INFORMATION, INSIGHTS, IMPACT FOR FOOD RETAILERS A Penton® Publication | February 24-March 9, 2014 | Vol. 62, No. 4 | $10.00

IN THIS ISSUE: > SN Whole Health: Survey findings...30 > Convincing kids to eat produce...... 42 > Restaurants in the frozen case...... 56

SUPERMARKET NEWS

FINANCIAL OUTLOOK Weather puts focus on essentials

THIS WINTER’S HARSH weather conditions may be having a negative impact on impulse spending at super- markets, industry analysts told SN last week — although overall the cold and snow may be a positive force for at-home dining. “Severe winter weather pretty much kills trading up,” Andrew Wolf, managing di- rector for BB&T Capital Mar- kets, Boston, said.

For updates on the financial performance of food retailers, visit supermarketnews.com

“Discretionary spending had been making a recovery in 2013, which resulted in stron- ger sales. But if bad weather is keeping people from shopping more often and forcing them to stock up more when the weather lets up and they do go out for groceries, they are less likely to be looking for that one additional discretionary item. “But with snow and severe winter weather, they’re not The New going after that floral arrange- ment or whatever. They want only more essential items.” Scott Mushkin, managing SUPERNATURALS director for Wolfe Research, As wellness goes mainstream, a new breed of retail New York, offered a similar as- sessment. “No one wants to go banners is built to benefit out and do anything when it’s By JON SPRINGER wellness — and food’s central role within that so cold outside, so when they The landscape is undergoing a fresh trend — are busy building stores that are compet- do shop, they’re doing so less reseeding. ing with and sometimes defeating traditional re- frequently — and that’s going Around the country, new retail brands built tail brands. to depress impulse sales,” he specifically to play to the trend toward health and Continued on page 20 explained. However, analysts inter- Continued on page 61 retail

The New Supernaturals As wellness goes mainstream, a new breed of retail banners is built to benefit

Continued from page 1 Where many conventional have all foods. The projection provides still more evidence “In the 1980s, wellness emerged as an alternative but given up on the idea of expanding geographically, that wellness is going mainstream and a new breed movement of the counterculture of the 1970s, and and companies like Safeway and Supervalu are trim- of retailers is determined to be there. you had things like Whole Foods, Diet Coke and Jane ming their branches, their natural and organic rivals Analysts say it’s not necessarily too late for tradi- Fonda’s workout for the first time,” explained June are plotting new-store growth of 20% or more a year. tional supermarket companies to also participate in Jo Lee, VP of strategic insights for Hartman Group, And where public markets for companies including this growth — some, like Hy-Vee and Co., al- based in Bellevue, Wash. “By 2000, wellness became , A&P and have died, ready are, they say — but doing so requires that they more of an aspirational lifestyle and it converged in their place are , Natural understand their shoppers’ pursuit of wellness may with food culture. What we’re seeing [now] is beyond Grocers by Vitamin Cottage and . well have flipped how they think about and shop for lifestyle. It’s just the way we live, and think about To be sure, these changes have been in motion food. how we want to live, and how we think about food, for years, yet appear now to be gaining momentum, The Hartman Group, which has been tracking because food is so central to the notion of health and particularly when comparing recent sales trends and consumer attitudes about health and wellness for wellness.” future projections. According to SN’s sister publica- more than a decade, argues that consumer attitudes A key point in Hartman’s recently published tion Nutrition Business Journal, the natural/organic have evolved to a point where “health” has come to consumer wellness study was the revelation that all segment will grow 10% annually through 2020 as de- represent “quality of life,” playing out in “a culture of consumers today are under some influence of the mand continues to develop for healthy and nutritious wellness” that impacts all decisions about food. wellness culture — their behavior differs only by

