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The Honolulu Advertiser
Posted on: Sunday, August 19, 2007

Whole Foods' arrival in Hawaii daunting to small grocers

StoryChat: Comment on this story

By Andrew Gomes
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Damian and Karen Paul, of The Source Natural Foods store in Kailua, said they think Whole Foods will have a greater effect on traditional supermarkets when it opens its stores in Hawai'i.

JEFF WIDENER | The Honolulu Advertiser

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WHOLE FOODS MARKETS VS. NATURAL FOODS STORES IN HAWAI'I

The biggest natural food retailer in the United States is opening four stores in Hawai'i in the next few years. Here's their size in square feet compared with the nearest existing natural foods market.

Kahala

26,000

(opening '08)

'Umeke Market

4,500

Ward Centers

67,000

(opening '08)

Down to Earth MO'ili'ili

6,000

Kahului, Maui

26,300

('08 or '09)

Mana foods PA'ia, Maui

6,500

Kailua

40,000

(opening '10)

The source

1,400

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Hawaii news photo - The Honolulu Advertiser

A Whole Foods Market in Jersey City, New Jersey.

EMIL WAMSTEKER | Bloomberg News

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Hawaii news photo - The Honolulu Advertiser

Down to Earth Natural Foods and Lifestyles in Mo'ili'ili.

DEBORAH BOOKER | The Honolulu Advertiser

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Dean Nelson is a natural foods store owner, not a boxer. But when industry titan Whole Foods Market opened a store near his in New Jersey, he said he felt like he was in the ring with Mike Tyson.

"You see your life and your family's well-being flash before your eyes," he said. "You get hit with one punch, recuperate, then get hit with another punch."

Fortunately, Nelson's business, Dean's Natural Food Market, absorbed blows that on some days were as heavy as a 40 percent hit to sales and survived. Three other small competitors in the area did not, he said.

Nelson's experience is something Hawai'i's collection of more than 40 small, independent natural and organic food retailers may benefit from as Whole Foods prepares to open four big stores in the state over the next three years.

As the nation's largest natural and organic food retailer, Whole Foods' planned stores on O'ahu and Maui will collectively occupy almost 160,000 square feet about the size of Costco in Iwilei and dwarf the combined size of the state's existing natural food stores.

The entry by the upscale food grocer will present new options for Hawai'i consumers, and introduce major new competition to large supermarket chains.

But to mom-and-pop natural food retailers like Hawaiian Moons Natural Foods in Kihei, Maui, or the Honolulu cooperative Kokua Market, Whole Foods represents a daunting challenge.

"It's definitely a tidal wave," said Daryl Yamaguchi, president and co-owner of 'Umeke Market Natural Foods & Deli in Kahala.

PLANNING TO ADJUST

Yamaguchi said he's concerned about Whole Foods opening its first Hawai'i store across from his early next year. He said he plans to adjust operations and expects that Whole Foods will promote awareness of natural foods among more consumers.

"They are going to grow the market," he said. "Anyone related to the industry is going to benefit."

Still, Yamaguchi's wary outlook is pervasive.

"We expect them to come in and start a price war immediately," said Ed Thielk, president of Mana Foods in Pa'ia, Maui.

Thielk said the days of friendly competition that he said exists among kama'aina natural food store operators will be destroyed by Whole Foods, which he suspects will try to outdo things Mana Foods does well.

"We feel we can go blow for blow, but they have deeper pockets and it doesn't hurt them as much," he said.

Mark Fergusson, CEO of Down To Earth Natural Foods and Lifestyle, Hawai'i's largest natural foods retailer with five stores averaging 5,000 square feet, also expects a ruthless attack by Whole Foods on his 30-year-old company.

"Whole Foods is a $5 billion company that built its success by eliminating the competition with their high-profile and aggressive CEO publicly stating that as his goal," he said.

Fergusson is referring to Whole Foods chief John Mackey, who in a very public incident last month was discovered to have been promoting Whole Foods and disparaging rival Wild Oats Market on a blog using the pseudonym Rahodeb, a anagram of his wife's name, Deborah.

Supporters of Mackey have said that his postings, for which Mackey apologized, amount to bluster from an extraordinarily competitive and unorthodox leader.

A Whole Foods representative did not respond to a request to comment on the subject.

LOWER PRICES

Fergusson of Down To Earth said his focus will be to enlarge his Honolulu store with a redesign and renovation, renovate and expand his Kahului store and add a warehouse to allow larger purchases and lower prices.

"While there may be some demand in Hawai'i for the high-priced gourmet products and glitzy shopping experience that Whole Foods has to offer, this is not our market," Fergusson said.

Whole Foods may be different in many ways from small, independent natural food stores, but it dominates an industry that is becoming increasingly crowded as more organic foods are stocked by conventional supermarkets, bulk discount clubs like Costco and even Wal-Mart.

Grown from a single store co-founded by Mackey called Safer Way, Texas-based Whole Foods is today a chain of about 200 stores.

