Call Whole Foods Market Inc. the Starbucks of the food retailing business. Like the pricey coffee emporium, Whole Foods asks for and gets premium prices for premium products.

The Austin, Tex.-based specialty grocer has created demand for expensive but appetizing delectables, and built elegently appointed stores to serve the cult of food lovers it has inspired.

“This company has single-handedly taken a niche category and brought it into the mainstream,” says Ed Aaron, an investment analyst with RBC Capital Markets in Denver.

Its niche? The fast-growing market for organic and natural foods, of which Whole Foods is the indisputable leader. In 2004, the niche was an $18.4 billion segment of the overall $457.4 billion supermarket sales industry, having grown 13 percent from $16.2 billion in 2003, according to Nutrition Business Journal. Sales of organic foods and beverages alone — a narrower and stricter category involving government guidelines and certification — grew 17 percent to $12 billion last year.

Whole Foods is a force to reckon with. Sales skyrocketed 70 percent to $3.87 billion in 2004, from $2.27 billion in 2001. By 2010, it expects $10 billion in annual sales.

For the food retailing industry, organic and natural foods is the spiciest dish in an otherwise bland meal. And Whole Foods is the five-star chef, occupying the top rung of the grocery ladder as it expands,.

“At one end is Wal-Mart and at the other end is Whole Foods, and both ends are growing,” says Gene Gerke, founder and president of Gerke & Associates Inc., a management consultant in Columbia, Mo.

Everyone inbetween — the Albertson's (which in September announced the chain was for sale) and Winn-Dixies (which is now operating under bankruptcy) of the world — are being squeezed by Wal-Mart's high-volume, low-cost strategy at one end and Whole Foods' high-quality, premium pricing at the other.

The 25-year-old Whole Foods chain, which wouldn't comment for this story, doesn't have its meaty niche market to itself. There's any number of Mom and Pop health food stores left; also, there's Wild Oats, Whole Foods closest direct competitor. But Boulder, Colo.-based Wild Oats, while continuing to grow is stores and sales, is less than one-tenth of the size of Whole Foods and operated at a loss in the first quarter.

To compete, Wild Oats is hooking up with Stop & Shop to operate what the partners call stores within stores. The organic retailer has opened two 1,400-square-foot holistic health boutiques inside Plymouth, Mass., and Fairfield, Conn., stores operated by the grocery chain.

In addition, Wild Oats is expected to get a boost from grocery maven Ronald Burke, who in March bought a 9.5 percent stake in the retailer for $25 million.

Turnaround specialist Burke bought grocers Alpha Beta, Ralphs and Fred Meyer and and sold them to Kroger for $12.6 billion six years ago. Before that he bought Chicago-area supermarket chain Dominick's and then sold it to Safeway Inc. for $1.2 billion.

One close but indirect competitor is Trader Joe's, a popular chain owned by Germany's Aldi Inc. with an eclectic choice of less expensive goods. Trader Joe's stores are smaller, not heavily organic and have a changing mix of gourmet foods. The selection isn't as broad as at Whole Foods.

Analysts say Whole Foods is a masterful merchandiser and knows how to turn an otherwise mundane chore — grocery shopping — into a must-see event. But what most impresses investors is the company's spectacular growth, including consistent double-digit increases in same store sales.

Its offerings include everything from organic apples to organic cotton underwear and a wide choice of foods to be taken home or eaten on the premises. It's all presented in a beautiful and stimulating way.

“There's a lot of sampling going on, and the employees are very knowledgeable,” says Gerke. “It's a very energized environment in which to buy food.”

The chain started in 1980 when the owners of two Austin natural foods stores, including current current Chairman and CEO John Mackey, got together to open the Whole Foods Market. Since then, the company has grown to about 176 stores (and counting), including seven stores in the United Kingdom (where it's been nicknamed “whole paycheck”) and three in Canada.

It has eight distribution centers, and four subsidiaries, including the Allegro Coffee Co., and a seafood-processing center. It also produces food under several private labels.

Much of the company's expansion has come through acquisition. Whole Foods started buying up other stores in 1986 when it purchased the Bluebonnet Natural Foods Grocery in Dallas, and hasn't stopped since. In 2004, Whole Foods consumed the U.K.'s Fresh & Wild stores. It's also planning a 75,000-square-foot Whole Foods-branded store in central London, a beachhead in an expected expansion into Europe once the U.S. market is saturated.

But now it's on a tear opening new stores in this country. In July, when it announced third-quarter earnings, the company said it had 65 stores comprising 3.5 million square feet, under development.