20 | SN February 24, 2014 supermarketnews.com retail

degree. So where one consumer might view a soft self and community,” the Hartman report said. “The and is a contrast to patterns of old when wellness drink as antithetical to their wellness lifestyle, an- most involved of them have an eye on authenticity concerns might have limited the range of what one other might view having a Diet Coke every day as ac- and ground their purchase decisions in a bank of would buy, Lee explained. ceptable. But both shoppers view the item through knowledge, while those less involved are glad to rely “It’s about actively looking for what makes them the prism of their wellness, Lee explained. on experts; in common, they value fun, enjoyment feel good. So instead of thinking about a lack [of “Health and wellness is a very personal topic and and quality, which typically includes the ‘experience’ options], they are thinking about addition, explo- for each person it’s going to look a little different,” of shopping for and consuming wellness.” ration and discovery. You see that in the prolifera- Lee told SN. Around 25% of all consumers reside on the “pe- tion of specialized diets. You see self-diagnosis and Hartman noted that 13% of consumers are “core” riphery” of the wellness culture. These shoppers are research. People are trying new approaches to food. wellness consumers. This is the smallest group, but most likely to bow to convenience and price while It’s not reactive or negative. It’s not ‘I shouldn’t’ or the one most dedicated to the lifestyle, while the ma- shopping, but understand they should eat right and ‘I ought.’ It’s more exploratory. It’s ‘What can I do? jority of all shoppers (62%) are mid-level wellness exercise, and view health with a goal of happiness, What can I try?’” consumers. not just freedom from illness. For retail brands like Sprouts Farmers Market, “As of 2013, they have solidly embraced ideas of At retail, this demeanor plays out as shoppers Fresh Thyme Farmers Markets, Natural Grocers by health and wellness that integrate mind and body, seek to improve the quality of their lives as they shop, Continued on page 22

In a sense, organic is already mainstream. It’s so ubiquitous that consumers can find it anywhere from to Whole Foods. — JUNE JO LEE Hartman Group

supermarketnews.com February 24, 2014 SN | 21 retail

The Supernaturals produce very aggressively — in line with or below the discount channel. On top of that, it’s a great format Continued from page 21 macro-demographically: The Millennials are just in Vitamin Cottage, Lucky’s Market, The Fresh Market love with eating pure food, but they’re not doing that or Mrs. Green’s Natural Market, the answer may well well [economically], so value is important to them. be, “Try us.” All are working this year to provide new Sprouts marries that. And as long as those trends opportunities through new stores, while the indus- continue, the sky’s the limit.” try’s leader, , has also stepped Sprouts’ produce business accounts for 20% up its store growth pace. to 25% of its overall sales, generating up to three These companies (see capsule profiles) reside at times the weekly produce sales of conventional different spaces along the natural and organic spec- competitors, according to Karen Short, an analyst trum, and each may aim to serve slightly different for Deutsche Bank Securities, in a recent research demographic targets, to satisfy different ranges of report. It supports competitive pricing in produce store trip missions and to provide unique in-store through long-standing relationships with growers offerings. But all share the distinction of being engi- and by printing its weekly sales ads on a shorter neered to serve the “wellness culture.” deadline than competitors — 10 days prior to the “There’s been a shift toward enjoying food — but event versus four to six weeks typical of competitors. food that’s good for you,” explained Jay Jacobowicz, “This much shorter lead time means Sprouts is the president and founder of Retail Insights, a Brattle- The transitional customer go-to retailer on last-minute, excess supply, and as boro, Vt.-based natural products consultant. “The is definitely who we’re a result Sprouts can include compelling last-minute standard is increasing, and putting increased pres- looking at, but affordable deals that competitors cannot match and promote in sure on every part of the food distribution value prices appeal even to the their circulars,” Short said. chain to provide better, more healthful quality so Beyond that, Sprouts has also been willing to that the consumer — whether they are going to a res- higher-end shopper. do something else competitors have tended not to. taurant or picking something up at a supermarket — BO SHARON (with wife Trish) “Normally the produce section is high-margin — let’s — can feel good about what they’re eating. It’s really Lucky’s Market say mid-30s or 30ish — Sprouts takes less than that,” about quality everywhere I go, anytime I want. Mushkin noted. “This is the rationale for the Sprouts and Fresh market” style store business for more than 40 years, According to a recent pricing survey in Southern Thymes of the world that are so produce-forward,” he has made little secret of its strategy: Using low pric- conducted by Wolfe, Sprouts was priced continued. “These models have a significant chunk of ing in produce to attract shoppers transitioning to competitively to discounter Walmart on a 15-item the floor space devoted to produce. All of the surveys healthier lifestyles, primarily from conventional produce basket — although when the basket was ex- identify produce as the top one or two things in de- food retailers. This intersection of value and fresh panded to 40 items, Sprouts was priced about 10% termining where I want to shop. Then it’s things like — what Sprouts calls “healthy living for less” — has above the more upmarket Whole Foods. This, Mush- value and convenience and cleanliness and so forth.” led to impressive sales gains fueling a busy schedule kin said, likely reflects Whole Foods’ higher volumes of store expansion that will land the company in the and better buying terms. Sprouts ‘marries’ fresh, value Atlanta market for the first time this year. Continued on page 24 Sprouts, whose founders have been in the “farmers’ “Sprouts are very good executors. They know who they want to be and their messaging is fantastic,” Scott Mushkin, an analyst for Wolfe Research, told THE FRESH SN. “Perception is reality: The farmers’ market does not look like a very upscale format and they price MARKET Founded: 1975, Asheville, N.C. Founded: 1982, Greensboro, N.C. Key personnel: Jack Murphy, CEO Key personnel: Craig Carlock, CEO Stores: 31 in 9 states LUCKY’S MARKET Stores: 149 (as of 1/30/14) Annual sales: $250 million (industry estimates) Founded: 2003, Boulder, Colo. Annual sales: $1.3 billion (est. for FY ended Growth plans: At least one new store in 2014. Key personnel: Bo Sharon, co-founder and 1/14/13) president; Patrick Gilliland, CEO Founded as “Dinner for the Earth” in 1975, Earth Growth plans: Opened 19-22 stores in fiscal Fare says its goal is to be “the most trusted Stores: 4 2013. Company confirms seven locations “com- ing soon” and at least 27 signed leases. Planned organic and natural food market in the country.” Annual sales: N/A It prides itself for being a pioneer in eliminating new markets include Dallas. Growth plans: New stores in 2014 planned for products from its shelves containing trans fats The Fresh Market uses its small size, high ser- St. Louis, Billings, Mont., and Louisville, Ky. and high fructose corn syrup. The company vice and high product quality standards to craft

