The seafood case is shorter by eight feet and there are miles of bulk bins on display at Whole Foods Market’s newest store. On opening day local politicians expressed delight that an abandoned urban store front is thriving once again while angry protesters criticized CEO John Mackey’s healthcare beliefs — a reflection of the times.
A walk-through of the 16,790-sq.-ft. remodel in San Francisco’s Noe Valley neighborhood reveals much about the now 30-year-old chain. The store is one of the smallest to open in recent years, reminiscent of the late 1980s before WFM decided its sweet spot was 35,000- to 50,000-sq.-ft. destination venues. Multi-story stores as large as 75,000 to 80,000 sq. ft. were constructed. Stores in Fairfax, Va., and Scottsdale, Ariz. feature a sit-down Smokehouse Grill and as many as four in-store restaurants.
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Noe Valley Whole Foods, San Francisco |
Smaller Stores, Fewer Stores
Smaller stores benefit from lower fixed costs for rent and utilities and require fewer employees. Whole Foods wants to improve key profitability metrics such as sales-per-employee and sales-per-square foot ($882 in 2008). The chains’ fabled 14,000-sq.-ft. Mill Valley store, where co-founder Walter Robb got his start, is one of the top performers in the nation, averaging $500,000 to $600,000 a week in sales, according to Natural~Specialty Foods Memo.
Downsizing is a trend. In its fourth-quarter financial statement for the period ending Sept. 27, the company reported reducing the size of two stores in development by an average of 16,200 sq. ft. and signed new leases averaging 33,000 sq. ft. In November, developer Mark Brennan announced that the 47,000-sq.-ft. WFM and condominium complex proposed for Haight Street in San Francisco had been downscaled to a 23,600-sq.-ft. renovation.
In 2005 the then 176-store Austin, Texas-based Whole Foods Market reported 15 percent same-store growth and 35 percent gross margins, its stock was trading at nearly $80 a share with multiples greater than Google. In his 2006 “Letter to Stakeholders” CEO John Mackey predicted WFM would exceed $12 billion in sales in 2010. Analysts told BusinessWeek the company could grow to 500 stores.
Four years later identical same-store growth had fallen to -2.0 percent. Shares are trading at $27. “While 2008 was the toughest year in our history, we still produced strong growth… with sales increasing 24 percent,” Mackey wrote in his annual letter to stakeholders.
Whole Foods is the 15th largest grocery chain in North America with $8 billion in 2009 sales and 275 domestic stores, six properties in Canada and five in London. There are 17 California stores in development and 28 more in 16 states, including Texas. Whole Foods opened nine new stores in 2009 and relocated six. It expects to open 13 in 2010. At this pace it may reach 300 by FY 2013.
Value Pricing
A cornerstone of WFM’s new strategy is healthy offerings at value prices, signaling a shift from more expensive gourmet and organic offerings.
The Noe Valley store occupies a former Bells Market (operated by Ralph’s). It is efficient and carefully stocked to emphasize healthy offerings. The chain’s “365” private-label products occupy a significant number of facings in every aisle. Products are “value” priced and positioned. The bulk bins with peanuts and almonds, for example, are located above electric grinders used to make nut butter.
Signs promoting low prices throughout the store suggest the chain is sensitive to Safeway’s recent shift in its $100 million “Ingredients for Life” campaign to a “slashing prices” message. Safeway, headquartered near San Francisco and operating 1,730 U.S. and Canadian stores, competes head to head with Whole Foods in 16 Bay Area cities.
To combat low-cost rivals such as Trader Joe’s, Mackey insists the 2,150 “365” brand products offered by WFM meet or come in lower than Trader Joe’s prices.
The Noe Valley store reflects this approach.
This is why the seafood set is shorter at Noe, explains a Whole Foods region manager. There are fewer selections in the case and items, such as salmon, are priced individually, instead of by the pound, so that shoppers can easily calculate how much it will cost. There is still room for delicacies, of course. He points to a wolf eel on ice, a special-order sea delicacy that lives on urchins. A 10-lb. eel sells for $119.90. Sustainably harvested sea scallops are $16.99 a pound.
WFM’s “healthy eating” initiative emphasizes cooking classes, nourishing recipes and a reduction in selections Mackey labeled “junk.” He told the Wall Street Journal “we’ve decided if Whole Foods doesn’t take a leadership role in educating people about a healthy diet, who the heck is going to do it?”
The Journal reports that Mackey is a fanatic about healthy eating.
"A healthy diet is a solution to many of our health-care problems. It's the most important solution,” he told the Journal’s Stephen Moore in October. “How much sugar do you think Americans consume?" he asks. I shrug and he rattles off the statistics: "Every man, woman and child consumes, on average, 43 teaspoons of sugar a day. In 13 days that adds up to a five-pound bag of sugar."
"We can spend all the money we want on bypass surgeries, chemotherapy and diabetes, but … two-thirds [of Americans] are overweight, one-third are obese." He's on a roll: "And it's not that they have to shop at a Whole Foods Market. But people need to eat whole food plant foods, primarily … whole grains, fruits, vegetables, nuts and seeds. That diet supports our lives. We ought to live to be 90 or 100 without getting any diseases," says Mackey.
