Cover story: How many natural-foods grocers is too many?
The hippies were first with tiny stores selling natural products. Then capitalism took over and organic and natural foods became an industry worth billions, with Colorado at the forefront. Now, with people watching food labels, both natural foods retailers and supermarkets are fighting for the hearts — and stomachs — of shoppers.
Kathleen Lavine | Denver Business Journal
Kemper Isely, chairman, co-CEO and co-president of Natural Grocers by Vitamin Cottage. He and his siblings in 1998 took over the company their parents started 40 years earlier.
- L. Wayne Hicks
- Associate Editor-Denver Business Journal
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When Mark Retzloff and S.M. “Hass” Hassanopened the doors of their first Alfalfa’s grocery in Boulder in 1983, they found shoppers from as far away as Wyoming wanting to stock up on natural and organic foods that at the time were unavailable almost anywhere outside of a farmer’s market.
Now, within a few miles of that store at Arapahoe Avenue and Broadway Street, which reopened in 2011, shoppers can buy organic and natural foods at Whole Foods Market,Lucky’s Market, Sprouts Farmers Market and Natural Grocers by Vitamin Cottage, all of which moved into town or bought out other chains to meet a growing demand.
They can also buy what they need at mainstream grocers Safeway and King Soopers and big-box chains like Walmart and SuperTarget.
Competition is fierce, but capturing even a small portion of the multibillion-dollar natural and organic foods business is too juicy an opportunity for mainstream retailers to ignore. And it’s too important for natural foods grocers to surrender their customers to mainstream retailers. Both sides are learning from the other.
“The supermarkets have realized this is not just a fad a few hippies are eating,” Hassan said. “This is a real slice of the American food scene.”
The natural-foods industry took root in Colorado in the early 1970s, when two followers of Guru Maharaj Ji and his Divine Light Mission — Hassan and Retzloff — established the Rainbow Grocery chain in Denver. They wound up buying a Capitol Hill store before deciding they’d find a better fit for their fresh and natural foods in Boulder at a store eventually named Alfalfa’s.
Since those early days, the market for natural and organic foods has grown while sales at traditional supermarkets flattened.
The latest survey by the Food Marketing Institute found the number of consumers who shop at organic and specialty stores increased by 26 percentage points between 2011 and this year. The percentage of those who said they shop at a traditional supermarket was unchanged, although people still were far more likely to shop at a supermarket than they were at a natural foods store.
The demand is being driven by an increased appetite for healthy foods, particularly as baby boomers and the younger millennial generation move away from processed foods and embrace a more natural diet.
The market could grow even faster, except for the fact that these products cost more – and that’s a price some consumers aren’t willing to pay.
But there are only so many ways to divide the billions spent on natural and organic products, even as more competitors open and clamor for customers.
“All the sales that we’re getting in here,” Retzloff said of Alfalfa’s new Louisville store, “are coming from someone else. We know it’s coming from Whole Foods in Superior. We know it’s coming from King Soopers and Vitamin Cottage and Sprouts.”
The original Alfalfa’s chain was sold in 1997 to Wild Oats Markets, which was later acquired by Whole Foods. The Alfalfa’s brand lay dormant for more than a decade, but was revived when the Boulder store opened three years ago.
Hassan, who served as president of Wild Oats after that company bought Alfalfa’s, isn’t involved with the new Alfalfa’s. He has a conflict: Hassan sits on the board of Whole Foods. But he doesn’t think Alfalfa’s can grow big enough to become a rival.
“I don’t want to say it’s too late,” Hassan said, “but you have to have a hell of a well-financed commitment and a really strong competitive advantage to say I’m going to go up against all the conventional grocers and Whole Foods and Sprouts and Natural Grocers and be a national player in the organic food retail scene. There’s much more opportunity to be a strong regional player.”
That’s the route Jonas Buehl intends to take. With his wife Missy, he opened Loveland’s first natural foods store, called The Crunchy Grocer, in November. A second location is at least two years away, but Buehl said he intends for that to also be in northern Colorado.
“The best approach I’ve found after talking to other retailers is you kind of want to develop a regional presence because you’re really building your brand,” Buehl said.
Colorado’s Isely family has built what’s now Natural Grocers by Vitamin Cottage from a company that started selling whole-grain bread door-to-door in the mid-1950s to a single retail store in Lakewood to 86 locations now. The company (NYSE: NGVC) intends to open another 18 locations in the next fiscal year.
“Over almost 60 years in business we’ve educated the consumer in Denver about natural foods and organic foods and nutritional supplements,” said Kemper Isely, chairman, co-CEO and co-president of Natural Grocers by Vitamin Cottage. He and his siblings in 1998 took over the company started by their parents 40 years earlier.
“And then a lot of other grocery stores have moved into the market and helped to expand the marketplace by also educating the consumer. As people have become more aware about having a healthy lifestyle and a healthy diet and taking nutritional supplements, our business has grown very well because of that,” Isely said.
The industry leader in the sale of organic and natural products is Whole Foods. The Austin-based company (Nasdaq: WFM) had 388 stores when its third quarter ended July 6, and 116 locations in development, including in Westminster and Loveland. The company expects to have 500 stores open sometime in 2017, and longer-term Whole Foods is forecasting the demand exists to eventually have 1,200 stores in the United States.
Sprouts has 191 stores, and predicts it will have at least 1,200 within the next 15 years and perhaps as many as 1,500.
Retzloff’s growth plans for Alfalfa’s are considerably smaller. He said that within five years, he’d like to see Alfalfa’s with five locations.