Store size is growing too. In the last five years, Whole Foods average store square footage has grown 22 percent to an average of 53,400 square feet, bucking an industry trend to smaller (about 32,000-square foot) stores. In the next four years, the company plans to open 58 stores that are at least 50,000 square feet in size. In Austin, the company's flagship location — featuring 600 choices of cheese, 40 varieties of olives and 18 flavors of handmade gelato — is a huge 78,000 square-foot-giant.

Whole Foods is also becoming the urban grocer of choice. The company now operates three stores in New York City — including the city's largest grocery store, the 58,000 square foot Columbus Circle store located in The Shops at Time Warner Center — two in San Francisco, four in Atlanta, three in Chicago, two in Boston, two in Dallas, four in Houston, one in Portland and one in Seattle.

Mixed-use moves

A second Seattle store is set to open late next year when a new, $200 million condominium development called the 2200 opens near the city's downtown business district. The 261-condo building is being developed by Vulcan Real Estate, an arm of the Paul G. Allen empire known as Vulcan Inc. The 550,000 square foot, mixed-use development will include a 160-room Pan Pacific Hotel and 100,000 square feet of commercial space, including a Starbucks, a Bank of America and a 50,000-square-foot Whole Foods.

“Whole Foods is a very successful national grocer, a brand that speaks to a number of our customers and other retailers we'd like to attract as well,” says Ada Healey, vice president of Vulcan Real Estate in Seattle.

Whole Foods has become a magnet for other developments as well, including the 74-story Met 3 condominiums in Miami and the 160-unti Aurora at Yerba Buena apartment complex in San Francisco. In fact, about a fifth of Whole Foods planned stores — about a dozen as of May 2005 — are located in mixed use developments like Seattle's 2200.

Whole Foods primary venue, though, is still the horizontal, metro/suburban strip mall with plenty of parking. There, too, developers are in hot pursuit of the national food retailer.

“Whole Foods is everything,” says Charles Woods, owner/manager, Chandelle Development in Denver. “They are the focal point of our redevelopment. And they have been the best retailer I've ever worked with.”

Chandelle has been redeveloping Denver's Tiffany Plaza, a dying, 1970s-era shopping center that the developer has refurbished over the last two years into a 240,000-square-foot mall anchored by Whole Foods and including a 24 Hour Fitness health club, a Benjamin Moore design center, a yoga studio and a Cingular Wireless store.

All that fits in with the Whole Foods lifestyle, a concept based on environmental stewardship that the grocer is beginning to market as well as healthy, expensive food. In fact, much of the growing square feet it occupies is being used to expand the stores' offerings — to clothing, books and music even hair styling.

In October, the company is scheduled to open the first of what it is calling the Whole Foods Market Lifestyle store, in a separate addition to its existing West Hollywood, Calif., store.

The 2,000 square foot add-on includes Edun Clothing, a line of clothing from U2's Bono, Green Sage Sustainable Furniture, Safecoat Paint, Lenore Handbags (made from old phone books), and John Masters Organics Salon Hair and Facial Care.

Ironically, the only thing threatening the grocery chain's success is success itself, say analysts, some of whom suggest it retain its focus on natural products.

Prudential Equity Group LLC analyst Robert Campagnino questions whether its move into “lifestyle” products at the West Hollywood store is a distraction.

“We see part of the company's success as being attributable to a laser-like focus on opening and running some of what we see as the best food stores in the U.S.,” says Campagnino. “And we think any dedicated move into slower-turning (but likely higher margin) general merchandise categories would be a mistake.”

Whole Foods is a “big gorilla,” says Gerke, who is quick to ask: “Can it manage its growth?”

So far, growth hasn't slowed it down.

FINDING A NICHE

PROBLEM:

In a competitive market, where Wal-Mart is eating up most of the grocery growth, how can a food chain find its sweet spot? And how can it stay the leader of the pack?

SOLUTION:

Take a page from Starbucks playbook. Don't feed the masses. Go after the upscale demographic; shoppers willing to pay high prices for top-of-the-line products. Also, offer them natural and organic goods, which are growing in popularity as foodies watch what they eat.

Courting Whole Foods

Corporate guidelines for real estate brokers:

  • 200,000 people or more in a 20-minute drive
  • 40,000-75,000 square feet
  • Large number of college-educated residents
  • Abundant parking for exclusive use
  • Mostly horizontal strip centers; some mixed-use developments
  • Easy access from roadways; lighted intersection
  • Excellent visibility, directly off of the street
  • Must be located in a high traffic area (foot and/or vehicle)

Source: www.wholefoods.com