Whole Story, the company’s official blog featured “Healthy Tip: Meet Your Health Goals” in September. Whole Foods is introducing in-store experts, rewarding weight loss and promoting its “Whole Deal Value Guide.” The Guide’s October issue contained $35 in coupons. The site has archived 85 “Whole Body” posts and 71 “Whole Deal” posts along with 68 podcasts.
Mackey encourages outreach and contributes 5 percent of the company’s net to charities annually. Four times a year stores contribute 5 percent of the day's net to a local 501(c)3 non-profit.
On opening day Store Team Leader Angela Lorenzen tells the crowd that her store is partnering with James Lick Middle School to create an Edible Schoolyard during the 2009-2010 school year. The James Lick Edible Schoolyard is a project involving the school’s staff, parents and student body along with the Noe Valley Farmers’ Market and the California Culinary Academy. For the first year, the garden will be incorporated into James Lick’s 7th grade science curriculum, says Lorenzen. She also pledged proceeds from one of the store’s 5 percent days, scheduled for early 2010, to benefit the neighborhood school.
Local Loyalty
Store Team Leader Angela Lorenzen was warmly received at the Sept. 30 opening by a crowd of 150 who gathered for the traditional breaking bread ceremony.
“Noe Valley is such a wonderful neighborhood, and we are thrilled to become part of this vibrant and diverse community,” Lorenzen told shoppers. “I hope that Noe Valley and surrounding area neighbors come to think of our store as their community ‘go to’ grocer. Whole Foods Market is a place where folks can find the highest-quality natural and organic foods as well as a place filled with awesome team members that can help them with all their needs –- be it information on special dietary requirements, shopping on a budget to choosing the right products for their children.”
Protestors were visible but the Noe Valley opening was spared a Flash Mob demonstration that took place at the Oakland Whole Foods the previous day. A dozen protestors, angered by published comments from Whole Foods’ CEO danced frantically with their arms waving, blasting out the music to “Hey Mickey” with parody lyrics and a “Hey Mackey” refrain.
In August Mackey wrote in a Wall Street Journal op-ed that “The last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits.” His comments incited a national boycott countered by a national BUY-cott. Noe is a liberal stronghold but attracted only one sign-carrier.
The Whole Foods Market parking lot is home to a mid-week farmer’s market and Lorenzen was quick to assure neighbors of its willingness to maintain that relationship. The farmer’s market began in 2003 following the abrupt closure of The Real Food Company, a natural food store that had served the area for 25 years.
The neighborhood’s smaller eateries worry that WFM’s prepared foods will cut into their business and the clerk at a specialty cheese shop a block away expressed concern that WFM’s piles of exotic cheeses could pose a problem, but Whole Foods has done an outstanding job cultivating local producers.
Lorenzen singled out Philz Coffee in her opening remarks. She said she is proud to stock the micro roaster located up the street. Any supplier would welcome five facings in the coffee aisle where Philz hand-labeled blends stand out. Other local offerings include Ritual Coffee Roasters, De La Paz Coffee and Vasquez Coffee Company.
The store features more than 50 made-in-San Francisco producers in all, including Lev’s Probiotics, Maggie Mudd, Dr. Melina Bars, Poco Dolce, 479° Popcorn, We Love Jam and craft beer from the 21st Amendment Brewery. Another 200 producers that are in the San Francisco Foodshed (defined by American Farmland Trust as farms and ranches that are within 100 miles of San Francisco) will be featured including Durst Organic Growers, Happy Boy, Devoto Gardens and Dirty Girl Produce.
Botanica’s Healthy Living Tonic™ Kombucha is available on tap.
San Francisco is home to La Cocina, a unique food-business incubator. This commercially equipped non-profit community kitchen offers lower-income entrepreneurs training and advice while launching, growing and formalizing food businesses. (www.lacocinasf.org)
The Noe Valley store’s prepared foods are made exclusively by La Cocina vendors including Zella’s Soulful Kitchen, El Buen Comer, 3Spoons and Shi Gourmet.
The bakery section is stocked with Artisan Hearth Breads (made with organic flour) dessert items from Inticing Creations, Kika’s Treats and Clairsquares (also La Cocina) and fresh pastries from La Boulange with mini cupcakes from Mission Mini Donuts.
The remodel incorporates green construction and energy-efficient display innovations and features a product-specific and consumer-driven curbside recycling program called GreenOps. Shoppers returning recyclables are given real-time redemption coupons to be used in the store. They can also get Think Green Rewards for discounts and coupons good for entertainment, dining and travel (wwww.greenopolis.com). The GreenOps Tracking System is product and material specific, it is traceable, and offers recycling on the go. Post-consumer PET will go to carpet makers and to make Earthbound Farms packaging, glass will primarily go to the wine industry, aluminum to beer brewers and high-density polyethylene (HDPE) will be routed to Epic Plastics -– makers of faux wood decking.