Retzloff was CEO and chairman before quitting in September in a dispute with board members, but remains the largest shareholder of Alfalfa’s.
“What we sell in the grocery department is not much different than anybody else could sell, including Walmart or King Soopers,” Retzloff said. But the quality of the organic produce, deli items and meats “are things that can make us different from everybody else,” he said.
Mainstream grocers in the fight
But mainstream retailers haven’t surrendered the organic and natural foods market to Alfalfa’s and other specialty grocers. King Soopers’ parent company, Kroger Co., uses the Simple Truth Organic label. Safeway carries a line of private-label products under the O Organics name.
Kris Staaf, regional director of public relations and government relations for Safeway, said organics and natural foods is a “growth category” for the company, one that she said customers are “very interested” in. “We are continuing to expand these offerings to our customers.”
When it can, Sprouts (Nasdaq: SFM) likes to open stores near an existing supermarket. The company’s strategy to attract customers includes pricing its produce between 20 percent and 25 percent below what a traditional supermarket charges, and also stocking non-organic produce.
“Sprouts is targeting the average grocery shopper as opposed to an affluent grocery shopper,” saidDonna Eagan, director of corporate communications for Sprouts.
Just as mainstream grocers have introduced more organic and natural products, some specialty grocers are planning reward programs, like the ones Safeway and King Soopers rely on to track shopping habits and give discount prices for their use.
Whole Foods is introducing a loyalty program, in limited markets at first, and Alfalfa’s has one in the works.
Jimmy Searcy, chairman and interim CEO of Alfalfa’s, said the idea behind his store’s loyalty program is “to appeal to more customers and to get people to come back more often. Time will tell if it makes sense. I’m a firm believer in trying new things. If doesn’t work, I’ll try something else.”
The crossover grocers
Until last year, Loveland was overlooked by natural foods grocers. Jonas and Missy Buehl changed that with the opening of The Crunchy Grocer in November. Although Loveland has a Safeway and King Soopers where people could buy some of those items, finding more meant driving 15 minutes to shop at the Whole Foods, Natural Grocers by Vitamin Cottage or Sprouts in Fort Collins.
“We knew there was a need in Loveland,” Jonas Buehl said. “There really wasn’t anything like what we do in town.”
The Crunchy Grocer received economic incentives from the city of Loveland, which is also now considering whether to extend similar help to allow Sprouts to set up shop. Another natural foods grocer that has not been publicly identified also has approached the city about a location there as well.
“The opportunity to keep people shopping in Loveland is a big issue for us,” said Mike Scholl, Loveland’s economic development manager.
“We have an approved economic policy where we want to support retailers, particularly when people are leaving the area to shop, and that’s one of them – national and organic. It’s a growing segment of the grocery market. Obviously when people are leaving to go to Longmont and Fort Collins to shop, that’s a need we’re looking to fill.”
Buehl said he isn’t too concerned about Sprouts’ plan to move into Loveland. “The arrival of a crossover store will not change our core focus on organics and naturals.”
Like Sprouts, Boulder-based Lucky’s Market is a crossover grocer that offers a mix of organic and traditional products.
“We’re a firm believer that Tide does get clothes clean and Drano does open drains,” said Bo Sharon, who started the company with his wife Trish in 2002.
Door opens for natural foods
The proliferation of natural foods retailers has enabled many organic companies to find an audience for their products.
“Sometimes the products are pretty cool,” said Retzloff, who encourages entrepreneurs just getting started to try their products out at Alfalfa’s. “Sometimes the products are me-toos and I tell them: We don’t need another granola.”
Getting shelf space in natural grocers is important, said Phil Anson, founder of what started as Phil’s Fresh Foods; it’s now Evol Foods, whose line of organic products include frozen burritos.
“It’s very important that you go into places like Whole Foods and Vitamin Cottage and Sprouts and places like that because that’s kind of the heart and soul of the more educated premium consumer, the early adopters, the seekers, the people who are willing to pay premium prices for great products,” he said.
Success selling a product in a natural foods store provides a manufacturer with the information needed to convince mainstream retailers to carry that item as well. It’s also an easier market to enter than securing space at a traditional grocery store.
“Entrepreneurs find they have an easier time and also a more aligned audience with the natural foods stores,” said Liz Myslik, executive vice president of brand management at Boulder-based Fresca Foods Inc., which helps makers of natural and organic products with such tasks as manufacturing, warehousing and shipping. “Natural foods stores embrace the product and are always looking for something new to introduce to consumers. It’s a symbiotic relationship that way.”
Whole Foods has taken the relationship further, having gone so far as to provide low-interest loans to help makers of natural and organic products expand or purchase needed equipment.
After earmarking $10 million for loans to start, Whole Foods last year increased the amount for the program to $25 million. The loans range from $1,000 to $100,000.
Quinn Popcorn, a Massachusetts company started in 2011, borrowed $25,000 from Whole Foods. The money enabled the company to buy more ingredients and make more of its organic popcorn, said Kristy Lewis, who founded the company with her husband. She said after only a few months in stores, Quinn Popcorn was “flying off the shelves and we weren’t really prepared for that.”
The company moved to Boulder this year.
Carlotta Mast, senior director of content and insights at Boulder-based New Hope Natural Media, which studies the natural foods industry, said independent retailers such as Alfalfa’s and Lucky’s Market can compete against mainstream groceries “by having the newest, most innovative products” first.
“It’s a really important role that the natural grocers play here, particularly in Colorado. They’re a test market for new brands.”
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