Whole Foods stores average 32,000 square feet and $31 million in annual sales. Elements include salad and seafood bars, a wine-tasting room and a chocolate fountain for dipping anything from fruit to cookies.

Items on the shelf range from about 250 artisan cheeses to nitrate-free meat to yoga apparel. The company sells organic items from lemonade to flowers to baby clothes.

Whole Foods also offers to smoke meat, fry fish, make sushi, bake pizzas and cook pasta in the store for customers.

In the last fiscal year ended September 2006, publicly traded Whole Foods reported sales of $5.6 billion. The company is seeking to become dramatically larger by acquiring No. 1 rival Wild Oats for $565 million, though the Federal Trade Commission is attempting to block the proposed acquisition in court, arguing that the combined company would control too much of the natural foods market.

According to The Associated Press, confidential filings mistakenly disclosed publicly by the FTC said the opening of a Whole Foods store can cut revenue 30 percent or more in nearby Wild Oats stores.

Industry consulting firm Danny Wells & Associates Inc. estimates that Whole Foods represents 10 percent of a $55 billion natural products market.

In Hawai'i, Whole Foods plans to open four stores, starting with a 26,000-square-foot store at Kahala Mall next spring.

A 67,000-square-foot store is under construction at Ward Centers and although ancient Hawaiian burials have been found on the construction site, opening is still projected for late 2008.

On Maui, a 26,300-square-foot Kahului store at Maui Mall is scheduled to open in late 2008 or early 2009. And a 40,000-square-foot Whole Foods in Kailua is slated for 2010.

Consultant Danny Wells, a former natural food retail business owner, said Whole Foods' competitive impact on Hawai'i's natural foods landscape should be no different than for any retail market that sees some weaker players give way to stronger ones.

"It's always a weeding time when a big chain expands into a new market," he said.

Similar situations have played out in other retail categories nationwide with expanding behemoths including Home Depot, Starbucks, Wal-Mart and Borders Books & Music all of which do business in Hawai'i.

RIVALS CAN BENEFIT

But California-based Wells said Whole Foods typically has its greatest impact on traditional grocery stores, taking 80 percent market share from their business compared with 20 percent from natural food stores.

Wells also said Whole Foods, more of a mainstream grocer heavily emphasizing natural and organic products, has helped make the natural foods pie bigger by increasing consumer awareness and demand that benefits smaller rivals.

Damian Paul, owner of The Source Natural Foods in Kailua, said he believes that positives from Whole Foods will outweigh negatives.

"Whole Foods will introduce natural and organic foods to a whole crop of people who wouldn't shop in my store," said Paul, whose business is a block from Whole Foods' planned store site. "I think it's really going to affect Safeway, Foodland and Times more than it will us."

Paul started The Source in 1986, and runs the 1,400-square-foot store with his wife, Karen, an herbalist studying to become a naturopathic doctor.

Paul said he's familiar with Whole Foods, and is certain that The Source will have equal prices but more detailed and personalized service. "I don't think Whole Foods is going to be able to offer that," he said. "People know they can come in our store and get answers."

Still, being a smaller rival to Whole Foods or other big chains can be scary and painful, as Nelson experienced.

Nelson opened Dean's Natural Food Market in Ocean, N.J., in 1996. The 6,000-square-foot store with a full-time nutritionist and herbologist developed into the area's market leader, he said. Nelson opened a second slightly larger Dean's seven miles away in June 2004.

Then in November 2004, Nelson got his first taste of David-Goliath competition when a 130,000-square-foot Wegmans supermarket opened across from the original Dean's. The Wegmans store featured a "store within a store" natural foods department called Nature's Marketplace.

New York-based Wegmans, with about 70 stores and 2004 sales of $3.4 billion, drew Nelson's best customers and drained sales by as much as 50 percent on some days. "We had some really dark days," Nelson said. "That was very scary."

Nelson said he felt like he had been diagnosed with a terminal illness, and experienced denial followed by anger. Then he said he faced a decision to ball up in a corner or fight.

Turns out he had the fighting spirit, so much so that he knew Whole Foods planned to open a store nearby before he opened his second Dean's.

"For some reason I said, 'Let's do this anyway,' " Nelson recounted.

Whole Foods' 48,000-square-foot store opened in June 2005, and sales at Dean's took a pounding. Nelson said he relied on a strong customer loyalty program, managed his inventory better, focused on exceptional customer service and targeted areas he felt Whole Foods didn't do as well on, such as a juice bar, nutritional items and eclectic foods.

"Your best customers are going to shop at both locations whether you like it or not," Nelson said. "That's just the way it is. There's almost nothing you can do. You don't beat these guys, you coexist with them."

Nelson said sales this year are within 5 percent of where they were before Whole Foods opened, and that he is seeking to expand his original store by 2,000 square feet. "I feel we're on pretty firm ground."

Reach Andrew Gomes at agomes@honoluluadvertiser.com.