most recently has been emphasizing price, with Founded by culinary school grads Bo Sharon a compelling shopping experience. Its offering MARKET LUCKY’S OF COURTESY PHOTO a new EDLP program introduced in January. and his wife Trish, Lucky’s Market specializes is based on fresh — but not necessarily organic Although the company is publicly mum on plans in what it calls “traditional” food, with an em- — foods with high buying standards to ensure for growth, Earth Fare has added six new stores phasis on locally sourced, natural and organic quality. Its rapid new-store growth following since being acquired by Oak Hill Capital Part- offerings, as well as specialty prepared foods a public stock offering has not come without ners in 2012, and has acknowledged at least and natural-living products. Teamed with Sun- struggles: Officials acknowledge new stores in one new opening (Fort Worth, Ind.) this year flower Farmers Market co-founder Pat Gilliland, and California have not grown as fast as while reports suggest several others are in vari- Lucky’s last year began an expansion into Mid- anticipated, prompting more aggressive pricing ous stages of planning. west cities. promotions than typical.

22 | SN February 24, 2014 supermarketnews.com retail

The Supernaturals margins to prove it,” Mitchell Pinheiro, an analyst Lucky’s is approaching as a kind of following the company with Imperial Capital, said in laid-back, Boulder version of The Fresh Market, trad- Continued from page 22 a recent research note. The company’s 29% margin ing on perishable quality, specialty offerings and Sprouts stores average 27,000 square feet and, was 3% to 6% lower than primary competitors and community focus for people who like to cook. The according to Short, Sprouts is increasing gondola underscores its commitment to what it calls “every- business was founded in 2003 by culinary school heights in existing stores and building new stores day value pricing,” Pinheiro said. grads Bo Sharon and his wife Trish, who purchased with additional shelving capacity to increase the A stricter focus on buying allows Natural Gro- an old known as North Boulder Market. number of grocery SKUs to around 5,200 — a 30% cers to get by with a smaller footprint and associated “It was a conventional grocery store being increase. This increase will allow Sprouts to accom- development and operating costs than its competi- shopped as a ,” Sharon, who today modate a more complete grocery shop. is Lucky’s president, told SN in an interview. “We re- branded it and put in our ethic of affordable, good High standards at Natural Grocers FRESH THYME food. It’s heavily based on local and organic food, but The marriage between value and the natural/organic FARMERS there’s also a conventional mix because, as we say, trend is also playing at Sprouts’ higher-standard MARKETS ‘Drano opens drains.’ Sometimes you need that. counterpart, Natural Grocers by Vitamin Cottage. “From a chef’s background, there’s tradition in “A lot of people may want to go to Whole Foods but Founded: 2013, Phoenix and Mt. Pleasant, Ill. Grandma’s recipes,” he continued. “So where a recipe they feel they don’t have the means,” Mushkin said. Key personnel: Chris Sherrell, CEO; Jim Mc- calls for a can of mushroom soup, don’t mess around “These guys give them the opportunity to shop bet- Closkey, CFO; Brandon Bagley, EVP, sales and with it. We respect the iconic, American brands, be- ter-for-you at a lower cost.” marketing cause they serve a purpose.” Natural Grocers combines a strict focus on nat- Growth plans: 60 stores in six years beginning Lucky’s original location — which added an ac- ural and organic groceries and supplements with with 9 in 2014. companying restaurant and bakery in succeeding sharp pricing and an emphasis on nutrition educa- After Sprouts Farmers Market and Sunflower tion in its stores. Like Sprouts, it is a public company Farmers Market became one, some displaced with experienced, family control. veterans of the chains set about the process of NEW SEASONS “While most, if not all, of the natural retailers pro- starting all over again in a new market: Fresh MARKET/ claim to have a focus on value, NGVC has the gross Thyme, whose first stores are only now coming NEW LEAF to be, is the result. Officials say Fresh Thyme will resemble the “farmers’ market” style of its Founded: 2000 in Portland, Ore./1985 in Santa MRS. GREEN’S progenitors, but include more foodservice ele- Cruz, Calif. NATURAL ments. Its operators also have the benefit of Key personnel: Wendy Collie, CEO rollout experience and strong investors includ- MARKET Stores: 13 around Portland/6 around Santa ing the mass merchandiser into whose Cruz Founded: 1991, Scarsdale, N.Y. markets the chain will expand. Key personnel: Robin Michel, CEO; Bass Annual sales: N/A Khoury, VP, marketing and merchandising; Growth plans: New Seasons has 4 new stores Shige Hatanaka, SVP, operations planned in 2014 and 2015. tors in the natural space, and that is helping to fuel Stores: 17 Fast-growing Portland natural food phenom- new store growth in excess of 20% a year. Its stores enon spread its wings Annual sales: $100 million (industry estimates) range from as small as 5,000 square feet to as large into an entirely new market for the first time late as 16,000 square feet today. Growth plans: At least new five stores planned; last year when it acquired New Leaf, a similarly some reports said the chain would double in situated retailer with six stores in California. Sunflower offshoots size in 2014. Both New Seasons and New Leaf base their More closely resembling Sprouts — but targeting Natural Markets Food Group, the Canadian concept on community involvement and local private equity-backed owner of Mrs. Green’s, growth in a different part of the country — is Fresh food offerings, and both received B-Corp. has a mixed record of success in the U.S. Thyme Farmers Markets, the nascent farmers’ mar- certification for their respective record on sus- (its Fresh & Green chain of converted former ket chain led by former Sunflower CEO Chris Sher- tainability, employee relations and community supermarkets failed, as did Wild & rell, who left the company following Sunflowers’ outreach. Both entities are backed by investor Greene, a market-style food court at a acquisition by Sprouts. Sherrell told SN in a recent Endeavor Capital. area mall) but it appears to be all in on Mrs. interview that the benefit of having rolled out Sun- Green’s behind a revamped executive team, flower — including taking the chain to first-time plans for geographic expansion already under markets like Texas and — has prepared way and a potential public stock offering in the his team for a mission of bringing Fresh Thyme to years — has always been profitable, Sharon said. works. Mrs. Green’s was founded as a chain the Midwest. That chain has nine stores on tap for It added a second location in Longmont, Colo., last of small natural grocery stores in wealthy bed- 2014 and plans to build as many as 60 in five years. summer before hatching plans for a multicity ex- room communities around New York, and was Sherrell said he envisions Fresh Thyme to repli- pansion targeting Midwest college towns. Lucky’s acquired by Canada’s Planet Organic in 2007. cate many of the pricing and selection attributes of opened late last year in Columbus, , and in That group was later acquired by Catalyst Sunflower, while improving the shopping experience Columbia, Mo., in January. Additional stores — all Capital and combined with other investments by adding more dynamic foodservice programs in- in the 24,000- to 26,000-square-foot range — are under the NMFG umbrella. Its stores empha- cluding sandwich, deli and hot food offerings. planned in Billings, Mont., and in Louisville, Ky., this size all-organic produce sections, local suppli- Another former Sunflower figure — co-founder year. The expansion is being financed through an ers, attentive customer service and “green is Pat Gilliland — today is CEO of a team pursuing ex- EB-5 program targeting foreign investors as well as good” lifestyle positioning. pansion of Lucky’s Market, a specialty brand found- from Sharon’s own nest egg, earned through a long ed in Boulder, Colo., more than a decade ago. Continued on page 26

