After three consecutive years of double-digit growth, Whole Foods Markets now is projecting that its same-store sales growth will slow to just 6% to 8% in fiscal 2007. So the natural-foods retailer is eagerly looking forward to the opening of its first store in Britain next spring. Located in the heart of London’s upscale Kensington neighborhood, the 80,000-square-foot outlet will mark the first step in a long-awaited British invasion by the Austin (Tex.)-based company. Whole Foods (NASDAQ:WFMI – News) took its first small step into Britain just over two years ago, when it acquired a chain of natural food stores called Fresh & Wild, with six shops scattered from Notting Hill, London, to Bristol in the West. Now, for the first time, the company will introduce its own brand name to Britain with the flagship Kensington store. Bryan Roberts, global retail research manager at Planet Retail, a London-based retail consultancy, says the store is dedicated to creating a shopping destination and “showcasing what Whole Foods can do.”
The timing is auspicious. Back home in the U.S. Whole Foods is big business, earning profits last year of $203.8 million last year on sales of $5.6 billion. But it’s facing stiffer competition from the likes of Trader Joe’s and expanded organic offerings at conventional supermarkets (see BusinessWeek.com, 11/3/06, “Wall Street Sours on Whole Foods”).
Unknown Name
At the same time, Britain holds out enticing growth prospects. Consumers there have recently gone nuts for organic and natural foods, and the market has soared more than 50% in the past four years, to $2.9 billion annually, according to market researcher Mintel. By 2011, the market should be worth more than $3.8 billion. With its 26-year history of specializing in organic foods, Whole Foods figures it can grab a slice of that growth, even with only a modest presence in Britain.
Analysts are somewhat more skeptical. “If you’re under pressure in your home market, the last thing you want to do is expose yourself to unprofitable risk in a foreign market that represents a small portion of sales,” says Edward Whitefield, chairman of Management Horizons Europe, a retail consultancy based in Isleworth, outside London.
Indeed, the U.S. retailer is venturing into a notoriously competitive arena with an unknown brand name. The country’s four large grocery chains already control about half of the grocery market, and organic food has become their new battleground. For Whole Foods, that means rivals have had at least five years to secure organic suppliers and develop their own labeled brands.
Milk Drought
The competition already has signaled it isn’t going to give the newcomer an easy time. Tesco, Britain’s largest grocer, took the aggressive step of copyrighting the “Wholefoods” brand name in Britain. That means the U.S. retailer won’t be able to sell any of its house-brand products with a “Whole Foods” label, which could be an important factor in establishing recognition in a new market. (Instead, the company says it will use its established “Fresh & Wild” moniker for house-brand products.)
Tesco’s preemptive move “is a sign of just how seriously it’s taking this increased competition,” says Alastair Lockhart, senior analyst at London-based retail consultancy Verdict Research.
A potentially even bigger concern for Whole Foods is whether it can obtain sufficient local supplies of organic produce, milk, and other products. The natural-food mania that has hit Britain in the past few years has left even some of the major players scrambling to secure supplies. Whole Foods North Atlantic President David Lannon says that one reason the company bought Fresh & Wild in 2004 was precisely to begin developing such relationships with local suppliers. Still, he concedes there “will be some short-term pain” in regard to supplies, especially items such as milk. He expects this to be quickly overcome as more farmers and dairies convert to organic.
Special Services
Still, with merchandise accounting for about 70% of grocers’ costs, having strong and reliable relationships with local suppliers is a “major issue,” says Whitefield. Rivals such as Tesco and Waitrose probably buy more in one week than the Whole Foods Kensington superstore will buy in a year, he notes.
Lannon responds that Whole Foods’ aim isn’t to compete with mass-market competitors like Tesco, which have “tacked on” organic ranges to their regular product lines. Rather, Whole Foods aims to make its mark by selling exclusively organic and natural products. It will also have an in-house bakery, chocolatier, and restaurant. Offering that level of service may be the best approach, given that the retailer’s high prices have earned it the unflattering nickname “Whole Paycheck” in the U.S.
Indeed, Whole Foods clearly has no intention of going the low-cost route. Lannon says the company aims to be competitive in commodities like milk and eggs and “fair” on all other prices. But if Tesco, which is well-known for its bare-knuckled pricing tactics, starts a price war on its organic ranges, Lannon says Whole Foods won’t engage.
Formula for Success?
Small wonder. The Kensington store, located on the ground floor of a former department store, is reportedly costing $7 million to build and won’t likely turn profitable for three to five years, figures Management Horizons’ Whitefield. Media attention surrounding the opening is helping boost interest from potential customers, but the true test will come months later, when the hoopla has died down. Whole Foods denies reports that it plans to open up to 70 stores in Britain. Rather, Lannon says, it aims to roll out a total of 15 to 20 new stores each year, some of which will be in Britain.
Certainly, if anyone’s in a position to temporarily absorb a loss, it’s Whole Foods, which now has 187 stores scattered across the U.S. Even with tempering growth, the company is forecasting $12 billion in sales in fiscal 2010. Lannon is convinced the Whole Foods formula will work as well in Britain as it has in the U.S., thanks to the public’s overwhelming demand for organic food. The doubters someday could be eating their own words.
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