Health-Food Chains Spar for Baby-Boomers
(FORTUNE Magazine) – "Would you ladies like a sample of Fantasia Planet Green drink with blue-green algae?" My mom glanced queasily at the plastic cup of green sludge the saleswoman was proffering, and took a swig. "At least it tastes better than it looks," she said.
I had taken Mom grocery shopping at St. Louis' new Wild Oats natural-food supermarket. Wild Oats and its crunchy national rival, Whole Foods, are battling for shoppers city by city. For two businesses founded by peace-loving '60s throwbacks, they invade each other's territories with surprising aggression. (When Austin-based Whole Foods opened a store in Wild Oats' hometown, Boulder, Colo., it sent Wild Oats a game of Risk with a note saying, "Forewarned is forearmed.")
Catering to an aging population educated about nutrition, both chains have moved beyond traditional health-food markets and built stores in towns you wouldn't think of as sprouts-and-tofu meccas--like St. Louis. Wild Oats opened its second St. Louis store in January. Whole Foods hopes to open one next year. The battles will be watched closely; the winner could gain the upper hand in the health-food industry and a grip on a lucrative customer base.
"Our typical customer is an educated female baby-boomer," says Jim Lee, president of the Wild Oats chain. Mom fits the bill, with a doctorate in education, a decent income, and a fear that hormone-filled meat contributed to a friend's breast cancer. After recovering from the algae drink and chuckling at the organic dog food, she pauses in front of the dairy case. "No hormones," she says, examining a carton of organic milk. "I might stop at a store like this to buy milk." But when we pass cups of instant organic oatmeal, my mom shakes her head: "Ninety-nine cents! For a cup with a few oats!"
There's a reason this $25 billion category, growing at 15% to 20% a year--one of the fastest-growing businesses in retail--is so profitable: Wild Oats and Whole Foods have high markups. While the standard supermarket (which both chains say is their biggest competition) sells $487 per square foot, Whole Foods sells $826, and Wild Oats gets $538, according to a Morgan Stanley report. For that money, you're buying into a lifestyle. The stores donate some of their profits to charities and offer massage, nutrition information, and classes like The Joys of Soy.
But as we take this in, my mom has noticed something--it's 11:30 Saturday morning, and there aren't many customers. Sure, Wild Oats is growing at a rapid clip--profits were up 23% last year, to $17.8 million, on revenues of $721 million, up 36%--but it expands by building new stores in territories adjacent to old ones, says Carole Buyers, an analyst for Tucker Anthony Cleary Gull. (Both Wild Oats and Whole Foods will own about 120 stores by year-end.) This has hurt the company's same-store sales growth (averaging 5% to 6% a year) and scared investors--the stock is trading around $18, down 36% from October.
By contrast, Whole Foods' same-store sales are better (growing 7% to 9% yearly), and the company's revenues last year reached $1.6 billion, up 13%. Whole Foods has gobbled regional chains, including Bread & Circus, Wellspring Grocery, Fresh Fields, Bread of Life, and Merchant of Vino. But its stock is also suffering, trading around $40, down about 16% since January. Profits last year were up only 3%, to $47.9 million--a result of its international vitamin business being hurt and of losses from an Internet startup it has since spun off.
What will this mean in the St. Louis battle? Well, in a comparable market, Chicago, the two are already competing, and analyst Buyers says, "Whole Foods is probably winning the Chicago market." Whole Foods Midwest regional president Dan Rodenberg, who grew up in St. Louis and picked the site for the upcoming 35,000-square-foot store, says, "Oats has paved the way for us in St. Louis. They've raised awareness, and then we're going to come in with a bigger, more beautiful store." Mom will pass that new store on her drive home from work. Let's see if he can get her to shop there.