Natural grocery stores are at risk as organic goes mainstream | CNN Business (2024)

San Francisco CNN Business

In the span of just eight days, two natural and organic grocery chains filed for bankruptcy.

The one-two-punch of insolvencies at Lucky’s Market and Earth Fare came at a time when natural foods grocers no longer serve as the gatekeepers for the health-centric products they sell. Once-niche organic products have gone mainstream. It’s the conventional retailers – the neighborhood supermarket, the expansive discount store and the cavernous warehouse club – that are bagging a greater share of natural and organic products sales.

It’s “a perilous environment for small-scale grocers,” wrote Morningstar equity analyst Zain Akbari, in a February 20 research note on Sprouts Farmers Market (SFM).

Lucky's Market in Melbourne, FL. Lucky's Market Related article How a beloved organic grocery chain collapsed

The downfalls of Lucky’s and Earth Fare – and to a lesser extent, the more conventional Fairway Market – are serving as gut-checks for other longstanding organic grocers that want to avoid similar fates.

“I think they still can survive,” Akbari said in an interview with CNN Business. “But it’s a matter of finding the right niche and navigating competitive waters.”

Carving a niche

Sales of natural and organic products have continued to grow substantially as the industry evolves from a grassroots movement into a consumer packaged goods staple.

In 2018, natural and organic sales hit $158 billion, according to industry trade publication Natural Foods Merchandiser, which is currently collecting data to tabulate 2019 sales. About 45% of the 2018 sales occurred at conventional retailers, while 37% took place in the natural products channel.

“Yes, competition is coming in gangbusters,” said Christine Kapperman, senior content director at New Hope Network, publisher of Natural Foods Merchandiser.

Natural retailers are having to get used to single-digit sales growth, after years of posting double-digit growth.

“As an industry matures, it’s naturally going to slow, but it’s going to continue to grow,” she said. “Zero percent to 1% [comparable stores sales growth] doesn’t feel good, but that’s higher than conventional grocery.”

What the natural retail channel has going in its favor is that it remains diverse, she said. The vast majority of the 9,000 natural foods and supplement stores in the US are small, independent operators with one or two shops.

“I just think there’s so much more going on in this space,” she said. “It’s an industry of unique folks sharing their health and wellness experiences with their communities. Everybody has that story of how they found food and found healing in some way.”

In Florida, Freshfields Farm has 47-year-old roots in selling local produce and meats. Its two barn-shaped stores in Orlando and Jacksonville are meant to be destination spots for organic and local meats, fruits and veggies.

And when retailers such as the Kroger-backed Lucky’s and Sprouts went big on opening stores in Florida, Freshfields Farm dug in deep and focused on improving its internal operations.

“We’re a very old-school, not a flashy kind of business,” said Earl McGrath, Freshfields Farm’s produce director. “Our growth, when we have grown, has been kind of slow and steady.”

At Rainbow Grocery in San Francisco, the venerable worker-owned natural foods cooperative founded in 1975 is feeling the competitive pressures. Grocers like Trader Joe’s, Whole Foods and Sprouts have multiple locations in San Francisco; plus, the area’s technology boom has shifted demographics and priced out longtime Rainbow customers into the south, east and north bays.

“As much as we have that history, how do we re-educate the new people as to why it’s a benefit to shop here versus Trader Joe’s or Whole Foods,” said Cody Frost, Rainbow’s marketing coordinator.

Those value propositions include touting how the dollars stay local, partnering with delivery apps like Instacart and offering eco-friendly solutions like bulk foods and bulk bath and body goods.

“As business and the economy takes dips and dives, we’ve seen many shifts,” Frost said. “But overall, the health of the store is very good and very strong.”

Survival of the largest

As Lucky’s and Earth Fare grappled with their respective bankruptcies, the two largest remaining independent, publicly traded natural foods grocers outlined plans for how they would survive.

Fewer people are shopping at Sprouts, and new CEO Jack Sinclair has a plan to change that.

Sprouts is going back to basics with smaller stores featuring the company’s original farmers’-market-like approach. The 340-store grocer intends to enter new markets with a higher concentration of stores and place more attention on its supply chain to ensure that its products are fresh.

The company also plans to shift away from commodity-type promotions – think cheap chicken breasts – to more focused marketing efforts highlighting products unique to Sprouts, like Van Leeuwen oat milk vegan ice cream.

“And the outcome of that, potentially, is you lose some unprofitable customers,” Sinclair said during a call last week with analysts. “But in the long run, it builds us a kind of profitable traffic growth that we’re going to be aspiring to over the course of the next few years.”

Natural Grocers By Vitamin Cottage (NGVC), which operates 156 stores in 20 states west of the Mississippi River, reported sales growth of 3.8% to $230 million, a 1.9% increase in comparable same-store sales for the first quarter of its fiscal 2020. The grocer increased enrollment and penetration metrics tied to its customer marketing and loyalty program.

“We’ve slowed down our growth strategy so that we are self-funding our actual growth,” Kemper Isely, Natural Grocers’ co-president, told CNN Business in the days following the Lucky’s Market bankruptcy. “In times of intense competition, it’s important to be careful about your site selection.”

Isely said a key element to Natural Grocers’ future success is tied to the company’s dedication to key principles including selling only certified-organic produce; applying a rigorous screening process to all products; employing nutritionists; and having knowledgeable employees easily accessible by customers.

“[Word of mouth] is probably the biggest driver of business that you can have,” Isely said. “Giving a customer a good experience in your store is the most important thing you can do.”

Natural grocery stores are at risk as organic goes mainstream | CNN Business (2024)
Top Articles
Latest Posts
Article information

Author: Chrissy Homenick

Last Updated:

Views: 5318

Rating: 4.3 / 5 (54 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Chrissy Homenick

Birthday: 2001-10-22

Address: 611 Kuhn Oval, Feltonbury, NY 02783-3818

Phone: +96619177651654

Job: Mining Representative

Hobby: amateur radio, Sculling, Knife making, Gardening, Watching movies, Gunsmithing, Video gaming

Introduction: My name is Chrissy Homenick, I am a tender, funny, determined, tender, glorious, fancy, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.