

And, says Northern Pacific regional president Walter Robb, the chain is now adding coffee roasters, walk-in freezer cases for flowers, and open kitchens so customers can see the dishes in the deli case being cooked.

“We’re trying to create a unique experience here, the ‘linger longer’ effect,” Robb says, noting that sales of prepared meals have doubled in his region during the last year.

However, the one thing Wild Oats has that its competitor doesn’t is Henry’s Marketplace, which the chain bills as its “stepping-store to healthier living.” Henry’s, which started in San Diego, delivers the attractive decor and produce presentation of a natural foods store but with much lower price tags.

The company tested the waters in its Mission Viejo Wild Oats store by slowly replacing organic produce with conventionally grown fruits and vegetables and adding more lower-priced bulk items. The result: Few customers balked, and the sign on the store will change to Henry’s in the coming month.

Six more of the stores will open in California in the next year, several of them in Southern California, Lee says.

“Our strategic repositioning is in response to a changing and expanding market,” Lee says.