24 | SN February 24, 2014 supermarketnews.com retail SPROUTS FARMERS MARKET The Supernaturals Founded: 2002, Phoenix, with predecessors Continued from page 24 dating to 1943 NATURAL list of credits as a child actor. GROCERS BY Key personnel: Doug Sanders, CEO; Jim Sharon said Lucky’s differentiates from other Nielsen, COO farmers’ market stores through specialty offerings VITAMIN COTTAGE Stores: 167 like store-cured meats, prepared foods and staff Founded: 1955, Golden, Colo. butchers and cheese mongers (“We’re trying to bring Annual sales: $2.4 billion (est. for FY ending Key personnel: Kemper Isley, Zephyr Isley, 12/29/13) the art of butchery back,” he said). He also insists co-presidents value is an important part of the equation. Stores: 72 Growth plans: 55 new sites approved; 30 “The transition customer is definitely who we’re stores with signed leases on tap for 2014 and looking at,” he said, “but affordable prices appeal Annual sales: $431 million (FY ending 9/30/13) 2015. even to the higher-end shopper. There’s no sense Growth plans: 20% annually; 15 new stores in Sprouts is the oldest and largest “farmers’ for anyone to buy a can of organic black beans at 99 fiscal 2014 in Western U.S. states. market” style store chain, founded by the cents when you can get it for 77.” Boney family whose previous businesses in- Family-controlled Natural Grocers by Vitamin cluded Henry’s Farmers Market (which was Traditional players evolve Cottage relies on strict product quality stan- dards (it sells only organic produce and will sold and later acquired by Sprouts through its While the new breed of natural and organic play- not approve items known to contain artificial backer, Apollo Capital Management). The for- ers almost without exception sees conventional su- mat relies on large selections of fresh produce colors, flavors, preservatives, sweeteners, or permarkets as a base for their shoppers, it does not partially hydrogenated or hydrogenated oils), at low prices, aimed at shoppers transition- prevent traditional supermarkets from also partici- ing to a healthier lifestyle. Its 2012 acquisition affordable pricing and high levels of in-store pating in the growth of natural and organic, observ- of added 35 new service. Vitamins and supplements comprise ers said. stores and prepared it for a public stock debut. 25% of total sales. A public stock offering last “On the natural side, keep in mind the pie is Its new-store expansion program includes a year will help fund plans to grow store count by growing at four or five times the rate of conventional plan to arrive in Atlanta for the first time later 20% annually. According to a study by Buxton, foods. If we’re 10% of the food dollar now, then we this year. the U.S. could support as many as 1,100 Natu- can essentially grow by a factor of 10 times and still ral Grocers stores. Continued on page 28

LIKE US

GROW YOUR SOUP SALES.