Organic Impact
Whole Foods Markets showcases whole foods, not organics. Only a small percentage of the typical store’s 30,000 SKUs are certified organic. Most of its 2,150 store-branded items are natural. However Whole Foods is a Mecca for those seeking organic perishables. Sales of fruit, vegetables, juice, meat and seafood account for 70 percent of the store’s sales, a percentage that is growing according to Mackey.
WFM was the first national grocer to be certified organic under USDA’s National Organic Program which is a commitment beyond that made by $45 billion Safeway or $80 billion Kroger. Conventional grocers might stock 50 organic SKUs in perishables compared to 250 SKUs stocked by WFM. In 2006 Wal-Mart publicly committed to selling organic in 4,000 stores at 10 percent more than conventionally priced counterparts but has since backed away due to the inability of suppliers to meet its stringent supply-chain requirements. Fortunately, Whole Foods rejects the idea of indexing organic foods, instead seeking neither to price organic high or low but responsibly so that production is sustainable.
The chain’s impact on organics reaches far beyond its shelves. Co-Founder Walter Robb is a tireless mentor to thousands of organic producers. Time and again he has nurtured small suppliers whose passion far exceeds their distribution capacity. Due to its policy of decentralized category management, Whole Foods is the first stop for virtually every successful brand from Seth Goldman’s nationally acclaimed Honest Tea to Clarine’s Florentines, a confectionery available only at the Walnut Creek, Calif. store.
Founder Clarine Hardesty of Lafayette, Calif., gladly provides direct product support. It takes time to train and build relationships with store staff and meeting WFM customers face to face through demos and sampling can be exhausting. “It’s worth the effort,” she says, “because once an item is listed in their system you are able to go to other Whole Foods and offer samples. Clark Stone, the bakery manager, even offered to call and tell others in the unusually collaborative system how well we were selling, she said. “They brought me in because I was local,” says Hardesty, “Whole Foods is definitely a launch pad.”
How do I get my product into Whole Foods Market store vendors ask?
It’s all explained here: www.wholefoodsmarket.com/contact/vendor.html
“Local produce is by definition seasonal. In spring in California, that means artichokes; summer in Michigan means blueberries and autumn in Washington means apples. We value this natural diversity, and each of our 11 regions has its own firm guidelines for using the term ‘local’ in our stores. While only products that have traveled less than a day (7 or fewer hours by car or truck) can even be considered for ‘local’ designation, most stores have established even shorter maximum distances. Ask a team member for your store’s definition of ‘local.’ ”
The Noe Valley Whole Foods insisted on a sizeable manufacturer’s discount before accepting his coffee says Jacob Jaber, president and CFO of Philz Coffee, a retail roaster that will soon open its seventh Bay Area store. “It took about a year and a half to get our coffee in there but within a month all four San Francisco Whole Foods were ordering from us,” he says. “We started with five blends in Noe but the Franklin store stocks seven or eight blends and we get big reorders every couple of days, says Jaber.
Whole Foods’ strategy of buying local and explicitly supporting small, growing manufacturers presents small ventures a unique opportunity, says Joyce Guan, founder of California Girl Foods, a San Francisco-based premium foods broker.
“When you’re small, Whole Foods is a great stamp of approval which gets the attention of other key customers,” she says. WFM’s willingness to allow manufacturers to directly support a brand launch in a single store is unusual, she says. “Whole Foods’ flexibility on this is pretty unique. Larger chains want a huge quantity and aren’t that flexible in helping smaller manufacturers scale up,” she says. They need feedback and don’t often have the production capacity to launch in every store in a region all at once.
Another advantage of dealing with WFM is that “artisan products often have a shorter shelf life, so it’s hard to warehouse product for six months or longer without compromising quality. By allowing smaller manufacturers to sell directly to stores as they get started, Whole Foods is really helping them be successful,” she says, adding that “ultimately, working with distributors is an important strategy once there is an established customer base. They are definitely logistically efficient.”
Admirable Mission
The range of certified organic packaged goods today is limited. Many certified organic products are not readily available through national distribution channels or even produced in quantities sufficient to stock a 286-store chain with 15,000 to 20,000 SKUs on display. If Whole Foods strictly followed the regimen of grocers like Goodwin’s Organic Foods & Drink in Riverside, Calif., which stocks 100 percent organics, it would not have earned $28.7 million in profits last quarter.
“We are very pleased with the $273 million of free cash flow we generated this year along with the significant year-over-year improvements we produced in our balance sheet,” Mackey told investors in November. “Our total cash increased $470 million to $501 million, and total debt decreased $190 million to $739 million. From where we stand today, we believe we are well positioned to meet our long-term debt maturities in 2010.”
Whole Foods is profitable with outstanding margins compared to conventional grocers, contributes a significant sum to charities and houses 10.2 million square feet of quality retail goods. It has painfully, but successfully eliminated Wild Oats, its fiercest competitor and 19th successful acquisition and now faces only regional chains like EarthFare in the Southeast and Oregon’s New Seasons whose similar business models make them tempting additions.
Mackey bragged to BusinessWeek in 2005: “I keep waiting for the competition I’ve been hearing about,” he said, “but nobody else is doing quite what we’re doing.”
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