Food for Thought

Being all things to all people is a sure-fire recipe for failure in today’s segmented retail environment. And no one seems to understand this better than the expanding class of grocery chains focused on natural and organic products.

There is no denying that the recession took a toll on the industry, as it did on nearly every sector of the consumer goods marketplace. But the good news is that even in a difficult economy, consumers are still buying natural. In a study conducted earlier this year, market research firm Mintel International Group Ltd. found that only 21% of organic food buyers have cut down or eliminated organic purchasing, while 20% have switched to less expensive organic options. Meanwhile, nearly half (48%) are buying as much or more organic food than before the recession.

According to Mintel, organic food has become a core lifestyle element for many people who may make cuts in other areas of their budgets. Sales in this segment are forecast to grow nearly 20% from 2010 to 2012.

While the sector is dominated on the national level by Whole Foods Market, many regional operators—by tailoring their stores to their communities, fostering close ties with their shoppers and embracing locally grown merchandise—are thriving. Here is a look at four regionally focused concepts that have built up a loyal following and a growing business.

Natural Grocers: Keeping it in the family has proved a successful strategy for Lakewood, Colo.-based Natural Grocers by Vitamin Cottage. The company was founded in 1955—long before organic was a mainstream trend—by Margaret and Philip Isely. The couple started out by selling vitamin supplements and whole grain bread door to door.

Still owned by the Isely family, Natural Grocers has grown slowly but steadily into a chain of 38 stores located in Colorado, New Mexico, Texas, Utah and Wyoming. Stores run around 10,000 sq. ft. and combine natural and organic grocery items with vitamins and supplements.

More locations are on the horizon. In its current fiscal year, which started Oct. 1, the company plans to open 12 stores, including the new markets of Arizona and Oklahoma.

Kemper Isely, co-president of Natural Grocers, attributes the company’s success to the core values established by his parents.

“We only carry high-quality products, including 100% certified organic produce and meats exclusively from naturally raised animals,” he explained. “We are committed to providing affordable pricing, nutrition education for customers, exceptional benefits and working conditions for employees, and support for our communities.”

Natural Grocers stores range from 8,000 sq. ft. to 15,000 sq. ft., and the portfolio is divided between free-standing and shopping center locations. Sales remain primarily divided between food, 55% of company revenues, and vitamins/supplements, roughly 32% of total revenues. While the exclusively organic produce is one of the store’s most popular categories, three of its strongest and fastest-growing merchandise segments are fresh dairy, private-label bulk foods and pet foods.

To keep prices as affordable as possible, the company buys aggressively and maintains tight margins and low overhead. Whenever possible, it sources from local suppliers. However, even if produce has been grown organically, the grower must be certified USDA Organic or Natural Grocers will not stock its product.

Natural Grocers is very much a family affair. Seven family members are involved in management, including Kemper’s brother, Zephyr, who serves as the other co-president, and sister, Heather, who is executive VP.

Kemper Isely said Natural Grocers limits how much money is taken out of the company, preferring to invest profits back in the business and fund growth through internally generated resources.

In addition to helping nurture its customers with healthy options for diet and lifestyle, Natural Grocers is also intent on caring for the environment. Describing the sustainable focus of his family-owned business, Isely said the company typically expands into existing buildings that they upgrade to a higher green standard.

“All of our recently opened stores have upgraded the HVAC systems, including using heat that is generated from our refrigeration units,” he noted. “We also use recycled building materials, install LED lighting throughout the stores and use a non-toxic, environmentally friendly polishing technique on concrete floors.”

Sunflower Farmers Market: Sunflower Farmers Market promotes healthful living across every facet of its operations. The 32-store chain was started in 2002 by grocery store veteran Mike Gilliland, the founder of Wild Oats Market (which was eventually acquired by Whole Foods Market), who was intent on providing a value-priced alternative in the health food category. The company’s mission, echoed in its tagline—“Serious Food…Silly Prices”—is to provide quality natural and organic foods at the lowest prices.

“We are in a valid segment so our business does well, although we continue to face the same challenges with food deflation and heightened competition that all food retailers have,” said Gilliland, who serves as president and CEO of the chain. “However, our stores are serving the needs of a segment of the population that [are] not being met by Whole Foods or traditional grocers.”

Although he admits the natural foods industry is clearly dominated by Whole Foods, Gilliland believes independent retailers around the country are changing their focus to find ways to compete, and this has altered the competitive landscape and made for some unique ironies. For instance, Gilliland noted that Whole Foods has recently initiated a more value-oriented marketing campaign.

In a surprising revelation, Sunflower has found that some of its best co-tenant neighbors are other food chains. The company often locates in shopping centers with Kroger or Safeway, and one of its most recent store openings was in a Super Target-anchored center. Another Sunflower opened beside a Trader Joe’s.

“We see a lot of cross-shopping consumers; our stores are a secondary destination for produce and meat,” Gilliland explained. “We co-exist very well with Trader Joe’s because they don’t focus on produce or meats, and those categories are 50% of our sales. They take away from our wine business, but we take their produce and meat sales.”

Sunflower maintains its low pricing strategy by keeping overhead low, minimizing store build-outs, optimizing purchasing by buying in bulk quantities and self-distributing from its company warehouse in Phoenix. The company sources locally as much as possible—a bit of a challenge, as the chain is becoming more regionally dispersed.

Sunflower continues to grow at a steady but conservative pace. Expansion, according to Gilliland, is limited by its supply line.

“We can probably go up to 1,000 miles from Phoenix,” he said. “California is next up on the agenda. We will open stores there in early 2011 and plan to open eight to 10 stores a year for the foreseeable future.”

In 2009, the retailer opened Sunflower Farm, a 40-acre working farm east of Boulder, Colo., that provides organic product to stores as well as local restaurants. The intent of the farm, Gilliland noted, is less about becoming a sourcing avenue for the stores and more about becoming a demonstration farm. Sunflower shoppers have the option of participating in the company’s Community Supported Agriculture program, where consumers can learn about composting, visit a petting zoo and re-connect with how food is grown.

“At the end of next year, we will be approaching $500,000 in sales,” he reported, “which positions the company for more competitive purchasing decisions.”

The growing chain continues to do well, with double-digit sales growth in organic produce and con