f ine foods retail

The Supernaturals argue that Kroger and Safeway are. “The positive for a retailer is that, because the Continued from page 26 consumer has traditionally put more emphasis on be only a third of the total food dollar by the next the brand of food they were buying, most of this [lack generation,” Jacobowicz said. “There’s plenty of blue of authenticity] is directed toward the manufactur- sky in natural growth because the pie is continuing ers rather than the retailers,” Mushkin added. “The to grow, and consumer receptivity is increasing.” benefit of being a conduit for food is that some of this Jacobowicz said competition over time would negativity doesn’t rub off on you and makes your weed out players that don’t evolve and result in a business more able to capture the trend.” market likely to consist of more smaller specialists And as conventional retailers become more adept and fewer large generalists. at serving customers in the wellness culture, natural “We’re overstored as a country, but not all food retailers will feel pressure to up their respective stores are the same quality,” he said. “If you take a games, Lee of Hartman Group said. 50,000-square-foot store and close it, it may be re- “In a sense, organic is already mainstream. It’s so placed by two 20,000-square-foot footprints with a ubiquitous that consumers can find it anywhere from new model.” Walmart to Whole Foods,” she said. “So what spe- In Atlanta, where Sprouts is due to arrive later cialty stores have to do is focus more on high-qual- this year, it will encounter two of the largest and most If I were guessing whom ity products as well as experiences. So we’re seeing successful grocery retailers in the U.S. — Kroger and things like personalized approach to health, and spe- Super Markets — along with Walmart. Sprouts would pull from in cialized diets. Clear labeling of items like gluten free.” “Publix might be a little bit vulnerable, and I’ve Atlanta it would be Walmart Hartman’s research indicates that affordable never thought about them that way,” Mushkin said. and Publix, with Kroger as an items also become an expectation of the wellness “They’re definitely one of the better operators but I’m honorable mention. culture. not sure if they have the produce or the pricing. So “Wellness shouldn’t be a personal practice for if I were guessing whom Sprouts would pull from in — SCOTT MUSHKIN those who can afford it. It should be a social wellness Wolfe Research Atlanta it would be Walmart and Publix, with Kroger culture. Consumers are in fact looking for healthy as an honorable mention.” that’s affordable and convenient. They appreciate it In general, Mushkin said traditional grocers like “The biggest problem that traditional grocers when they can find a brand for less. They love find- Kroger have improved produce presentation and per- have is that they are not perceived to be authentic,” ing an abundance of fresh produce and organics at formance in recent years to benefit from consumer he said. “Say what you want about [Whole Foods co- Walmart. And it isn’t just the shopper’s bottom line attention toward wellness. But some will likely battle CEOs] Walter Robb and John Mackey, they are some driving this. There’s the notion that food is the be- a perception problem due to strong associations with of the founding fathers of the movement. It’s hard to ginning of health and wellness, and health and well- branded goods rejected by shoppers of the new breed. argue Whole Foods is not authentic. But it is hard to ness is a social problem.” SN

Maximize your merchandising space! SN INSIGHT The so-called mainstreaming of the health and wellness trend is resulting in new possibilities in store formats and foods that are disrupting the status quo. Where Whole Foods exploded behind the idea of marrying “good food” to “natural food,” the more recent- ly emerging farmer’s market concepts like Sprouts today are finding nearly unlimited potential behind brands pair- ing “natural food” and “value.” This clicks snugly into research indicating an emerging “wellness culture” that believes eating well isn’t something that ought to be re- Increase your merchandising served only for those who can afford it. space by as much as 30% These natural competitors — several of the fastest- growing profiled in this article — will test the ability of and increase sales! conventional supermarkets to evolve their own concepts Let us show you how you can achieve and appear likely to further accelerate the ongoing Learn more at: quick ROI and increase your annual store trends toward private label, smaller boxes, and fresh at supermarkets. The most vulnerable to this change may sales! Contact Southern Imperial today for www.nextmerchandising.com not be supermarkets but the branded goods on their a custom quote on the NEXT System! shelves, particularly if the non-GMO standards champi- oned by natural formats continue to gain momentum. — J.S.

800.747.4665 or 815.877.7041 • www.southernimperial.com 28 | SN February 24, 2014 supermarketnews.com