Forty Under 40: Small Chains Flourish

Supermarket veteran Mike Gilliland, who founded Wild Oats Market in 1987, is on a mission: to bring natural and organic food to the masses. Gilliland stepped down from Wild Oats in 2001, and one year later he was back in the game with a new concept, Sunflower Farmers Market.

The 20-store natural-foods grocery chain is on Chain Store Age’s first-ever ranking of the 40 fastest-growing chains with 40 or fewer locations. For the complete list, which is based on year-to-year sales, see the chart starting on page 24. Several of the retailers are profiled here.

Sunflower: When Gilliland left Wild Oats, he knew he would eventually get back in the business; he just didn’t know it would be the next year.

“I got bored a lot sooner than I expected. But I really love the grocery store business,” said Gilliland, founder, president and CEO, Sunflower Farmers Market, Boulder, Colo.

Gilliland built Wild Oats into a $2.2 billion company before resigning as CEO (the company was acquired by rival Whole Foods Market in 2007). With Sunflower, he is tapping into a new vibe, one that especially resonates with consumers in today’s harsh economic climate: value.

“I couldn’t have predicted what was going to happen back when we first launched,” he said, “but it does seem to be the right time for us.”

With a tag line of “serious food…silly prices,” Sunflower targets consumers who want to eat healthy and are interested in natural and organic foods, but can’t afford—or don’t want to pay—the higher prices typically associated with such products.

In many ways, the chain is a more-affordable, downsized (the average footprint is 20,000 sq. ft.), no-frills version of Whole Foods. Sunflower stores are bright and upbeat, but are fairly simple in design.

“There’s nothing fancy about us,” Gilliland said. “In terms of atmosphere, we’re comparable to Trader Joe’s, but with a few more bells and whistles and a higher level of finish. For instance, we have a service meat department, and we also offer lots more produce.”

Indeed, produce, with an emphasis on organic, is one of the chain’s strong suits, accounting for approximately one-third of its sales and floor space. Another is its private-label line.

“We carry about 350 private-label grocery SKUs and another 350 in the natural-living segment,” Gilliland said. “All told, private label accounts for about 10% of our total SKU count and 20% of our sales. Our plan is to add about 100 private-label SKUs annually.”

Value pricing is key to Sunflower’s strategy.

“We try to kill everyone on price, especially on produce,” Gilliland said. “It’s our loss leader. We even beat Wal-Mart when it comes to produce prices.”

A low-cost economic model is the engine that drives the company. The chain keeps its overhead low, with basic store fixtures and furnishings. It buys big, and buys produce by the truckload directly from farmers.

“We self distribute, which is usual for a chain our size,” Gilliland said. “Ninety percent of our produce comes direct through our own warehouse, which helps us keep the prices down. It also makes for a fresher product.”

A simple store build-out and no-frills store environment helps minimize construction costs.

“We use a lot of recycled equipment and recycled real estate sites,” Gilliland added. “On average, we’re able to build a new store for less than $2 million, so we don’t need a big return.”

Former Wild Oats veterans comprise more than 90% of Sunflower’s management team.

“That’s also helped,” Gilliland added. “We’re all able to capitalize on the relationships we had built up with farmers and suppliers.”

Sunflower expects to open eight stores in 2009. Expansion, at least for the foreseeable future, will be limited to where the chain’s existing 20 stores are located, in the West and Southwest.

“We plan to grow at a rational or reasonable rate,” Gilliland said. “You learn from your mistakes, and one of the mistakes we made at Wild Oats was growing too fast.”

The chain, which is one-third owned by La Jolla, Calif.-based Pacific Corporate Growth, generated roughly $200 million in revenue in 2008. Gilliland expects to do $300 million in 2009.

Small-town retailers can produce big-time results., as is the case with Home Hardware Center, based in Winnfield, La. With all of its units sprinkled in small towns in Louisiana and Mississippi, Home Hardware Center caters to contractors, do-it-yourselfers and homeowners. The chain was launched in 1984 by Jim Smith, a small-town Southerner himself, who saw a niche for a home center retail operation that could out-serve the big boxes.

“We have found success in these small- to medium-sized markets where, frankly, people don’t really like the big-box home center stores,” Smith said. “And, because these are generally underserved markets, it has been a good niche for us.”

Six of the Home Hardware Center stores are in small towns in Mississippi; nine are in Louisiana. Merchandise offerings are deep—from tools, paint and hardware to electrical, lawn and garden, and sporting goods—and the retailer approaches $40 million in annual sales through a combination of its bricks-and-mortar stores and an online catalog.

Home Hardware Center’s growth has come through a combination of ground-up development and acquisition. According to Smith, five of the 15 stores were new-build and the remaining 10 were acquired.

“In several cases, we acquired competitors and then merged their operations into ours,” he added.

This year will see continued growth, despite a down economy. On tap for early this year is another acquisition. Smith plans to continue to watch for opportunities to build or acquire to further boost the chain’s store count.

“Also, we are remodeling two locations this year—one in Louisiana and one in Mississippi—and adding larger sales floors to both,” he said.